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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

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October 9, 2006

If You Care About The Deficit, You Care About Social Security

Dean Baker has a bone to pick with Ben Bernanke:

The projected increase in Social Security spending is relatively modest over the next 45 years and in fact no larger than it was over the last 45 years. In addition, he also knows that workers have already largely paid for this projected increase in spending, paying a designated Social Security tax that exceeds current needs. The Congressional Budget Office projects that future tax revenue, plus the accumulated surplus over the last quarter century, will be sufficient to pay all scheduled Social Security benefits through the year 2046, with no changes whatsoever.

So, Mr. Bernanke was not being honest when he claims there is a problem with Social Security...

At the risk of being labeled one of those "unified budget types" that keep Angry Bear's pgl angry, I object.  The trick there is the stipulation that "future tax revenue, plus the accumulated surplus will be sufficient to pay all scheduled Social Security benefits."  It is fair enough to say that the Social Security "trust fund" is a promise to workers that the government ought not breach.  It is incorrect to say that it will finance "all scheduled Social Security benefits" in any economically meaningful sense. 

The relevant piece of information is this, from the 2006 report of the Social Security and Medicare Board of Trustees:  "Projected OASDI tax income will begin to fall short of outlays in 2017..."  In other words, the Social Security ceases to be self-financing out of payroll taxes in about 10 years.  Absent an increase in overall tax revenues or a reduction in government spending, the payment of scheduled social security benefits adds to the deficit. If you think that deficits are a problem, then logic compels you to treat the payment of accrued Social Security promises as a problem, and one that will arrive in fairly short order.

Note that the same sort of problem does not apply to a large chunk of the Medicare program.  Again, from the Board of Trustees:

Part B of the SMI Trust Fund, which pays doctors' bills and other outpatient expenses, and the recent Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future by operation of current law that automatically sets financing each year to meet next year's expected costs.

Part A of the program, which covers hospitalization costs, remains a problem, of course, and it is big -- about 1/2 of all Medicare outlays.  And you might reasonably argue that the increasing share of medical expenditures in both government expenditures and GDP is worrisome. Though I think this subject to some dispute, I'm not inclined to object too vehemently. But I just don't buy the argument that this is reason for ignoring the very real imbalance that exists in the Social Security system.

Several bloggers I admire have consistently argued that, given the benefit promises they imply, it would be a very good thing to not commingle Social Security taxes with other sources of federal revenues.  pgl is in that group.  So is Calculated Risk and Andrew Samwick.  In the name of transparency, you can put me on that list as well.  But unless you harbor pretty firm Ricardian views -- in which case you believe that any discussion of the deficit per se is fundamentally off-topic -- the relevant economic measure is indeed the unified budget.  And for that, the trust funds don't mean a thing.