Government Spending: Social Security, Part 4

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff concludes his series on Social Security spending with a look at a more nuanced defense of the program's alleged non-contribution to the national debt.

“BUT SOCIAL SECURITY IS OFF BUDGET”

Lastly we discuss one more great defense of Social Security often thrown out by its more informed liberal proponents: that it (along with Medicare spending) has nothing to do with raising the national debt.

The argument here is Social Security is “off budget,” and its spending proceeds are paid for with payroll taxes, not income taxes. Therefore, they say, it’s military spending and income tax cuts for the rich that are to blame for our huge deficits and debt.

This is a clever argument, but one with a giant accounting hole that the Economics Correspondent believes many liberals themselves are unaware of.

First of all, Treasury bonds in the Social Security trust fund are being redeemed to make up the shortfall between current payroll tax receipts and retiree benefits. But tax dollars used to pay off Treasuries are being diverted away from deficit reduction. So yes, Social Security is contributing to the deficit as we speak.

But the more nuanced problem with the progressive claim that Social Security is deficit-neutral is an even bigger mistake.

We’ll explain.

It is true that Social Security, Medicare, and Unemployment, despite collectively spending $3 trillion in 2023 (more than three times the official defense budget including aid to Ukraine), don’t draw their money from federal borrowing because their annual outlays are funded by a separate tax (payroll taxes). Therefore, as liberals argue, the remaining federal income and business taxes that pay for the military and other non-entitlement programs are insufficient to pay for everything else.

The problem with this argument is payroll taxes siphon an enormous amount of money off of literally every American’s paycheck—$1.68 trillion vs $2.33 trillion for income taxes—that in turn reduces the space remaining to impose income taxes to pay for everything else.

Worse yet, unlike income taxes Social Security and Medicare taxes are imposed on the very first dollar of income earned by everyone. Income taxes only kick in after one’s income is greater than the standard or itemized deductions plus other credits and even the Earned Income Credit.

So a minimum wage worker typically pays zero income tax in most states and even gets an Earned Income Credit (i.e. payments from the government), but he doesn't get away from paying payroll taxes on every dollar he earns.

Another telling statistic is that while tens of millions of American workers pay no income tax every year, 100% of workers pay payroll taxes.

Such an all-encompassing, universal tax, at 15.3% of everyone’s income (6.2% SS + 1.45% Medicare plus the same from employers) on up to $160,200 a year for individuals, places a heavy tax burden on most Americans right from the starting gun and crowds out the federal government’s ability to impose sufficient income taxes to pay for everything else. If Congress tries to raise income taxes the public rightfully complains that their total tax bill, a huge portion of which goes to Social Security, is already too high.

Putting it another way, if we were dealing with a mattress then Social Security and Medicare would claim 42% of the bed first and every other government program would be forced to try sleeping on the last 58% with many sleeping on the floor (a deficit). But Social Security and Medicare never have to sleep on the floor because they always get first dibs at America’s paychecks and every other program just has to cope with what’s leftover.

Which is part of the reason they're called “mandatory” spending programs.

Now imagine if some politicians really wanted to balance the budget through income tax increases, only this time Social Security, Medicare, and their associated payroll taxes never existed.

It would be a lot easier to tell Americans “Your income taxes are going up a little to pay down the debt” once they knew they were no longer sacrificing 15.3% of their first $160,200 of income to payroll taxes.

On a side note, all income tax collections will yield the federal government an estimated $2.33 trillion in 2023, yet the budget deficit is forecast to be $2 trillion at a time when the unemployment rate is 3.5% and total federal tax revenues are at their highest share of GDP since World War II (except for the dot-com bubble of 1999-2000).

So just to fill the $2 trillion deficit income tax revenues would need to increase by 86% from $2.33 trillion to $4.33 trillion.

Like Ronald Reagan said, government doesn’t have a revenue problem. It has a spending problem.

These two giant entitlement programs carve out their claim on Americans’ paychecks first, a very large claim on workers who don’t even make enough to pay income taxes, and all the other programs have to struggle to find the money to fund themselves. Hence a deficit.

So yes, Social Security does contribute to the debt, by withholding funds that could otherwise be used to close the deficit.

WHAT IF: A “MILITARY PAYROLL TAX”

What few liberals know of this explanation don't like it, and a few even deny a causal link between confiscating $1.68 trillion of workers' paychecks for Social Security/Medicare and not being able to tax enough of what's left to pay for everything else.

So what would happen if the taxes were reversed? With retirees’ pension and medical expenses paid out of the income tax, but only after a “military payroll tax” of 15.3% was imposed on the first $160,200 of every American’s income?

If, after the military got its taxes first, the remaining income taxes proved insufficient to pay for entitlements, then every time Congress tried to raise income taxes across the board Americans would also scream bloody murder.

But especially liberals. Why? Because they’ve already paid so much up front “for the military” that the tolerance of Americans to endure a big income tax increase to pay for everything else is greatly limited. Just like Social Security.

Under such a scenario liberals would be blaming the “Pentagon payroll tax” for making it too difficult to raise the income taxes needed to balance the budget. Yet under the current system liberals try to have it both ways and argue the military is responsible for the national debt because it’s just cheeky that Social Security and Medicare get first dibs at 15.3% of everyone’s paycheck.

And lest we forget, there’s another giant entitlement program: Medicaid. It will cost another $500 billion in 2023, and its budget is paid out of income taxes as well, not payroll taxes. So Medicaid is yet another program that increases the debt, in this case directly.

ps. When playing out the military tax role reversal keep in mind the military budget is considerably lower than Social Security plus Medicare and wouldn’t need anything on the scale of a 15.3% payroll tax either. Here’s how much the federal government alone will spend on the largest programs in 2023:

Social Security: $1.35 trillion

Medicare: $830 billion

Medicaid and other health programs: $890 billion

“Income Security” including unemployment: $792 billion

Education, Training, Employment, and Social Services: $269 billion

TOTAL “ENTITLEMENTS”: $4.13 trillion

National Defense: $815 billion

Veterans Affairs: $305 billion

TOTAL “MILITARY”: $1.12 trillion

(source: White House budget tables)