Social Security benefits will not be cut


Fellow blogger Craig Eyermann aptly explained that the Social Security Trust Fund is expected to run out of money by 2035. The result, according to Social Security Administration administrators, is that either payroll taxes will have to be increased or benefits will have to be cut.

My message is this: Social Security benefits will not be reduced. My guess is that payroll taxes won’t be increased either, but that’s not so certain.

So what happens when the Social Security Trust Fund runs out of money? Here is my best guess.

Members of Congress will observe that the Social Security Trust Fund has been in surplus for many decades. When its balance drops to zero, they will propose that the federal government can lend money to the trust fund and allow it to drop below zero. They will use money from other taxes or loans to make up the difference. No one’s benefits will be cut.

There are two major factors to consider when evaluating the solvency of the Social Security trust fund. First, the fund is a fiction. The trust fund holds federal government bonds, so it is one part of the government lending money to another part. Currently, the trust fund is in surplus, so the social security program lends money to the treasury. If the fund fell below zero, the Treasury would lend money to the trust fund.

What matters is not how much money is in the trust fund, but whether there are more inflows than outflows, or more outflows than inflows. If there are more inflows than outflows, the Social Security program gives money to the rest of the federal government. If there are more outflows than inflows, the rest of the federal government contributes money to the trust fund.

As the link in Eyermann’s post shows, the time when the Treasury started sending funds to the trust fund happened around 2010, more than ten years ago. Each year, some of the money is transferred to the treasury trust fund because the Social Security program now distributes more benefits than it collects in taxes.

The Social Security Trust Fund balance is not relevant. If the balance falls below zero, the Treasury can continue to send that money to fund benefits.

Why they will is the second major factor to consider: political support for the Social Security program. How much benefit the program pays and how much tax it collects is a purely political decision. Congress has the power to increase benefits, decrease benefits, or even end the program.

If members of Congress were truly concerned about the solvency of the Social Security program, they could act now. One thing they could do is eliminate increases in the cost of living. This in itself would keep the trust fund balance permanently in the green. Or, they could simply reduce cost-of-living increases, which are already very generous. Or, they could decide to reduce benefits by 5% now to avoid having to reduce them by 20% in 13 years.

None of these ideas are on the table. Why? Because any reduction in benefits would be politically unpopular, now and in the future. The trust fund is not like a bank account, in which the holder could run out of money. Its funding already comes from the Treasury because its expenditure already exceeds its revenue.

Whether benefits are cut is a political decision, and politicians will not decide to cut Social Security benefits by 20%, or any amount, when there is an easy alternative. They can simply decide to appropriate money from the Treasury to make up the difference.


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