Nobody From Nowhere (@i8dc)

Occasional Common Sense

Why Social Security and Medicare Payments Will Continue

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Note: My thinking on this evolved over the course off the day, so I’ve edited this somewhat.  To the one person who read it previously, I apologize.

The United States is rapidly approaching the arbitrary limit known as the debt ceiling, which would cause the government to stop borrowing money and consequently cause all kinds of bad stuff to happen.  The President would be faced with extremely “tough choices,” but these won’t include reducing Social Security and Medicare payments. Here’s why.

For decades and until very recently, Social Security and Medicare ran at a surplus, meaning they took more in through payroll taxes and interest than they paid out in claims or operating expenses.  This surplus was used by the federal government to fund the rest of its programs, and the “trust funds” were born.  The trust funds are the cumulative debt owed by the rest of the federal government to Social Security and Medicare, and they increase through interest as does any other collection of U.S. government debt. It’s really all done with accounting, as there are no actual T-bills sitting in a vault somewhere.  Nonetheless, the Social Security and Medicare trust funds, and the national debt, get bigger whenever the government uses their dedicated revenue for another purpose.

Today, these programs are not collecting as much in taxes as they pay out; part of operations is funded through current taxes and interest, and part is paid by drawing down the trust fund.  When the trust fund is drawn down, the gross national debt declines, creating room under the debt ceiling for additional government borrowing.  So the government can fully fund Social Security without impacting the gross national debt, and without violating the debt ceiling.

Think of it this way – to cover its revenue shortfall, Social Security sells some of the U.S. debt it holds in the trust fund to the private sector (this isn’t exactly how it works, but it’s close enough).  The composition of the gross debt changes and the debt held by the public increases, but the gross level of debt does not.

Since the debt ceiling limits the size of the gross debt as opposed to the debt held by the public, Social Security and Medicare can be fully funded regardless of the debt ceiling.

Unfortunately, this doesn’t get us much closer to dealing with the problem should Congress and the President fail to increase the debt ceiling; the amount of current Social Security and Medicare funding coming from the trust fund in on the order of $4B per month.  With a projected revenue gap of more than $130B in August, this is just a drop in the bucket.

What really protects Social Security and Medicare is their dedicated funding sources.  I’m not a legislative aide, but I’m guess that the law says that those funds collected for Social Security and Medicare and not paid out must be put into the trust fund.  Since adding to the trust fund adds to the national debt, the government can’t just redirect those funds without exceeding the debt limit.  Unless they arbitrarily try to change the rules.  Which they might, as this is frickin’ serious.

So the government must pay out Social Security and Medicare’s revenue as benefits or else it will exceed the debt limit.  And it can draw down the trust fund to fully fund these programs without exceeding the debt limit.

I can’t see any reason why Social Security and Medicare recipients have any reason to fear for their compensation.

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Written by David Clayton

June 30, 2011 at 6:57 am

Posted in Punditry

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