Social Security’s Effect On The Treasury: Why We Are “Effed”

by Aaron Krowne

Bruce Krasting has a post over at ZeroHedge with an update on Social Security’s finances.  He points out that while SS has a “surplus” of earnings, it has a negative cash position, and says (rightfully)

While the MSM and the politicians in D.C. will point to the accounting ‘surplus’ at SSA as the measure of continuing health, I take a different view. The only thing that matters is the cash position. That is negative for the first time in 27 years and is a harbinger of things to come.

But I think to the uninitiated to the world of arcane government finance, the reason this is so bad is still rather mysterious.   To me, it’s easier to understand — as is our general public-financing predicament — if we stop looking at it in terms of Social Security per se, and rather as a function of the general government (and thus overall Treasury disbursement).  After all, there is no true segregation of taxes or funds inherent in the system.

Krasting has the following brief high-level income statement:

Operating Results (in Billions):

Payroll tax receipts: 655
Tax on benefits: 24
Interest Income: 118
Total In: 797

Benefits Paid: 702
RR Interchange: 4
Overhead: 7
Total Out: 713

Net 2010 Surplus: 84
Net 2010 Cash Position (surplus minus interest): -34

But in terms of the Social Security influence on the Treasury, this becomes:

Treasury Social Security Cash Flow 2010:

SS Payroll tax receipts: 655
SS Tax on benefits: 24
Total Revenue Due To SS: 679

SS Benefits Paid: 702
RR Interchange: 4
SS Overhead: 7
Total Out: 713

SS 2010 Net cash flow: -34

So here we have arrived at the same conclusion as Krasting: a negative $34 billion hit to the Treasury — except now we can see it is simply a drain on Treasury’s general cash flow, not anything having to do with any notion of cash “balances” at SS (or any other balance sheet notions).

What did we do here?  I simply removed the “Interest Income” line because this is phantom income.   These are simply payments to the SS bureau as “interest owed” on SS’s Treasury securities (these are what are referred to every time you hear “Social Security Trust Fund).  But since these are just intragovernmental payments, just as the Treasury’s “held” by SS are internal IOUs, they can be eliminated when looking at Treasury’s external balance due to Social Security.

So that’s why we’re screwed.  The Social Security system is now a net negative drain on Treasury.  While some accounting statement smoke and mirrors can make it seem “solvent”, the overall effect is that more borrowing has to be done to support SS obligations.  It is no longer a self-supporting bureau.   And given that it is going to be one of the major, non-negotiable expenses of the government going into the boomer retirement era, this is very bad.

I’ll finish with a quote from Krasting:

SSA has produced a forecast that has the cash position returning to a small positive number over the next few years before going permanently negative in 2015. The economic assumptions used to produce that forecast are not going to be realized. In my opinion we will never see another cash surplus at SSA in history. 2010 marked the year where Perpetual Deficits started. Unless laws are changed the cash deficit will continue and increase every year for the next 75.

Indeed; when we see (as above) that its the Social Security cash flow itself at Treasury that has turned negative, there is no real fooling ourselves that some sort of imaginary “Trust Fund Income” is going to turn the financial tide, so I have no choice but to agree with Krasting here.