Social Security Does Not Add Debt
Once again, a lot of misinformation is being spread about Social Security by those who wish to cut it, privatize it, or even end it.
Social Security does not add to the National Debt and will not run out of money.
Let’s dive in.
Americans pay a specific tax, known as a payroll tax, that funds Social Security, Medicare, and unemployment insurance. Social Security must use the funds it receives through the payroll tax to pay benefits and is prohibited from borrowing money. By law, Social Security can never increase the national debt.
So why do people claim that Social Security is increasing the debt?
The first reason is conflating a deficit with debt. Social Security has been paying out more than it has brought in in recent years. It has a deficit, but past years' surpluses have covered it. Social Security has not borrowed a penny to cover this deficit.
When people talk about how Social Security will run out of money at some point in the future, they mean that the past surpluses will be used up. At that point, Social Security still wouldn’t borrow money. Benefits would be reduced to what it can afford, about 80% of what they are today. Reduced benefits would be a problem, so there is an urgency to solve the deficit before the surplus runs out, but Social Security would neither be out of money nor incur debt.
The second misunderstanding concerns how the government has handled past national deficits. When the US government can’t cover its expenses with the revenue it collects, mainly from taxes, it issues Treasury bonds (and other types of securities) to raise money. You and anyone else can purchase these bonds. They are one of the most stable investments available.
While many of these bonds are bought by people and organizations, the government also borrows from itself. Social Security is required by law to invest surpluses in Treasury bonds held in a trust fund. The government began borrowing from this trust fund in the 1980s to the tune of almost $3 trillion.
Just like people and organizations collect on their bonds, Social Security does, too. This isn’t creating debt; it is collecting on existing outstanding debt.
Politicians have discussed cutting Social Security to create government debt forgiveness by erasing the money it owes at the expense of the American people. That would be terrible.
It all boils down to this: Social Security is prohibited by law from borrowing; therefore, it cannot incur debt.
The real problem facing Social Security is that the large Boomer generation is retiring, and Social Security revenue can’t cover the current level of benefits for this many people. How do we fix that?
The most direct option is to reduce benefits, which will happen automatically once the surplus runs out. Benefits are already at a level barely enough to survive on; any reduction would be catastrophic for millions of Americans, which in turn would negatively impact the rest of the economy.
Another approach is raising the retirement age. This protects current benefits by making new generations wait longer to collect, reducing the overall burden on the system. Politicians regularly discuss this option, but, not surprisingly, it is not popular with the American people. When France raised its retirement age in January 2023, massive protests filled the streets.
Social Security does not tax income above $168,800. This is based on the limit on the accrual of Social Security benefits. Removing the tax cap without increasing the benefits threshold would extend the time Social Security can continue paying full benefits by several years. That wouldn’t fully solve the problem. It must be combined with other actions, such as increasing the payroll tax, another idea that isn’t popular but could be highly effective.
Finally, there is means testing, which would reduce or even eliminate benefits based on having a high income during your retirement years. Protecting the benefits for those who need them by ending them for those who don’t.
Regardless of how we shore up Social Security to maintain benefits for future generations, one fact remains true: Social Security does not contribute to the national debt, and anyone saying it does is lying to you to take from you.
IfI wasn’t convincing enough, maybe Ronald Reagan will be:
Social Security has nothing to do with the deficit. Social Security is totally funded by the payroll tax levied on employer and employee. If you reduce the outgo of Social Security that money would not go into the general fund to reduce the deficit. It would go into the Social Security trust fund, so Social Security has nothing to do with balancing a budget or erasing or lowering the deficit.