According politicians, Social Security affects the federal budget or has nothing to do with the budget and deficit. They are wrong. They are right.
Social security as a separate plan should run based in the revenue it receives from payroll taxes, but that’s no longer how it works. Several elements necessary to making Social Security work in the 21st century do relate to the federal budget.
Take a look:
Myth #7: Social Security has nothing to do with the rest of the budget.
Fact: Regardless of how Social Security is viewed, it interacts in many ways with the broader federal budget.
There are two different ways to look at Social Security: as its own isolated “off-budget” program or as part of the broader “unified” budget. We discuss these two frameworks in detail in our 2011 paper, “Social Security and the Budget.” Both of these frameworks are valid, and both show the program to have a financial problem.
If treated in isolation, Social Security is on the road towards insolvency. If treated as part of the unified budget, Social Security is adding to the deficit, and this effect will increase over time. If viewed as an off-budget program, Social Security does not directly add to the “on-budget deficit.”
However, it indirectly contributes to the on-budget deficit because the interest payments it receives from the general fund are on-budget. It also receives funding from income tax revenue on Social Security benefits, which is technically on-budget, and has at times received general revenue transfers to compensate for policies that would reduce Social Security revenue (such as when lawmakers cut payroll taxes in 2011 and 2012).
Viewing Social Security as a self-financed program is not a reason to exclude it from fiscal constraints. In fact, this view highlights the need to make the program solvent for its own sake without relying on general revenue transfers or borrowing. To be self-sufficient, the program would need changes to bring spending in line with revenues. Although Social Security is excluded from on-budget calculations, most economists consider the unified budget deficit to be a more meaningful measure of the government’s fiscal health because it better measures the budget’s impact on the economy.
The Social Security system has been contributing to unified budget deficits on a cash-flow basis since 2010 and will continue to do so indefinitely. The federal government will have to borrow more, cut other spending, or raise taxes to make up for the Social Security system’s cash-flow deficit.