What happens when Social Security runs out of money?

0:01NPR

0:11This election, how the US government is going to pay for stuff is less clear than ever. Donald Trump has proposed to eliminate taxes for everybody from firefighters to people working overtime. He's also proposing cutting taxes on Social Security benefits. And the Committee for a Responsible Federal Budget last week released a report that has estimated that that policy, among others, would mean that the Social Security Fund would run out of money in 2031. That's a few years earlier than it would be otherwise. Now, to be clear, when the Social Security fund runs out of money, it doesn't mean that no Social Security payments will go out to retirees and disabled people and survivors of deceased spouses.

0:56But if nothing is done, it could mean lower payments. To date, Social Security has been self-sustaining. And when it runs out of money, as it's projected to do, politicians might ask, could we just borrow more money? If the government starts borrowing for Social Security, though, that would put pressure on already rising government debt. That's right. The Committee for a Responsible Federal Budget separately estimated that both candidates' policies would increase the wider federal debt. Kamala Harris by around$4 trillion over 10 years. And Donald Trump nearly double that. This is The Indicator for Planet Money.

1:34I'm Adrian Ma. And I'm Darian Woods. Today on the show, given all these election goodies for voters, how worried should we be about social security and the federal debt? Today we explain a fresh indicator to assess whether or not America's getting too far in the red.

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2:57Simplify how you stock up to get ahead. Go to amazonbusiness.com for support. When you're talking about the government's finances, a good place to start is Social Security that accounts for more than 20 % of all government spending. The way Social Security works is that payroll taxes go into this big fund, which then pays out monthly checks. But the problem we have now is the money coming into that fund is not keeping up with the money going out. Under current policies, the Social Security Fund is estimated to run out in about nine years. Jason Furman is an economics professor at Harvard University and served as chair of the Council of Economic Advisors under Obama.

3:38Under the way the law functions now, it's not entirely clear what has to happen. But it appears to be the case that the Social Security Administration would automatically cut everyone's benefits, and they would just have to do that legally. Those automatic cuts would be nearly 20%. And in the past, they've been avoided. Politicians on both sides of the aisle came together and found compromise, raising a little more payroll tax here, trimming benefits there. In the early 1980s, Congress agreed to raise the age of full retirement benefits to 67, while payroll taxes rose. There is a third option, though.

4:17Now, Congress could pass a law saying you're allowed to borrow money and send people full benefits. I think that would be unfortunate because that law would just take this deficit in Social Security and shift it elsewhere in the budget. It means it would squeeze money that currently is going for education or medical research or something else. But that would, regardless, require a law of Congress to borrow money. And if Congress starts borrowing money instead of paying retirees and others through payroll taxes built up through the Social Security Fund, well, that adds to the national debt, which is already very high by U.S.

4:56historical standards. Under current policies, it's on track to hit 125 % of gross domestic product in about a decade. Gross domestic product is the value of everything that the country produces in one year. So if you hypothetically spent all of America's earnings on paying down that national debt, it would take a year and a quarter. The Committee for a Responsible Federal Budget estimates that Donald Trump's policies would raise the debt even further, to 143 percent by 2035. Kamala Harris's policies would also cause an increase to the debt, but less so, to 134 percent. Either way, there seems to be a bipartisan lack of concern about the federal debt this election.

5:39So we asked Jason Furman whether he was worried. It concerns me to some degree. Debt cannot be indefinitely on a rising path. If it keeps rising decade after decade after decade, eventually you're going to hit a problem. It's a little trickier to pinpoint exactly when you do hit that problem. Argentina had a huge crisis when its debt was only 45 % of GDP. Great Britain 150 years ago went all the way to 250 % of GDP without having a problem. So we don't quite know where the line is. We don't know when we'd cross it, but we can't keep going this way forever. And I'd rather stop digging the hole deeper now than wait to figure out what the point of no return is.

6:29And even if there is not a crisis, Jason says more government borrowing means higher interest rates for everyone in the economy. When the debt is higher, that puts upward pressure on interest rates. Basically, there's a limited pool of saving. And if the government is competing for more of it and borrowing more of it, that drives up the price. Just like anything where demand goes up, the price goes up. So, for example, mortgage rates are pretty high right now. You want to bring mortgage rates down? Well, it turns out cutting government spending or raising taxes would take some of the pressure off of mortgage rates and help families in addition to businesses.

7:08So where is the point where this is just too much borrowing for the economy? At the moment, one of the main measures people use is that debt-to-GDP ratio, the 143 % debt-to-GDP ratio under Trump or 134 % under Harris. That sounds scary, but we don't need to pay our debt off in a single year. It's not like we need to take all of that year's income to pay the debt off. We can spread it over time. How easily you can spread it over time depends a lot on what the interest rate on your debt is. So when interest rates are lower, I think higher levels of debt are sustainable. And by the way, right now, interest rates are higher than where they were prior to the pandemic, but they're a lot lower than they were 30, 40 years ago.

7:53And so we do have more room to run debt than I would have thought 20 years ago. So instead of looking at the famous debt to GDP ratio as a measure of how secure the government's finances are, Jason prefers to look at how much it's spending each year on interest payments and how that compares to the size of the economy. I like looking at real interest payments as a share of GDP. Real interest payments, just meaning adjusted for inflation. When inflation is high, the government's actually doing great on its debt because high inflation means that debt isn't worth as much. So yeah, he just wants to adjust for that effect.

8:32How much is the government paying on interest after inflation. And if you look historically, if that ratio is below 2%, generally we've been fine. As it approaches or exceeds 2%, we've seen some bigger tremors in the economy. So for me, that is the metric I keep my eyes on. And where are we now in the US? Are we above or below that magic 2 % number? So we are currently below that magic 2 % number, but under either candidate's plans within a decade, we will be at or above it and continuing to rise, which is why I think we should take steps now to avoid being in that position, but also why I'm not panicked.

9:15We don't need to drop everything, have a huge fiscal summit to figure out all our problems, but let's not make them worse when we're heading above the threshold that might be a danger signal. In the past, a spark for a big fiscal summit has been social security crises. Yet, in some ways, the whole conversation about Social Security running out of money is an accounting fiction. Yeah, under the current law, it would need to trim payments to retirees and others. But Congress can always change that law. On the other hand, it is one big burning platform that brings Congress people together to work on either raising more taxes, cutting spending or some combination.

9:57It's an incredibly useful accounting fiction. It served the program well for 90 years. It served our country well overall. And I would much rather politicians be brought to the table by an accounting fiction than by a very real fiscal crisis. We tell each other accounting stories to live, Adrian. Yes. This episode was produced by Angel Carreras with engineering by Maggie Luther. It was fact-checked by Cyril Juarez. Kate Concanon edits the show and The Indicator is a production of NPR.

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