Social Security and the U.S. Federal Budget

Social Security is an important part of the federal budget and influences the national economy. Although Social Security is considered separately during the budget process, the program contributes to the government’s overall effect on the economy.

Social Security programs influence economic growth through their effects on labor supply and national saving. The exact degree of their effects is unclear. Economists generally agree that Social Security benefits reduce the labor supply of older workers. The effect of Social Security taxes on overall labor supply is more ambiguous and depends upon the consumption preferences of individual workers and whether workers perceive the tax merely as a reduction in income or as an increase in wealth. Likewise, the effect of Social Security on national saving is not perfectly understood, although most economists agree it reduces private saving to some extent.

Although there is uncertainty about the exact effect of Social Security on national saving, some economists and policymakers believe it may be possible to use Social Security financing to improve economic growth, particularly if Social Security could be used to increase national saving. However, prefunding retirement benefits does not guarantee that increased saving in one sector of the economy will not be offset by decreased saving in another sector. Many economists and policymakers agree that paying down publicly held debt will help the economy and the government prepare for anticipated increases in expenditures resulting from the aging of the baby boom generation.