Social Security and Federal Debt: An Ongoing Debate - AMAC Foundation Inc
Pew Research Center recently observed (1) (to read the article here…) that the U.S. federal debt is a growing concern among the American public, with now more than half of the sampled population considering it a top priority. At this writing, the “debt clock” shows our country’s indebtedness exceeding $38 trillion and steadily climbing.
Most rational thinkers can agree that current levels of federal government spending are unsustainable. So, it becomes inevitable to focus on the “drivers” of federal debt, and that’s where the issue of Social Security’s role in the country’s financial problems comes into focus.
Does Social Security Contribute to Federal Debt?
Social Security’s finances operate through trust funds used to track money entering and exiting the system. The program receives no cash directly; instead, all incoming revenue is automatically converted into special issue Treasury bonds and subsequently credited to the program’s Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. According to former Social Security Chief Actuary Stephen Goss, these bonds are, in effect, “loans made to the general fund on behalf of future beneficiaries.” They represent funds that Treasury would otherwise need to raise for other government programs.
Income (payroll taxes, etc.) increases the trust fund balances, expenses (benefit payments, etc.) decrease them. Any surplus is held in the trust funds as unredeemed bonds. When benefits are paid, the bonds are redeemed to provide the “cash” used to pay benefits.
At year-end 2024, the combined trust fund balances totaled $2.7 trillion and are being used regularly to make up the difference between scheduled benefits and incoming revenue. This is projected to continue until the trust fund balances are depleted, at which point—absent legislative correction—outgoing payments will be subject to mandatory reductions to match incoming revenue.
So, Where Does Debt Come into the Picture?
The popular notion that Social Security drives federal debt appears related to the simple fact that, to redeem the special-interest bonds held by Social Security, Treasury needs to borrow from the public to replace the revenue previously loaned to the federal government. Treasury, then, is simply “paying back” to the trust funds the revenue converted into special-interest bonds.
It’s called intergovernmental debt, and when looked at this way, it becomes clear that Social Security has no direct effect on federal debt levels. This is undoubtedly a simplistic view of a mightily complex process, but it illustrates that Social Security is by design a self-funded program, with no borrowing authority and no way to create debt directly.
As an aside, our research here at the Social Security Advisory Service has verified that no funds ever collected for Social Security benefits have been misused and are indeed tracked and accounted for regularly via the annual trustees reports to Congress.
The Unfair Characterization of Social Security as a Debt Driver
We’ve dealt with many myths and misunderstandings about Social Security over the years, from cultural beliefs that the funds have been “stolen,” to technical misinterpretations about how benefits are calculated. One of the more enduring of these is the assumption that paying Social Security benefits is a significant cause of our country’s skyrocketing debt. Unfortunately, that assumption casts a negative light on Social Security and further compounds the difficulties in addressing its long-term financing problem.
A recent House Ways and Means Social Security Subcommittee hearing[2] (read report here,,,) took a deep dive into the relationship between Social Security and federal debt levels. Cato Institute’s Romina Boccia penned a recap[3] (click here… to see report) of the Subcommittees’ dialog, specifically focusing on the question, “Does Social Security spending add to the national debt?” She notes, “The answer is yes because the US government did not save any of the excess payroll taxes the Treasury Department collected when Social Security was running a surplus. Instead, the US government turned around and spent those payroll taxes on other things.” (Emphasis added)
That’s one way to look at it but, remember, earlier we noted that cash does not come directly into Social Security. It’s received by the U.S. Treasury and converted into interest-bearing bonds held by the trust funds for eventual redemption to pay benefits. When the bonds are redeemed, which has been happening regularly since 2021, the federal government must sell additional bonds to the public to raise the cash to pay benefits. In our view, the need for bond redemption to finance payments is, in effect, simply restoring revenue to Social Security that originally came from payroll taxes.
This system, of course, creates a financial conundrum. While spending revenue designated for Social Security benefits during times of surplus allowed the government to fund programs unrelated to Social Security’s mission, it merely pushed the costs of these unrelated programs off to the future. The future is now, and the impact on escalating federal debt is becoming clear.
The Bottom Line?
Federal debt is generally considered unsustainable, with the debt-to-GDP ratio raising concerns about future fiscal flexibility and economic stability, especially with steadily rising healthcare and aging-related costs. But don’t blame it on Social Security, a program that has operated successfully for nine decades and will remain solvent for the next six years.
The larger concern is what happens in six years, when the accumulated reserves—the trust fund balances—reach zero. If Social Security is not restructured to meet the 21st-century economy, and if America’s senior population cannot endure an across-the-board benefit cut, the only alternative would be to infuse the program with general revenue, making it – at least partially – a welfare program, rather than a 100% earned benefit and totally self-funded operation.
That would make it correct to say that Social Security affects the federal debt…and not in a small way.
If you have any questions, email ssadvisory@amacfoundation.org
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