The Fallacy of the "Government Raid" on Social Security

The past couple of weeks have brought added interest to America's most important social program, Social Security. The program that's responsible for making payments to 63 million people each month, over a third of whom are lifted out of poverty as a result of this payout, recently received its annual "checkup" from the Social Security Board of Trustees. And as you probably could have guessed, it didn't go all that well.

According to the 2019 report, Social Security is set to begin expending more than it collects in 2020, with each successive year after 2020 leading to a larger net cash outflow. A number of ongoing demographic changes are expected to completely exhaust Social Security's $2.9 trillion in asset reserves -- i.e., the program's aggregate net cash surpluses since inception -- by 2035. Should this excess cash disappear, retired workers could be facing benefit cuts of as much as 23% if Congress fails to act.

The Fallacy of the
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Did Congress steal your hard-earned Social Security dollars?

As you might expect, Social Security's poor long-term outlook has led to plenty of finger pointing -- especially at lawmakers on Capitol Hill. The only problem is that, while this blame game is deserved, the American public is angry for all the wrong reasons.

I've written about Social Security's short- and long-term outlook for the better part of a decade now, and one consistent complaint I encounter is the idea that Congress raided Social Security. More specifically, a notable percentage of Americans believe that lawmakers threw the program's extra cash into the general fund and paid for fruitless wars with this cash, and now the program is "screwed" because politicians didn't put the money back.

If you don't believe me, check out any Social Security post on a major social media platform, and I can almost guarantee you'll find comments suggesting that Congress stole Social Security's trillions in excess cash and the only reason the program is running short on cash is because of this "raid." These folks want the money repaid and want Congress to add interest on what they've borrowed.

The fact, though, is that very little of the "government raid on Social Security" theory holds water.

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Congressional borrowing of Social Security's asset reserves is required by law

About the only shred of fact in this thesis is that the federal government included Social Security in the federal budget beginning in fiscal year 1999. This was done at the request of the President's Commission on Budget Concepts, which found the presentation of federal budgets to be confusing (there were three separate budgets at the time, all of which had separate deficit figures). Presenting the program, which had a history of net cash surpluses, as part of the federal budget made things cleaner and may have also provided a bit of window dressing on the federal deficit. But to be clear, at no point were Social Security dollars conflated with federal dollars.

Then, in 1983 under the Reagan administration, the process was set in motion to take Social Security off-budget, once more. This change, which was to be made over many years, was completed by 1990.

Somewhere between Social Security going "on-budget" in 1969 and today, Americans believe the program's spare cash was raided, used to fund wars, and never repaid, leaving seniors high and dry. However, this isn't the case.

Here's the truth: Social Security's asset reserves have been borrowed by the federal government, but this borrowing is required by law. The Social Security Administration invests the program's asset reserves into special-issue bonds and, to a lesser extent, certificates of indebtedness. In turn, the federal government utilizes this cash to fund all types of budget line items. This might include defense spending, but it may also include social programs, education, and healthcare. Money borrowed from Social Security isn't earmarked for any federal spending program, in particular, so suggesting that the borrowing was done solely to fund wars isn't correct.

The Fallacy of the
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In addition, what most folks are probably overlooking is that Social Security is being paid interest on what it's lent to Congress. The combination of various maturities and yields on its special-issue bonds worked out to an average interest rate of 2.844% at the end of April. In 2018, interest income led to just over $83 billion in revenue collection, or a little more than 8% of all the money Social Security collected last year.

Paying back what was borrowed isn't the answer

What really boggles the mind is the idea that somehow, paying back what was borrowed would make Social Security all better when, in reality, it would have either no effect or make things markedly worse.

Think about this for a moment. Let's say you have $2,000 in cash sitting in your bank account. You could leave that money in your checking account earning virtually no interest and lose out to inflation or you could put that money to work in a safe interest-bearing certificate of deposit (CD) with your bank. Let's assume you choose the latter and invest your $2,000 into a CD. Has the bank stolen or raided your $2,000?

Well, no. It almost certainly took your $2,000 and lent it out to generate a profit, but your bank CD continues to have value with the bank. In other words, you've changed the type of asset you have but still have $2,000 (albeit it's growing due to the interest being paid).

The same is true of Social Security's asset reserves. Rather than letting $2.9 trillion in cash sit there and lose to inflation, it's instead invested into extremely safe interest-bearing government bonds. Just because the nature of the asset has changed from cash to bonds doesn't mean that any value has been lost.

The Fallacy of the
Image source: Getty Images.

Likewise, redeeming bonds doesn't mean any extra value is created. If the federal government were forced to pay back what's been borrowed, the program would have exactly the same amount of total assets -- $2.9 trillion. The only difference is it'd no longer be receiving an interest payment from the federal government, which would mean more than an $80 billion decline in annual income. That would have a markedly negative impact on the Social Security program.

Thus, there's zero validity to the idea of Congress raiding Social Security and putting the program in its current predicament.

If you want to blame lawmakers for something, let it be for not finding common ground on a fix when both political parties have solutions that would work. Going more than 30 years without a major overhaul to the program is the real crime here.