(Originally published on TheHill.Com)

 

Traditional coverage of Social Security tells voters that if Congress does nothing, the system will continue to pay scheduled benefits for nearly two decades. 

The problem with the analysis is of course that Congress is not in a position to do nothing. It cannot ignore Social Security as the relationship between Congress and the system evolves from private banker to creditor. Over the next 15 years, Congress will have to refinance debt held by the Trust Fund much to the chagrin of those who claim that the Trust Fund doesn't exist. 
 

The media and experts tend to view this process as a seamless transaction that will go unnoticed by the public markets. The reality is that the government will have to borrow more from the public markets at uncertain rates as it competes with private borrowers for cash. This likely means higher rates for both the U.S. Treasury and for private businesses.

The relationship of Congress and the Social Security Trust Fund was largely shaped by the 1983 Social Security Amendments which increased taxes and reduced benefit levels. The combine changes allowed the Social Security system to grow into the largest customer of the US Treasury Department, buying nearly $3 trillion dollars of debt from the government between 1983 and today.

This pool of money largely insulated the government from the reality of borrowing in the public markets. As excess cash from Social Security flowed into government securities, the borrowing cost of the government dropped from 10.8 percent to 2.9 percent.  The latest round of borrowing from Social Security was completed at 2.5 percent.

There is nothing illegal or unreasonable about this relationship.  What is unreasonable is to fail to acknowledge that the relationship is changing, and how the consequences will affect the way we pay for government. 

We are looking at unwinding 30 years of subsidized borrowing over a relatively short period of time. When the Social Security Trust Fund redeems a bond for cash, the Treasury Department must find a source of funds. The government has two options: It can increase taxes in order to buy the debt or sell new debt to a new lender. 
 
This refinancing burden arrives at the exact time that Social Security is reducing its role as the nation's private banker. In short, the best customer of the Treasury is about to become a direct competitor. Consider, if you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving you so that he can open his own shoe store next door to yours.

This process is unfolding quickly.  Since 2010, Social Security has largely been a player on the sidelines, financing much of the interest that it charges the government for the use of the money. For the last 5 years, the Trust Fund largely allowed Congress to stand still while the imbalances continue to grow.  Every year from now on, Social Security will provide less buffer between Congress and its profligate ways. 

It would be wonderful if Congress could do nothing.