Does Social Security Really Add to the U.S. Budget Deficit? Here's How it Works

The following is a “fact-check” piece from The Associated Press. It was not conducted by The Blaze. Weigh in with your thoughts in the comments section, below.

WASHINGTON (AP) -- Now that Social Security is paying more in benefits than it collects in taxes, there is a fierce debate among politicians, academics and advocates about whether those shortfalls are adding to the federal budget deficit.

The issue is important because the federal government's annual deficit already exceeds $1 trillion, making any more borrowing tough to swallow. If Social Security is adding to the government's financial problems, it becomes even more urgent to fix it.

"Over 77 years and now through 13 recessions, Social Security has not added one penny to our deficit or our debt," Rep. Xavier Becerra, D-Calif., said at a recent hearing by the House Ways and Means Social Security subcommittee. Becerra is the top Democrat on the panel.

"I believe that Social Security has not contributed one nickel to the deficit because it is funded by the payroll tax," Sen. Bernie Sanders, a Vermont independent who heads the Senate Social Security caucus, said in an interview.

Former Sen. Judd Gregg, R-N.H., disagreed.

"We all know that it's on a cash-flow basis," Gregg said in an interview. "The cash comes in, the cash goes out, and right now we're running a negative cash flow."

The Facts: Social Security's shortfalls are adding to the federal budget deficit, in a roundabout way. One big reason: The rest of the government has been running such huge deficits over the years that it has spent all of the surpluses accumulated by Social Security.

Here's how it works: For nearly three decades Social Security produced big surpluses, collecting more in taxes than it paid in benefits. The government, however, spent that money on other programs, reducing the amount it had to borrow from the public, including foreign investors. That's why some advocates complain that Congress has "raided" Social Security.

In return, the Treasury Department issued special bonds to Social Security. The bonds are now valued at $2.7 trillion. They are accounted for in two Social Security trust funds, one for the retirement program and one for the disability program.

The bonds pay interest like other Treasury notes and are backed by the full faith and credit of the U.S. government.

Social Security is now spending a portion of the interest because it needs cash to cover monthly benefit payments. This year Social Security is projected to pay $789 billion in benefits and administrative costs and collect $623 billion in payroll taxes and taxes on benefits, a shortfall of $166 billion.

About $112 billion of the shortfall is from a temporary reduction in the payroll tax that is scheduled to expire in January. There is no question that money adds to the budget deficit because Congress financed the tax cut through borrowing.

The rest of this year's shortfall, about $54 billion, will be financed by the interest payments. Social Security's trust funds are projected to earn about $110 billion in interest this year.

Until recently, the interest payments were an accounting device, with one part of the government crediting an account held by another part of the government. As interest accumulated, Social Security's trust funds grew on paper but no money changed hands because the program had plenty of cash from payroll taxes to pay benefits.

Now that Social Security needs money from the interest payments to cover monthly benefits, the cash has to come from somewhere.

"If you don't have the cash to pay for it, then you have to borrow that money from China or you have to raise taxes," Gregg said. "Those are the only two options."

Becerra, however, said it is wrong to blame Social Security for adding to the budget deficit when it is simply spending money generated by its investments. That's like blaming bondholders for expecting to be repaid, he said.

"If we don't owe Social Security - Americans who paid into it - then we don't owe the foreigners either," Becerra said.