Shortly after the ceiling on federal debt was raised on October 17, 2013, the conservative Heritage Foundation notified its readers that the outstanding debt of the United States had “rocketed past $17 trillion,” and that “entitlement spending—the key driver of spending and debt—remains unaddressed.” The three assumptions in that statement—that the true measure of our debt is $17 trillion, that the cause of the buildup of debt is entitlement spending, and that therefore the appropriate policy to “address” this problem is to cut Social Security benefits and other “entitlements”—are endorsed by many politicians and policy pundits in Washington. But they’re all wrong as economic analysis and disastrous as policy recommendations.
Seventeen trillion dollars certainly sounds like a big, scary number, especially when national debt clocks tell us that this translates into more than $53,000 for every person in the United States. But we shouldn’t be focusing on that number.
The $17 trillion figure is a measure of “gross debt,” which means that it includes debt owed by the U.S. Treasury to more than 230 other U.S. government agencies and trust funds. On the consolidated financial statements of the federal government, this intragovernmental debt is, in effect, canceled out. Basically, this is money the government owes itself. What is left is termed “debt held by the public.” It is this measure of debt that is relevant to a possible increase in interest rates due to competition for funding between the private and public sectors. It is also the category of government debt used by the Congressional Budget Office and other analysts. (Of course, the full economic significance of any debt measure needs to be considered in context, in relationship to the income available to service the debt.) The total debt held by the public is $12 trillion.
The Social Security Trust Fund owns $2.7 trillion of the $5 trillion of Treasury securities held in intragovernmental accounts. In fact, Social Security is the largest single owner of Treasury securities in the world, surpassing even China’s significant holdings of $1.3 trillion.
Social Security accumulated all these Treasury securities because of the way that its finances are organized. Social Security benefits to retirees (and to the disabled) are paid for by a payroll tax of 12.4 % on workers’ wages (with 6.2% paid by the worker and 6.2% paid by the employer), up to a limit, currently $113,700. If, in any year, Social Security revenue is greater than what is needed to pay current retiree benefits, the surplus must, by law, be invested in Treasury securities (most of which are “special obligation bonds” issued only to the Social Security Trust Fund).