How Social Security Affects the Federal Budget

Today I want to tackle an issue that comes up when we talk about government deficits and debt: Does Social Security actually contribute to the deficit? So let’s dig into how Social Security works.

Social Security was set up to be fully funded through payroll taxes-the 6.2% that you pay out of your paycheck, plus another 6.2% that your employer pays on your behalf.

When Social Security takes in more than it pays out, the extra goes into a trust fund. But the money doesn’t just sit there-it’s loaned to the federal government in exchange for Treasury bonds. The government spends the cash, and the trust fund holds the bonds as assets. Later, when needed, the government has to pay that money back-with interest.

For many years, the Social Security program ran a surplus. But that’s no longer the case. As the population ages and more people retire, benefit payments are now exceeding payroll tax revenues. This means Social Security has to start drawing down the trust fund to keep paying benefits.

Now when the trust fund redeems those Treasury bonds, the government needs to find the money to pay them-just like it does with any other debt. That money usually comes from general tax revenue or new borrowing. So even though Social Security is technically “off-budget,” once the trust fund starts shrinking, it does add pressure to the broader federal budget.

Is this a problem? Social Security is doing what it was designed to do: collect taxes, save the extra, and then use that savings when needed. But the problem is that the government already spent the surplus.

So when we say Social Security doesn’t “cause” the deficit, that’s true in an accounting sense-but it does increase the amount the government has to borrow once the trust fund starts running down. And that’s exactly what’s happening now.

According to recent projections, the Social Security trust fund will run out around 2035. When that happens, the program can only pay out what it collects in payroll taxes-about 80 percent of promised benefits.

At that point, if Congress wants to avoid benefit cuts, it will have to increase taxes, reduce spending elsewhere, or borrow more money. So while Social Security has been self-financing in its early days, it’s already adding to budgetary pressure and will become an even bigger financial and political problem if no changes are made.

Originally published at https://mytwocentsandcounting.substack.com.