South-Western College Publishing - Economics  
Sophistry, Surpluses and Social Security
Subject Budgets, Deficits, and Public Policy
Topic Taxes, Spending, and Deficits
Key Words Budget Surplus, Budget Deficit, Federal Debt, Social Security Trust Fund
News Story

As Congress debates this year's spending bills, Congressmen, Administration officials and the President are all reciting a variant of the mantra, "save social security and its surplus." It appears that political rhetoric generated during budget deliberations has created an artificial crisis - stories are reported that the recommendations of one party or the other if they became law, would bankrupt social security and millions of social security recipients would not receive checks. This crisis has been generated by political need and faulty reasoning.

Although economists look at the federal budget as a single entity, budgeters treat the budget as a number of separate accounts that, at least technically, function independently. One of these accounts is the Social Security Trust Fund. Over the years, the Social Security program has generated more in taxes than it needs to pay current benefits for years. Both parties have made use of these surpluses and surplus funds were lent to the Treasury to help finance current government expenditures. Using these funds made deficits appear smaller. These transactions neither increased nor diminished the benefits paid to social security recipients. If Social Security needed these funds, the government would have to respond by cutting spending, raising taxes or running budget deficits.

When the rest of the government budget began generating a surplus, politicians proposed limits on the spending of Social Security surpluses. The overall surplus is estimated to be $161 billion, with $147 billion generated by social security. The difference, $14 billion, is essentially spent; the struggle now is to avoid spending any of the $147 billion. Saving the social security surpluses essentially means drawing down the national debt. Although this may benefit future generations by lowering borrowing costs, it will not save social security. Even if the government agreed not to spend a penny of the surplus, it would not solve the fundamental mismatch between potential revenues and expected expenditures on benefits. Future expenditures exceed potential revenues and Congress and the Administration need to address this issue rather than accusing each other of "raiding" the social security surplus.

(Updated November 1, 1999)

Questions
1. What is the federal budget process, that is, how is an annual budget determined?
2. Explain how the government can generate a budget surplus. A budget deficit.
3. What is the Social Security Trust Fund? How are social security tax collections and expenditures treated in the budget?
Source George Hagar, "Hands-Off Social Security Vow Ignores Reality, Experts Say," The Washington Post, October 10, 1999.

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