September 17, 1999

A Small Non-Social Security Deficit In Fiscal Year 2000
Would Not Adversely Affect Social Security

by Robert Greenstein and James Horney

Congressional budgeteers and the Administration continue to argue about who is doing the most to "protect Social Security." Both sides are trying to demonstrate their concern for Social Security by asserting that their policies will — at least on paper — keep the non-Social Security part of the federal budget from falling into deficit in fiscal year 2000, thereby preventing a "raid" on the Social Security surplus for that year. At this juncture, however, efforts to avoid any non-Social Security deficit next year may cause some harm by causing essential needs to go unmet, whereas a modest non-Social Security deficit next year will not directly harm Social Security.

The Congressional claim of a balanced non-Social Security budget in 2000 has rested on the Congressional budget resolution plan to cut annually appropriated spending $25 billion below the level enacted in 1999, adjusted for inflation. CBO recently pointed out, however, that actions already taken by Congress on appropriation bills for fiscal year 2000 make it likely that such cuts will not be achieved and that there will be a small deficit in the non-Social Security budget. Instead of generating a more realistic debate over appropriations levels for 2000, the CBO analysis has triggered a spate of schemes that members of Congress hope will allow them to continue claiming that the Congressional plan will avoid a non-Social Security deficit. Some of those schemes involve accounting gimmicks that would harm the already frayed integrity of the budget process. Others, such as a proposal to delay earned income tax credit refunds to low-income workers, would do harm to hard-working low-income families. Such proposals appear to be based on mistaken judgements about the effects of a modest deficit in the non-Social Security budget.

Many Americans — and more than a few policymakers — appear to believe that using a portion of the Social Security surplus to cover a deficit in the non-Social Security budget would constitute a "raid" on Social Security — reducing Social Security's assets and impairing its ability to pay benefits in the future. Indeed, polls indicate there is a widespread view that a primary reason Social Security faces long-term financing problems is that Social Security reserves needed to help finance the benefits of future retirees have been depleted by the past use of these resources to cover deficits in the rest of the budget.

These beliefs are not correct and appear to be rooted in a misunderstanding of how Social Security finances work. Whether or not the non-Social Security budget runs a modest deficit in fiscal year 2000 would have no appreciable effect on either the Social Security trust funds or Social Security solvency. The significance of such a deficit is not in its effect on Social Security but rather in its effect on the government's contribution to national saving through paying down the debt. (The fact that a deficit is likely in 2000 because the Congress has not been able to hold appropriated spending to the level allowed for 2000 also demonstrates that the assumption in the budget resolution that deep cuts will be made in appropriated spending over the next 10 years — an assumption that forms the basis for the claim that a large tax cut is affordable — is not realistic. A tax cut of the magnitude of $792 billion would be likely to result in much larger non-Social Security deficits on a sustained basis.)


Social Security Financing and Non-Social Security Deficits

While there have been deficits for years in the non-Social Security budget, the Social Security trust funds have not been "raided." The trust funds have reserves that currently total about $850 billion and are scheduled to rise to $4.5 trillion by 2021. Social Security's long-term financing problems are the result of entirely different factors.(1)

When the Social Security trust funds take in more revenues in a year than the trust funds need to pay Social Security benefits and administrative expenses that year, the Treasury borrows the surplus funds and provides the trust funds with Treasury bonds.

If there is no deficit in the non-Social Security budget, the Treasury uses the surplus Social Security revenues to pay down debt. If there is a deficit in the rest of the budget, the surplus Social Security revenues are used to cover that deficit, with the remaining surplus revenues going to pay down debt. The Social Security trust funds receive the same amount of Treasury bonds — and thus have the same amount of assets — regardless of whether the Treasury uses the surplus funds to help fund other government programs or to pay down debt. Thus, deficits in the non-Social Security budget do not diminish the assets the Social Security trust funds hold.

This is not a defense of non-Social Security deficits. Using the Social Security surpluses to pay down debt is a sound idea; it is helpful both to the long-term prospects of the economy and to the nation's long-term fiscal health. Doing so increases national saving, which in turn should result in modest increases in the long-term economic growth rate. In addition, a larger economy can more readily afford to provide the resources to finance Social Security, Medicare, and other needs in the future. Paying down debt also reduces the interest payments the federal government must make on the debt, thereby creating more room in the budget to help finance spending for other programs or tax cuts. Furthermore, paying down debt would give the government more flexibility to borrow in the future to meet some of the temporary demands of Social Security and Medicare without amassing a level of national debt that would cripple the economy. Paying down debt is thus an important goal to pursue. A $20 billion or $30 billion non-Social Security deficit in fiscal year 2000 is too small to have much effect on long-term economic growth, however, particularly if the deficit is a temporary phenomenon.


1. Those problems are primarily due to demographic changes that will result in more retirees and slower labor force growth in future decades and to increases in average life expectancy. Social Security is projected to become insolvent (i.e., no longer to be able to pay full benefits) in 2034, regardless of whether there are modest deficits in the next few years in the non-Social Security budget. Addressing Social Security's long-term problems entails making changes in Social Security itself; avoiding non-Social Security deficits does not obviate the need for change in the program.