Dumb question about SS/Medicare and the deficit

[wryter2000]

I know you'll be shocked (shocked!) that a DU mod should ask such a dumb question, but this has been bugging me since I looked at my W2. :)

Box 2 is "FEDERAL INCOME TAX WITHHELD"
Box 4 is "SOCIAL SECURITY TAX WITHHELD"
Box 6 is "MEDICARE TAX WITHHELD"

To somehow lessen the budget deficite and, therefore, the national debt by decreasing "entitlement" (gag, I hate that word) payments, wouldn't you have to take money out of boxes 4 and 6 to pay for things that are normally paid for out of box 2? (The only way SS/Medicare could be contributing to the deficit would be if some money from box 2 is going to pay benefits, no?)

In other words, we'd all be paying the same social and medicare taxes but not getting the same benefits. (This, of course, is a totally separate argument about whether the money in boxes 4 and 6 will be enough in the future to continue paying benefits at the same level. It's also a different question from whether ss/Medicare should be "privatized.")

[Turbineguy]

1. Shhhh!!!!!!!

Don't tell anybody! It's supposed to be a secret.

[wryter2000]

4. LOL

A well-kept one. I'm sure if I tell David Gregory, Katie Couric, Diane Sawyer, or George Stephansnaglepuss, they'll report on this so the American people are well informed. :evilgrin:

[Yavin4]

15. Nah. David Gregory et al. Are Math Challenged

That's why they like telegenic people like Paul Ryan.

[rucky]

2. In that scenario, it would be a de facto tax increase

and the worst kind, since it affects everyone's income for the first 90-some thou, then the cap.

What if they raise the cap and use the difference to cover the deficit?

But we don't know if they're planning on cutting the tax rate in accordance with the cuts or not. if they do, then it's not helping the budget - they just want to slash the program and are counting on people not knowing how the budget works.

[rurallib]

3. yep - you pretty much got it right.

Money tagged for medicare and SS has for years (since Nixon I think) been thrown in to a large pile along with general revenue. Therefore Repugs claim that Medicare and SS are part of the general fund. Not true. This was the genesis of Al Gore's "lock box" comments in the 200 election.
Another non-truth that the right pushes is the whole $14.5T debt. Much of that is owed to citizens in the form of bonds owned by citizens and much of SS is in Tbills (~$5T). So the debt is not exactly what it is purported to be. It is money we owe to us.

[wryter2000]

9. Interesting

I figured they were getting the bogus argument by looking at the checks the government issues. Of course, a lot of money goes out every month for SS and Medicare. It reminds me of the fake math that "proved" that autoworkers make $75/hour or some such idiocy.

[flamingdem]

5. Please stand up and throw logic out the window and bow down to Paul Ryan

because Republicans and Teafarty members think he's hawt and has currage.

[dixiegrrrrl]

6. Box 4 and 6 have been spent by the government for decades.

It essentially was just another tax we paid, it was used in part to pay then current retirees, but a lot of it went
poof! down whatever drain the government flushes our taxes.
A never ending drain.

[Turbineguy]

8. If there was ever a tax cut

for the rich, boxes 4 and 6 are it.

[alc]

7. special bonds.

The money from box 4 (social security tax) was used to purchase "special treasury bonds". That money was used by the government the same way as money from box 2 (federal income tax) and money collected from selling normal bonds.

The government now has 2 sets of bonds that need to be repaid
* SS trust fund bonds
* normal bonds

We need to borrow to repay either of those when they come due since we have a deficit. This year SS needs money so they want to cash in some of the bonds. When that happens, the feds need to borrow money to pay SS and the deficit goes up.

Lenders (China, Japan, Trump, etc) don't really care if we honor the SS bonds - they are "special", and to a lender they are "money we owe ourself". If we default on those it doesn't lower our credit rating. If we default on the bonds we "owe to someone else", then lenders get scared and it gets harder to borrow.

[wryter2000]

10. Thanks so much to everyone

:hi:

[econoclast]

11. Given how important SS is, it always amazes me how little is understood about how it works

Ok. Here is the history. Since the inception of SS in the thirties the rules have ALWAYS been thus :

SS tax receipts (box 4 on the W2) are used immediately by SS to pay current benefits.     A surplus exists if SS collects more in current taxes than it pays out in current benefits. 

SS is "off budget". The budget deficit does NOT include SS in any way. ( except perhaps the interest paid to the SSTF on their holdings of US Treasury securities ... I have to check that out ). But if the budget deficit is 500 billion dollars and SS has a 100 billion surplus, that does NOT reduce the deficit to 400 billion dollars. What it DOES do is reduce the amount of the 500 billion deficit that the government has to borrow IN THE MARKET. 

The deficit is 500billion, but they only haveto raise 400billion in the market. The rest comes from selling 100 billion to the SSTF. This is how it was designed. Really. You can go to the SS website and search for the official historian. They have one. There you can see for yourself that it has been like this sinse the 30's

FYI. For a period starting in the LBJ administration and ending in the Reagan administration SS WAS "on budget" and SS surpluses WERE put "on the budget" and any SS surplus did reduce the reported budget deficit. They called it the "unified budget". (There is a school of thought that thinks LBJ did this to hide the true cost of the Vietnam war.)   But that stopped in the 1980's and SS was again put "off budget". 

What about when SS itself has a deficit? IE SS takes in less in taxes than it pays out in benefits. I think this is the first year that will happen. Then, the process works in reverse.

Suppose the government budget deficit is 300 billion dollars. But suppose SS has to pay out 80 billion in benefits in excess of what they collected in taxes. Where do they get the money? They redeem 80 billion of their treasuries. Ok. Where does the treasury get the money from if the government already has a deficit. They borrow it in the market. So, the budget deficit is 300 billion but they have to go to the market to raise 380 billion dollars. 300 to finance that year's budget deficit and 80 to pay off SS

So, SS doesn't impact the budget deficit, but does impact how much the government has to raise in the market.

To turn the 2.4 trillion in assets in the SSTF into the cash needed to make future payments, those assets have to be redeemed. Which means that, since the government seems likely to continue running budget deficits, to get that cash the government will have to borrow an additional 2.4 trillion dollars in the market. That is an additional 2.4 trillion on top of what they need to borrow to cover the annual budget deficits.

Forget about default....the real question is....is there a limit to how much the US can borrow at reasonable interest rates?    Is the well bottomless?     And if it is not,    What will interest rates have to be to attract enough cash to meet our borrowing needs?

In a sense, the current crisis atmosphere around the world plays into our hands as it increases demand for Safe assets.    And nothing is safer than US treasuries.    So the "flight to quality" helps keep rates down and US borrowing costs relatively low.    

[wryter2000]

13. Thanks

I'm so glad I started this thread. DU has such smart and well-informed people. :hi:

[Gormy Cuss]

12. Don't hate the word "entitlement." Embrace its meaning in this context.

It has nothing to do with unearned privilege. It has specific legal meaning appropriate to discussing government programs, namely the right to benefits of government programs.

[wryter2000]

14. Hi, Gormy

I really ought to get my butt back to C&B, but I've been so busy.

You're right about the word, but they say it with such a sneer. "If y'all didn't feel so ENTITLED to money that you didn't earn, we wouldn't have all these debts." I guess it's like the word "liberal," which I do us.

[RebelOne]

16. "Entitlement" to me means that

for all the many years that I worked I deserve the social security taxes that I have paid in. And I am collecting social security now, and I am entitled to receive it, as it is my money.