September 18, 2018 Reading Time: 4 minutes

Have you ever heard the expression “If you find yourself in a hole, stop digging”? Apparently some 150 Democrats in the Senate and the House won’t heed that advice. The same week that news broke of the country reaching $21 trillion in national debt and returning to $1 trillion deficits is also the week they chose to announce a caucus to expand Social Security. This is the same Social Security that’s heading into insolvency and faces trillions of dollars in unfunded liabilities.

According to Vice Magazine, Sen. Elizabeth Warren defended the caucus by saying, “It’s become increasingly clear that [seniors] are facing a retirement crisis.” This is a very questionable generalization. Social Security is the one facing a retirement crisis. No one who looks at the program’s financials concludes it can be sustained in its current form, much less in an expanded form. That’s true even if Democrats get their way by lifting the payroll-tax cap and raising all sorts of taxes.

It’s Already Bad

It’s not as if Social Security isn’t already massively expensive. With a budget of $992 billion in 2018, it’s the largest federal program. That’s 24 percent of the entire budget. This year’s Social Security trustees’ report, like every report before that for many years, reiterated that the program is broken.

For example, since 2010, Social Security has been running a cash-flow deficit, meaning that taxes collected for the program aren’t enough to cover the benefits paid to retirees. To fill the gap and keep payments to retirees going, the program is drawing from the trust funds. It first used the interest paid on the bonds in the fund, but starting this year, earlier than expected, the program will draw on the principal.

What’s the big deal about that, you may ask? After all, that’s what these assets are there for. When Social Security needs to draw from the interest or principal in the trust funds, it goes to the Treasury Department, which then has to borrow money to pay back the trust funds for the money they lent it. You see, for all the years when the payroll taxes collected were larger than the benefits paid, the program gave the extra cash to the Treasury in exchange for bonds.

But it’s not as if the Treasury saved that money. Instead, it spent it on wars, education, transportation, and more. The only way the government returns the money to the program is by getting into more debt than it already is. The bottom line is that for the last eight years, paying all the program’s benefits has required some level of deficit spending.

Exhaustion on the Way

Additionally, the program’s design means that if no changes are made, the Social Security retirement trust funds will be exhausted by 2034, one year sooner than projected last year. This is assuming there aren’t any financial crises or major recessions between now and then, which is an unlikely scenario.

When the trust funds dry up, benefits will be automatically cut by 21 percent to sustain payouts until 2092 without any further cuts.

According to the program’s trustees, Social Security is currently on pace to run a $13.2 trillion cash shortfall between 2034 and 2092. Making the retirement program more generous without big increases in its funding source (the payroll tax) would make things much worse.

In the Hole 

Social Security is in the hole. It’s time to stop digging. That means choosing from the many policy options available to Congress to reform the system: private accounts, privatization with a safety net for the poor, or an eligibility-age adjustment. Raising benefits, however, isn’t one of them.

Under these conditions, which have been widely documented by both scholars and government agencies, one can only wonder what these Democrats are thinking. Maybe they think they will be able to save the programs as they have in the past. For instance, the disability part of Social Security was supposed to become insolvent in 2016, which would have triggered benefit cuts. However, it was “saved” at the last minute by shifting payroll-tax funds from the retirement fund to the disability fund.

I wouldn’t count on something like that happening again though. By 2034, public debt will be 107 percent of GDP, spending will consume 25 percent of GDP, and the deficits will be way past $3 trillion. Taxes will have likely gone up to address the fear of high deficits, and the option of maintaining Social Security benefits will not likely be on the table. For all these reasons, it seems totally insane to call for an expansion of Social Security now.

Again, I must ask, what are these Democrats thinking? One simple answer is that they actually don’t understand how the program works. This is particularly visible in the remarks made by Rep. John Larson (D-Conn.) at the announcement of the new caucus. He said: “Social Security is not an entitlement. It’s the insurance that American workers have paid for.”

He’s right that Social Security isn’t an entitlement. The Supreme Court actually ruled on this issue in 1961 and found that no matter how much in taxes you have paid to the program, your benefits aren’t guaranteed. But he’s totally wrong about it being an insurance policy, and it’s untrue that American workers have paid for it. First, insurance implies a potential risk. Getting old is not a potential risk, it’s a certainty. Also, we aren’t paying a premium to insure ourselves against the consequences of a risk materializing. We’re paying taxes. And these taxes go to pay for current retirees, not our future retirement.

That level of ignorance from the legislator who could become the chairman of the committee that would produce a bill to expand Social Security benefits if the Democrats take over the House in November is scary. It also tells you everything you need to know about how this new caucus would make America more broke than it already is.

Veronique de Rugy

Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist.

Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.

She received her MA in economics from the Paris Dauphine University and her PhD in economics from the Pantheon-Sorbonne University.

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