The Causal Relationship Between Social Security and the Federal Budget

As the 1990s begin, social security is once again at the center of public debate. Under current projections social security is expected to post substantial surpluses during the next two or three decades and a string of ever-increasing deficits thereafter. In the meantime the social se­ curity trust funds are projected to accumulate large reserves. At the heart of the current controversy is the question of how politicians will behave when the trust funds are temporarily flush with cash. Will the surplus funds actually be saved for future years, or will they be spent­ either directly through social security expansion or indirectly through an expansion of the rest of the budget? No binding rules on politicians dictate how surplus monies will be used. Under current law any excess revenues in the trust funds must be used to purchase new special-issue government bonds, but that does not reveal what is done with the revenues the Treasury has thus been lent. Excess social security revenues, like any other federal revenues, are available to finance the general operations of the government. They may be used to retire outstanding government debt or to finance an increase in federal spending or a reduction in federal taxes. How political discretion determines this fiscal choice is the subject of this chapter. If tax and spending decisions in the rest of the budget are independent of social security, then any excess social security rev­ enues reduce the federal budget deficit and allow the Treasury to retire outstanding privately held public debt. If po\iticians respond to the surplus social security revenues by increasing federal spending (or reducing federal taxes), then some or all of the surpluses translate into a higher deficit in the rest of the budget, with little or no reduction in the overall deficit or national debt.