Social Security's Accounting Fiction

I must be missing something. I've read the blog pieces here by Henry Aaron and Larry Haas in which they take issue with a March 24 story in The New York Times noting that Social Security is operating in the red this year, taking in less money than it pays out. Henry and Larry say The Times is wrong. I disagree. The story is correct. (Every bit as correct, by the way, as the virtually identical story my USA TODAY colleague Richard Wolf wrote back on Feb. 8.)

Let's take a look at Henry Aaron's math. He says Social Security is projected to take in $819 billion in income this year against expenses of $714 billion, leaving a hefty surplus and a growing trust fund. Where do those revenues come from? He says there are three sources: payroll tax revenues, taxes on Social Security benefits and interest on the trust fund. The problem is that only two of these are real money, in the sense that they're "revenues" created by the Social Security system. Those interest payments aren't "real," and without them, Social Security is running a deficit.

We all know (right?) that the trust fund is an accounting fiction. The surplus payroll tax revenues that we've been paying for years and supposedly putting in Al Gore's "lock box" to build the trust fund have, in fact, been going right back out the door again to be spent on other things. There's nothing in the lock box but IOUs.

So Social Security is drawing interest on this imaginary money. OK, in one sense that's fine -- when you put money in a bank savings account, for example, it's lent out to others and stays in your account as an IOU, on which the bank pays you interest. The difference is that a real bank (we hope) lends your money to profit-making enterprises that pay the bank interest, out of which the bank pays your cut.

In the case of Social Security, the money is lent to a bankrupt operation (the federal government) that has been losing money since its last surplus in 2001. The bankrupt operation pays interest to Social Security by -- and this is why I argue it's not "real money" -- borrowing more. If you're actually in charge of making the federal budget work, the artifice falls away. The only way you'll get those "interest" payments on the Social Security trust fund is by borrowing more money.

It's comforting to think that Social Security is humming along nicely with money to spare, but that's an illusion. The only way Social Security will stay in the black this year is by borrowing $29 billion to make up the shortfall between its real income and its expenses. (See this month's CBO projections here and back out the interest payments to get the true state of affairs.)

As illusions go, this is a small one. At $29 billion, this year's shortfall is just 4 percent of Social Security's budget. The shortfalls get smaller in 2011-13 and turn into small surpluses until things start to go off the rails again in 2016, after which the numbers get much worse. A better-than-expected recovery could make these numbers better -- for a while.

But the point is that we're deluding ourselves about Social Security's finances. The far more dangerous delusion is that the trust fund's $2.5 trillion in accumulated assets means we don't have to worry until 2037. By then, Social Security will be devouring huge chunks of general revenues to stay afloat. The trust fund may be a moral and political obligation, but it's not real money. Henry and Larry are right that the time to start fixing this is now. The problem is that pretending things are OK when they're not lessens the urgency to act.

Post a comment below or check out the rest of our experts' debate on the issue: Henry Aaron on Social Security's alarmist math; Lawrence Haas on finding savings in Social Security; Joseph White on the difficulty of finding such savings.

George Hager is a member of the USA Today editorial board.