Does Social Security Impact the Federal Deficit?

Over the past two weeks, the discussion about Social Security and its impact (or lack thereof) on the federal deficit degenerated into a full blown ‘does so’ – ‘does not’ school yard shouting match. The author analyzes the validity of the claims each side is making.

Tim Geithner’s dog whistle is back in the news. Over the past two weeks, the discussion about Social Security and the deficit degenerated into a full blown ‘does so’ – ‘does not’ school yard shouting match.

The exchange started when Jeff Merkley, a candidate for Senate in Oregon, blew the whistle, and PolitiFact challenged his statement.  Michael Hiltzik challenged its assessment.  And the dogs were off to the races.

To fully understand the dispute, you have to know that the word deficit has one meaning to Markley and a very different meaning to PolitiFact.  Both sides ignore the most basic facts of the subject, and use words assured to mislead just about everyone. It is the circus of extremes. Between fact problems and loose words, the reader only learns what he wanted to hear in the first place.

“Social Security has never contributed one cent to the deficit.  Not one cent!”

~ Senate Candidate Jeff Merkley

These participants are more interested in circus than answering the basic question: does Social Security contribute to the overall financial imbalances of the federal government?  Here is the answer.  While Social Security does not count toward the government’s red-ink, it contributes to it significantly.

Merkley’s statement is completely false.  Social Security is not self-supporting as he claims.  It receives by law (Public Law 98-21) annual general fund transfers, mainly the revenue from the taxation of Social Security benefits. This revenue appears on-budget, and is dollar for dollar deficit spending. Over the past three years, Social Security has by law created more than $75 billion of “On Budget” deficit – according to the Trustees.

Yes, Center for Economic and Policy Research is wrong.  Michael Hiltzik is wrong.  Paul Norr, the financial expert who has written extensively about Social Security, is simply uninformed.  These transfers are clearly detailed in the Trustee Reports.  They are outlined in the budget.  But, sound bites are better than facts.

Merkley has used the wrong word. It is possible to say is that Social Security does not “count” toward the deficit. This is very different from saying it does not “contribute”. Count is a very narrow word dealing with what revenue and expense is included in a calculation.  Contribute weighs the changes in the deficit caused by the system as a whole.

Merkley’s statement is a dog-whistle guaranteed to mislead people. It assumes that Social Security operates in a vacuum, where it has no impact on the economy around it. This assumption reflects more ideology than reasoned deliberation. It isn’t possible to redistribute nearly a trillion dollars of income without affecting the broader economy.  For example, the National Bureau of Economic Research has shown that Social Security encourages people to retire earlier in life which means that older workers are trading an income tax producing job for a tax-free pension.  Lower income tax collection will foster a deficit.

On the other side of the discussion, PolitiFact’s assessment may be even worse. While its rating is essentially correct, the accuracy has more to do with random luck than actual reason.  The piece has a number of fact problems, only one of which is that Markley did not say what PolitiFact has judged.

PolitiFact has substituted its own definition of the word “deficit” in its ruling.  There is more than one equation to calculate the deficit. Merkley is talking about the on-budget deficit.  PolitiFact has validated his statement against a different measure, the unified budget deficit. Mind you, PolitiFact has made this mistake repeatedly.  (PolitiFact New Hampshire, Politifact Georgia, PolitiFact Wisconsin)

Fact: Since 1984, Social Security Trust Fund has accumulated $2.8 trillion dollars more revenue than it paid out in benefits.

PolitiFact’s reasoning changes the relationship between Social Security and the government. In the unified budget approach, Social Security is a profit center to fund other spending. There is no $2.8 trillion dollar reserve of payroll taxes, nor interest earned.  The money is spent on other priorities with nothing left over.  So PolitiFact is testing Markley’s statement against a measure which specifically excludes revenue dedicated to Social Security.

In PolitiFact’s world, Social Security adds to the budget deficit as soon as the cost of benefits exceeds the revenue collected from payroll taxes and on-budget subsidizes. This line of thinking is the exact reason that Social Security was moved off-budget in the 1983. The National Commission for Social Security Reform argued that “changes in the Social Security program should be made only for programmatic reasons, and not for purposes of balancing the budget.”

This approach to government is nonsense.  Social Security does not belong in the budget.  The government does not make a profit or loss on Social Security.  The revenue dedicated to Social Security should not be used by bureaucrats to hide spending problems elsewhere in the budget.

Neither argument is particularly helpful for someone who wants to understand the relationship between Social Security and the overall financial imbalances of our government. That question is never even really discussed.

About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes,, MarketWatch,, and regional media like The Denver Post.