Has Social Security Gone ‘Cash Negative’?

-Submitted by David Drumm (Nal), Guest Blogger

According to a Washington Post article, a “treacherous milestone” was reached earlier than expected when Social Security went “cash negative” last year. With high unemployment and the subsequent loss of payroll taxes, the outlays of benefits outstripped the income from payroll taxes. There’s just one small detail that the article didn’t take into account: the interest income on the government bonds that the Social Security trust fund generates. When the interest income is added to the payroll tax income, Social Security is ‘cash positive,’ that is, more money is coming into the system than is going out.

The omission of the trust fund’s interest income from the equation is a glaring oversight, but it makes for a more scary headline.

Social Security has its own budget and can only spend money from its trust fund. Its trust fund is financed via payroll taxes and interest on the bonds purchased using those payroll tax revenues. The article appears confused about the operation of the trust fund when the author writes:

The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.

So? That’s true for anyone owning government bonds. When a government bond comes due and is cashed in, the government “must raise taxes, cut spending or borrow more heavily from outside investors” to pay the bond holder. That’s how the Social Security bond holdings have always been paid. What’s so dire about that?

The article notes that in an MSNBC interview, Sen. Harry Reid said:

Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.

However, the article claims: “Such statements have not been true since at least 2009, when the cost of monthly checks regularly began to exceed payroll tax collections.” Again, the article is omitting the interest from the bonds that the trust fund holds. Of course Sen. Reid is exactly right. The Social Security system is self-financed and the trust fund is estimated to last for another 30 years.

Kevin Drum suggests:

If we gradually raise the payroll tax from 6.2% to 7.2% and gradually raise the earnings cap from $100,000 to $250,000 between 2030 and 2050, Social Security will be solvent forever.

H/T: Dean Baker, Paul Krugman, Dean Baker.