Image: Erskine Bowles
J. Scott Applewhite  /  AP
Erskine Bowles, co-chairman of President Obama's National Commission on Fiscal Responsibility and Reform, testifies before the Senate Budget Committee Tuesday.
By Tom Curry National affairs writer
msnbc.com
updated 3/10/2011 3:43:56 PM ET 2011-03-10T20:43:56

With most of Washington locked in a debate over just how big a bite should be taken out of a (relatively small) portion of overall government spending, one group of senators is pushing forward to face the larger budget challenge.

President Barack Obama has kept a cautious distance from the recommendations issued last year by his own commission on fiscal responsibility — particularly when it comes to entitlements like Social Security. But this bipartisan group of six senators, led by Sen. Mark Warner, D- Va., and Sen. Saxby Chambliss, R- Ga., is keeping the commission's proposals alive and drafting them into legislation.

Fiscal retrenchment, including reining in entitlement spending, can no longer be delayed, they argue. “If we put this off, we are approaching financial Armageddon," Warner told an audience in Richmond, Va., this week.

This week, commission co-chairman Erskine Bowles put Social Security — and its often-misunderstood trust funds — squarely in the center of the debate.

Slow down Social Security benefit growth
The commission, co-chaired by Bowles, President Clinton’s former chief of staff, and former Senate Republican Whip Alan Simpson, recommended slowing the future growth of Social Security retirement benefits, particularly for higher earners, increasing taxes on higher earners, and raising the eligibility age for collecting benefits, except for workers with physically demanding jobs.

But skeptics wonder: why pick on Social Security? Since Social Security will be solvent until 2037, why must it be part of any fiscal overhaul now?

Rep. Xavier Becerra, D-Calif., a member of the Bowles-Simpson commission who voted against its recommendations, has accused Republicans of wanting “to raid Social Security to pay for their past failures to balance the books.”

He said Social Security has “$2.6 trillion in reserves dedicated to paying the retirement, disability and survivor benefits that American taxpayers have earned” and that $2.6 trillion “doesn’t add to our deficit.”

At a Senate Budget Committee hearing this week, Sen. Bill Nelson, D-Fla., quizzed Bowles about why his proposed Social Security changes must be such a central part of any fiscal reform.

What's in the trust fund?
“What people sometimes forget is that when somebody my age goes to collect on their Social Security I want money, cash,” Bowles, who is 65, replied. “And I go to present that obligation to the Social Security trust fund and it doesn't have cash. What it has is the government IOUs there which are as good as gold. But the government has to go out into the marketplace and borrow the money. And so it increases the national debt.”

The gross national debt is now equal to about 100 percent of gross domestic product, the highest level since right after World War II, and it will grow as more Americans retire and collect Social Security and Medicare benefits.

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The controversy hinges on the nature of the Social Security trust funds. They aren’t trust funds like wealthy investors leave for their grandchildren. So what are they?

Some people, such as Bowles, refer to one fund but there are in fact two of them: the Disability Insurance fund and the Old-Age and Survivors Insurance fund.

Most analysts look at the system’s finances as a whole and aggregate the two funds. The Social Security Administration displays all the trust fund data on its site.

Where does the excess money go?
For most of the past 30 years, since the reforms designed by the 1982 Greenspan Commission to extend Social Security’s solvency, the system has collected more in revenue from Social Security taxes on workers than it has paid out in benefits to retirees, widows, orphans, and the disabled.

The excess revenues did not go into “an ironclad lockbox where the politicians can't touch them,” as Al Gore proposed as a presidential candidate back in 2000.

As a Congressional Research Service (CRS) report explained in 2000, “Contrary to popular belief, Social Security taxes are not deposited into the Social Security trust funds ... Along with many other forms of revenues, these Social Security taxes become part of the government’s operating cash pool, or what is more commonly referred to as the U.S. treasury. In effect, once these taxes are received, they become indistinguishable from other monies the government takes in.”

But the Social Security revenues are “accounted for separately through the issuance of federal securities to the Social Security trust funds … but the trust funds themselves do not receive or hold money. They are simply accounts.”

By the end of last year, those securities, or bonds, amounted to $2.6 trillion, the number Becerra used.

The bonds earn interest. That interest — essentially paid by the federal government to itself and amounting to $117 billion last year — helps pay for the benefits.

Last year — partly due to high unemployment and the aging of the population — Social Security taxes collected (nearly $640 billion) were less than the benefits paid out (more than $701 billion). The system had a “negative net cash flow.”

Cashing in the bonds
That reversal points to the future of Social Security when the $2.6 trillion in bonds will need to be cashed in to pay the benefits promised to future retirees.

According to the latest Social Security trustees report, about 14 years from now, the interest earned on the bonds won't be sufficient to cover the annual difference between benefits and tax revenues.

At that point, the trust funds will be drawn down — the bonds will be cashed in — until the bonds are gone in 2037. If Congress does nothing before 2037, benefits would need to be cut by 22 percent to keep the system in balance.

“What often confuses people is that they see these securities as assets for the government,” the CRS report said. They aren’t really assets, but liabilities.

Or as the Congressional Budget Office explained in a report to Congress, “The balances in the trust funds (in the form of government securities) are assets to the individual programs (such as Social Security) but liabilities to the rest of the government.”

“When an individual buys a government bond, he or she has established a financial claim against the government,” the CRS said. But “when the government issues a security to one of its own accounts, it hasn’t purchased anything or established a claim against some other person or entity. It is simply creating an IOU from one of its accounts to another.”

The bonds are a promise to pay benefits in the future — but not the ability to pay those benefits.

Effect on the rest of the federal budget
“The redemption of those bonds can only occur out of current income,” explained Senate Budget Committee chairman Kent Conrad, one of the Warner-Chambliss “Gang of Six,” last month.

“The general fund has been borrowing from Social Security and we've borrowed well over $2 trillion,” he said. “That money has got to be paid back. How's it going to be paid back? It's going to be paid back by the other general expenditures of the federal government having to be reduced to make way for the payments that we're going to have to make on those bonds.”

It may also require increasing taxes, which the Bowles-Simpson report recommends and which the gang has not ruled out.

With the need to cash in the bonds held by the trust funds, Conrad said, “we’re going to see a dramatic impact on budgets” because the rest of the federal government’s operations, from Navy aircraft carriers to National Park Service rangers, have been “enjoying in effect a subsidy from the Social Security trust fund of several hundred billion dollars a year.”

He concluded, “Instead of having several hundred billion dollars a year coming in from Social Security that we could send somewhere else, those days are over.”

Would this gloomy picture have been different if Gore had been able to create his “ironclad lockbox”? No.

As the CBO has explained, “Even with the securities held by the trust funds and with a dedicated future stream of revenues, by 2039 those resources will be insufficient to pay the full benefits that will accrue under current law.”

“Some of this is just math, you know,” Warner said recently. “Sixteen workers for every one retiree 60 years ago… and now it’s three (workers for each retiree). It’s not a Democrat or Republican problem, it’s just math.”

And the math is pointing to higher taxes and a reduction in future benefits.

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