When does the Social Security surplus disappear, and who is it a “day of reckoning” for?

The Center on Budget and Policy Priorities released "Social Security Does Not Face a Near Term 'Reckoning'" by Paul Van de Water and Kathy Ruffing, which takes issue with claims that the recent decline in the Social Security surplus constitute a significant fiscal event.

The recession has affected the system's finances, and the next report of the Social Security Trustees — due in coming weeks — is expected to show some deterioration in the program's financial outlook. But Social Security faces no immediate threat. The program continues to run large surpluses and remains capable of paying scheduled benefits in full for the next three decades or so.

This is all true as far as it goes. The overall Social Security surplus – cash surpluses generated from payroll taxes and interest on the trust fund – remains significant in size. And because of that, there is no day of reckoning for Social Security, which can continue to pay full benefits.

But it is true because it is stated entirely from the point of view of Social Security as a free-standing program independent of the rest of the federal budget. From the point of view of the Social Security program in isolation, the cash surplus does not matter. But then, the total surplus – cash plus interest – doesn't matter either. The day of reckoning for Social Security itself occurs only when the trust fund reaches zero. That may be a few years earlier than previously projected – see my back of envelope calculations here – but is still a long way off.

But when commentators have discussed the Social Security surplus, it has almost always been in the context of flows of cash between Social Security and the rest of the federal budget. Why? When Social Security runs a surplus, those funds are available to the Treasury – although they are not counted as part of most-reported measures of the budget deficit and the national debt. This is what many people call the "raid" on Social Security. Although, under law, there's not much else Social Security could do with surplus money, there is reason to believe that these surpluses, and how they are accounted for in the budget, encourage the non-Social Security part of the budget to spend more or tax less than it otherwise would. When those surpluses end, this effective subsidy from Social Security to the rest of the budget ends and the Treasury must begin repaying what it borrowed. That's the day of reckoning commentators are referring to.

The authors acknowledge that:

Excluding interest, the OASDI surplus is indeed expected to slip to a slender $3 billion in 2010 before rebounding as the economy recovers. That matters to the Treasury; when Social Security generates less extra cash, the government has to tap the credit markets to borrow more (just as the Treasury must borrow more when income tax receipts sag in a recession). Economic recovery will bolster the program's finances, although the annual Social Security surplus will deteriorate again after 2015, as demographic pressures accelerate with the retirement of the baby boomers.

But this is precisely the point: in general, the Social Security surplus is discussed only with relation to its effect on the Treasury, and in that context the cash surplus is what matters. The total Social Security surplus is rarely discussed since it has no real meaning to anyone: no meaning to the Treasury, which cares only about how much it must repay and when, not whether that repayment is part of the interest or principal on the trust fund. And no real meaning to Social Security, which can continue to pay full scheduled benefits so long as a penny remains in the fund balance. Everyone who works on Social Security policy knows two dates: the date the cash surplus disappears (currently 2017 in the Trustees projections) and the date the trust fund balance reaches zero (2041). The date when the total surplus disappears (currently projected at 2027) is an afterthought in most reporting, and for good reason, I believe.

The key fact here is that the Treasury must begin repaying trust fund bonds when the cash surplus disappears, not when the total surplus disappears. That day of reckoning will put additional pressure on the federal budget in the near future.