The $17 Trillion Delusion: The Absurdity of Cutting Social Security to Reduce the Debt
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Since 1983, workers have been paying more in Social Security taxes than what was needed to pay retiree benefits. A special commission, appointed by President Reagan and chaired by future Federal Reserve Chair Alan Greenspan, recommended several changes to increase the revenue received by the Social Security Trust Fund. Most prominent among these changes was an increase in the payroll tax rate to its current level of 12.4%, although the Commission also recommended reductions in benefits, including a gradual increase in the retirement age from 65 to 67. The effect of the changes would be to create significant surpluses in the Social Security Trust Fund. The thinking was that, if in the future payroll taxes fell below benefits, the Trust Fund could draw upon the accumulated surpluses to pay benefits.
Therefore the $2.7 trillion of Treasury securities held by the Trust Fund came about not because entitlements are out of control and the government has been forced to borrow to meet retiree benefits, but rather because future retirees have paid more taxes than necessary to meet benefit obligations. Workers have essentially been prepaying into the Trust Fund in order to provide for their future benefits.
So it makes no sense to try to solve the supposed problem of too much government debt by cutting benefits for current and future Social Security recipients. These workers were asked to help keep Social Security solvent by paying increased payroll taxes. As a result, the gross federal debt increased. It would be totally unfair and irrational to cut benefits now because these workers had sacrificed in the past. That would be hitting them with a double burden, the second burden of benefits cuts incurred because there was the first burden of overpaying payroll taxes into the Trust Fund.
What’s more, the strategy the Heritage Foundation advocates would make the alleged problem they are claiming to address even worse. That’s because cutting benefits would mean that payroll taxes would more easily meet retiree benefits, and so the surplus accumulating in the Social Security Trust Fund would be greater. Since the Trust Fund is required by law to invest its surpluses in Treasury securities, a greater surplus translates into more bonds being accumulated by the Trust Fund, and therefore a higher gross federal debt (assuming that Treasury borrowing from other sources remains the same). So cutting Social Security benefits in order to reduce a $17 trillion debt would produce the contradictory result that that debt would be even higher than it would have been without the benefit cuts.
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http://www.truth-out.org/opinion/item/21154-the-17-trillion-delusion-the-absurdity-of-cutting-social-security-to-reduce-the-federal-debt