Comments submitted to U.S. House Ways & Means Committee hearing on Improving Social Security
Summary:
Besides facing a major long-term funding shortfall, Social Security is putting increased pressure on federal spending and pushing up annual deficits. Spending down Social Security reserves requires the Treasury to sell bonds. As the program moves toward debt financing organically, the paper below explores the possibility of adding long-term public debt and assistance from the Federal Reserve Bank as tools to deal with Social Security’s financial shortfall. Experts differ widely on whether increased debt or general fund financing would be a positive change. Findings include:
- A related and deeper problem than how to structure Social Security’s funding is demographic. The U.S. is not producing enough children or allowing sufficient immigration to build the type of workforce needed to sustain Social Security’s current level of benefits.
- Bonds with longer terms than currently issued could help finance Social Security while benefiting private pension plans and insurance products under certain conditions. But the market for them may be limited.
- There are several ways Congress could provide liquidity or short-term funding for Social Security if needed.
- Increased levels of debt financing could affect legal and procedural protections for Social Security beneficiaries now receiving “entitlements” under the budget rules for mandatory spending.
- Proposals to channel Social Security funds into the stock market would significantly increase the amount of money Congress would have to raise through debt or taxes. One pot of funds would be needed to deal with the current Social Security shortfall, and another needed for stock purchases to fund the program in the future.
- The longer policymakers wait to deal with Social Security’s funding problem, the more likely some kind of debt financing may be needed to maintain the program in the future.