Social Security and the General Treasury: Who's Raiding Whom?

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Throughout its history, the Social Security program has been marketed as a program financed by earmarked taxes. This arrangement has protected Social Security from being cut in the service of general deficit reduction, but it is also intended to limit benefits to the amount that can be financed by the program's earmarked taxes. Unfortunately, this delicate balance has been upset by policies that have effectively allowed Social Security to raid the general treasury. In 2009 and 2010 Congress enacted four provisions authorizing implicit or explicit transfers of general revenue to the Social Security Trust Fund, continuing a pattern set by earlier provisions.

Social Security's raid on the general treasury has largely escaped attention. Indeed, in a startling inversion of reality, the general treasury is often accused of raiding Social Security, based on the premise that the $1.7 trillion of surplus Social Security taxes collected from 1984 to 2014 have been looted from the program. In reality, current law provides that the surplus taxes will be paid back to Social Security more than fourfold (reflecting compound interest), enabling the program to pay $7.2 trillion of benefits in excess of taxes from 2015 to 2037.

Although general revenue financing averts Social Security tax increases and benefit cuts, it forces larger tax increases and spending cuts in the remainder of the federal budget. Using the general treasury as a piggy bank for Social Security distorts the budgetary process by giving the program the best of both worlds. Social Security receives political protection from tax increases and benefit cuts on the grounds that it is a self-supporting program financed by earmarked taxes, but it is not required to actually live within its earmarked revenue. General revenue financing is simply one more way to camouflage the hard choices that will ultimately have to be made to reform Social Security, taking its place alongside myths about the pessimism of the trustees' projections and free-lunch fantasies about privatization.

Congress should either turn Social Security into a general revenue program with no earmarked taxes or make it a genuinely self-supporting program that receives no general revenue transfers. The latter approach is preferable, because it allows the linkage between each worker's taxes and her benefits to be preserved. Ending general revenue transfers will allow decisions about Social Security reform to be made in an open and transparent manner without draining resources from the remainder of the government.

To examine these issues, I first explain the relationship between the Social Security Trust Fund and the general treasury.

Alan D. Viard is a resident scholar at AEI.

For a complete listing of all On the Margin articles, please visit: www.aei.org/onthemargin/.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

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