Why Social Security is debt by another name

There is a lot of debate in America today about the country's long-term fiscal position. Some of the confusion around this debate centers, I think, on what seems like a minor technicality: the definition of what is a tax and what is borrowing. Most people view Social Security payments as a type of tax. Indeed, the payment is even called “Social Security tax.” But it's just as sensible, or perhaps even more sensible, to view Social Security as a form of debt taken on by the US federal government. Here's why.

What's the difference between taxing and borrowing? This seems like a very simple matter, but it's not. This might pass as a sensible definition of a tax: A tax is money charged by the government that it is free to use however it wishes, obviously within the confines of the system of government (laws, citizen approval if it's a democracy, etc.). It does not create a specific liability and does not have to be paid back in a specific way. Sure, we expect our governments to spend the tax money we pay in some fashion that will benefit us in some way, but there isn't a specific liability nor specific need to pay us back in a specific way (and it is usually accepted that more money is taken from some groups than they receive and vice versa).

Borrowing, on the other hand, means there is a specific liability. If someone borrows money from you, the understanding is normally that they will pay it back with interest. The way they pay it back, and how much they pay back, are usually subject to the terms of the borrowing arrangement.

Viewed this way, Social Security is more like borrowing than a tax. You give money to the government in the form of the Social Security tax, but the government is obligated to pay it back to you in the form of a pension. In effect, the government has borrowed this money from you and this has created an obligation. In the private sector, any such arrangement would be counted as a debt and accounting rules would mean that the company would have to show how it planned to pay for the future liabilities it was incurring through this debt. Governments, however, are not required to do this. If the US government were required to list Social Security payments as a tax, US government debt today would already be much much higher than its current official figure. In fact, it would be around $61.6 trillion if Social Security, Medicare, and Medicaid (also promises the government makes to pay for care over time that are currently unfunded and thus a form of borrowing). That's a debt-to-GDP ratio of around 411%!!! Put another way, that's over $205,000 of debt per person in the US! That makes my student loans sound like a pittance. Basically, everyone has to pay for an additional mortgage or two before they retire.

Members of the tea party who are really thinking (that may not be a large proportion) are upset because of figures like these. They are right to be. One group of citizens who are not particularly upset are young people. This must be because of ignorance, since they are the ones who are going to bear the brunt of this massive debt burden, a colossal transfer of wealth from the young and healthy to those who are old and need care.

It's a thorny issue to say the least. These debt obligations are also moral obligations to make good on what the government, and through it the American electorate, have promised. We surely can't cancel old peoples' pensions or simply stop paying for care for the needy and the old. But we do have to take action, and it has become clear that the amount of payments we are currently set to dispense are simply unsustainable. In some way, healthcare costs must be brought down (see my plan), the pension age raised, contributions to Social Security and healthcare programs increased, and, possibly, Social Security payments reduced in some way. This is horrendous, but it is unavoidable. The longer we ignore it, the worse it will become.


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