Social Security and the U.S. Federal Budget

Economic growth is critical to a nation’s ability to improve standards of living over time, because citizens are able to purchase more goods and services. The desirability of increasing available goods and services will be more important as the baby boom generation starts retiring in about 2010. For example, expenditures for OASDI programs are estimated to increase from approximately 4 percent of GDP in 1999 to nearly 7 percent of GDP by 2075 (U.S. Social Security Administration). Economic growth will not entirely resolve questions about how large the Social Security programs or other federal programs ought to be in relation to the federal budget and the economy. However, economic growth can help future generations by providing a larger income base to use in meeting society’s needs.

Some economists and policymakers believe the Social Security programs could be used to increase national saving and capital investment, and consequently promote economic growth. Some propose greater prefunding of Old-Age benefits (the program is currently a ‘‘pay-as-yougo’’ system), either through individual retirement accounts or larger Trust Fund reserves. Others propose reducing the amount of publicly held debt (meaning government bonds held by individuals or nongovernmental institutions) by running overall federal budget surpluses.

Prefunding Old-Age benefits does not automatically lead to increased national saving. Prefunding would only increase national saving to the extent that saving in one form is not offset by reductions in other types of saving. For example, if individuals offset other types of saving in direct relation to increases in their individual accounts, the net effect may be neutral. Also, if the government borrows from the public in order to fund the accounts, national saving will not change. In other words, decreases in government saving would offset increases in private saving. Likewise, increasing reserves held by the Trust Funds will not automatically lead to increased national saving if the government reduces taxes or increases spending in direct relation to resources held by the Trust Funds.

Reducing publicly held debt could potentially increase economic output by increasing national saving. Persons and institutions selling their Treasury bonds back to the government would potentially seek other ways to use their money. To the extent the private sector is more likely to use the funds for capital investment than the government, the funds would increase productivity and economic output.

Reducing publicly held debt would also reduce the government’s expenditures on interest payments. In fiscal year 1999, the government spent approximately fourteen cents of every federal dollar on interest payments. To the extent the government’s income increases by taxing the larger income base and the government’s expenditures on interest payments decrease, government saving could increase (assuming no changes in tax rates or expenditures). These changes would help create room in the federal budget for the increased Social Security costs of baby-boomers and the generations that follow.