Well although the attempt to attach Conrad-Gregg to the Debt Ceiling Bill failed, it looks like we are still going to get a Deficit Commission and will be told that in the interest of shared sacrifice and controlling long-term debt now totalling $12.3 trillion and schedule to go up by more than a trillion a year everything has to be on the table, including Social Security.
But this ignores a little inconvenient reality. Cutting Social Security benefits does not cut Public Debt as it is normally reported, we could cut $100 billion a year in Social Security benefits and not change the Debt Clock by a penny. In fact when you get down to the granular level cutting Social Security benfits INCREASES total Public Debt. Which makes the attempt to attach Conrad-Gregg to a Debt Ceiling bill, at least to the extent it concerns Social Security something of a farce, one has nothing to do with the other. To see why this is you have to dive kind of deep into Trust Fund and Budget Accounting, which we can do below.
Although most people see 'debt' and 'deficit' as amounting to more or less the same thing with debt just being the sum of accumulated deficits, when it comes to Social Security finance they are not the same thing at all, in fact under current circumstances they actually work in opposite directions, the amount that Social Security serves to cut the deficit in any given year is almost precisely offset by the amount it increases Public Debt.
To understand this we need to look at the breakdown of Public Debt, which can be done by consulting this handy web application maintained by the Treasury called Debt to the Penny. If we do we can see that total Debt Held by the Public as of close of business Tuesday was $7,849,743,504,000.83 while Intragovernmental Holdings were $4,511,200,485,344.65 for a total Public Debt of $12,360,943,989,345.48 which later is the number you mostly see reported in the paper. Also reported in the paper is a projected deficit number for this fiscal year of $1.6 trillion which most people probably think could be added to the Public Debt figure for Oct 1, 2009 to get projected Debt for the end of FY2010 on Sept 30, 2010. Well no, even if the $1.6 tn number is exactly right the sum won't work out, in fact Public Debt will actually be some $60 billion higher.
The $1.6 tn figure reported as the 'Obama deficit' is the Unified Budget calculation. The Unified Budget takes on-budget deficit/surpluses and sums them with off-budget deficit/surpluses to get a combined deficit/surplus. 'Off-budget' in this context means operations of Social Security and the Post Office with all other government functions being officially 'on-budget'. For my purposes I am only going to address Social Security.
The Social Security surplus is calculated by taking all Income and subtracting Cost with the net credited to the Social Security Trust Fund as 'Net Increase' in assets for the year. Actual results and projections for the combined Trust Funds can be seen in this table from the 2009 Report:
http://www.ssa.gov/...
It is that 'Net Increase' number that is reported as the Social Security off-budget surplus/deficit and added to on-budget surplus/deficit to get our $1.6 trillion combined deficit. Okay but here is where start getting strange.
In 2009 Social Security was projected to run a surplus of $137 billion in 2009 and $138 billion in 2010. Well numbers released by SSA last month and CBO this week put big, big dents in that, those numbers now look to be more like $94 billion and $60 billion such is the effect of 10% unemployment but in any case will score as surplus for Unified Budget purposes. But since those surpluses are converted by Treasury into Special Treasuries and credited to the Trust Funds they equally increase Intragovernmental Holdings and so score as an increase in total Public Debt. Instead of subtracting from our debt total of $12.3 trillion they actually add to it, Social Security surplus = increase in Public Debt = decrease in Unified Deficit. Which leads to some odd results.
Lets say the Deficit Commission proposed to cut Social Security benefits by $100 billion a year starting in 2011, what would be the effect on the deficit and debt? Well under the 2009 projections this would mean cutting benefits from $724 billion to $624 billion. Depending on how they structured the cut this would also eliminate a portion of the Tax on Benefits projected at $28 billion, if we assume that was proportional we end up with maybe a net change of around $90 billion which would take the projected $154 billion surplus to $244 billion. And in turn that would translate to a deficit $90 billion less than projected. Hurrah! But by that same token the Trust Fund balance would be equally $90 billion MORE than projected and so add to Public Debt by that same amount.
Now while this may seem to lead to a totally counterintuitive conclusion that cutting Social Security actually boosts debt there is in fact an offset working on the General Fund side. In our scenario SS benefits are cut by $100 billion with a net savings of around $90 billion after tax effects. In theory that $90 billion in cash savings means $90 billion less in needed borrowing from the Public to account for the Unified Budget Deficit. And that reduction in borrowing removes that same amount from projected total debt. That is in theory a $100 billion cut to Social Security means an increase in Public Debt on the Intragovernmental Holdings side of $90 billion plus a decrease in Public Debt on the Debt Held by the Public Side of that same $90 billion with the net effect being zero.
So cutting Social Security benefits has no net effect on total Public Debt, it simply saves the General Fund that much in borrowing and debt service while adding to a Trust Fund balance whose repayment is already claimed to be impossible by the Social Security crisis-mongers. All it does is screw Gramma over for the benefit of the bond market, the actual bill for repaying the Trust Fund balance in the future actually increasing.
So when Peter G Peterson and friends tell you we need to cut Social Security spending in the present to preserve intergenerational equity know what they are really doing is running up the ultimate tab for future generations while delaying their own responsibility for paying back the money they have been borrowing from Social Security since 1983. Now I suppose they could avoid the Debt effect by simply declaring that these savings should simply not accrue to the Trust Fund at all, that would just be to convert indirect theft to direct theft by totally redefining what a Social Security surplus is. But that is, or at least hope would be, too raw even for some proven thieves and liars, they can't just cut benefits and claim that doesn't add to the current surplus. Can they?