Why Can Social Security Go Bankrupt, But The Department of Defense Can’t?


Every few years, especially around the Presidential Election season we begin hearing about the “fact” that Social Security and Medicare are going “Bankrupt” or “will soon run out of money”. The Wall Street Journal reported that those under 40 shouldn’t expect much more than 70% of what your benefit statement says. The press and one party or another have jumped on the bandwagon (if you doubt me, just type in “social security bankrupt” into google) and the full-court press to discredit Social Security is underway.

What I’m about to write is party agnostic, though it is controversial (strange how facts can be controversial) – regardless of what you may think of Social Security, there are certain truths that need to be taken into account before one declares the program on life support.

My controversial statement is: If Social Security goes “bankrupt” or pays out less benefits than it is currently projecting – this will be a function of a political decision, not a funding constraint.

But, Scott, you must have read the Annual Trustee’s Report that stated Social Security and the other programs are set to run out of money, right, how is that a political decision and not a funding constraint? Good question, glad you asked, here goes:

Background

Do you find it curious that there is never an annual “trustee” report stating that the Department of Defense (or choose any Federal Government bureaucracy) will run out of money in “x” number of years? Why is it that we NEVER have a funding deficit for so many huge federal government programs (DOD, CIA, FBI, Department of State, etc…)? The simple answer is that none of these programs are connected to a specific tax that is imposed, unlike Social Security & Medicare.

The only reason we see Social Security and Medicare as having “deficits” is because we only allocate the tax revenues from FICA taxes to the funding of the respective programs. This creates the perception that these programs are separately funded and can run out of money. If these were state programs, then yes, they could run out of money, but since they are federal programs, paid for with U.S. Dollars and the federal government is the chief and sole issuer of U.S. Dollars – there can never be an a funding constraint. The Federal Government can ALWAYS issue dollars to fund Social Security and Medicare so long as it has the political will to do so.  In other words, Social Security is not revenue constrained (taxes don’t fund spending anyways), it is politically constrained.

If FICA taxes were eliminated tomorrow, Social Security would not go away, it would become part of our normal budget (as most other programs are) and the talk of a “bankrupt” system would disappear (note, talk of a “bankrupt” nation would not – but that’s a separate topic).  One can argue the long term effects of having Social Security on budget or off as well as the wisdom of printing money to fund these programs – but those are entirely different arguments than saying that Social Security is going bankrupt or is revenue constrained – it is not and cannot be, it is only constrained by politics.

There is so much more I could write on this topic and I likely will come summer (especially about the accounting of the “surplus” in Social Security), but for now, please, let’s stop the fear mongering that some how the United States, who is the monopoly issuer of the Dollar is somehow revenue constrained and unable to meet some future obligation – it simply isn’t true.

Scott Dauenhauer, CFP, MSFP, AIF

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One thought on “Why Can Social Security Go Bankrupt, But The Department of Defense Can’t?”

  1. I hope to hear more on this topic from you especially in light of the selection of Ryan as VP nominee. Your explanation of this as well as your post on the error found in 2016 make too much sense. Just tired of one side or the other lying to voters in order to get them to vote the way that they wish.

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