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Retirement Planning > Social Security > Social Security Funding

What’s at Stake for Social Security as Debt Deal Moves to Senate

By John Manganaro

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News emerged late Wednesday that the House had passed debt-limit legislation forged by President Joe Biden and House Speaker Kevin McCarthy that would impose restraints on government spending through the 2024 election and avert a destabilizing U.S. default.

A majority of lawmakers from both parties approved the bill in a 314-177 vote, sending the measure to the Senate for consideration as the June 5 default deadline declared by Treasury Department leadership draws near.

According to Greg Valliere, chief U.S. policy strategist at AGF Investments, the bipartisan house vote represents a “remarkable” compromise, but he also remains concerned about what will happen now in the Senate. He warns that a default remains “very possible.”

Debt Deal Is Closer, but Not Finished Yet

“The remarkable House votes this week should have ended the debt ceiling crisis, but nothing in Washington is quite that simple,” Valliere warns in new commentary on the AGF website. “The drama now shifts to the Senate, where angry opponents of the bill may push for amendments in the next few days.”

Valliere says this possibility raises a mind-boggling potential twist: Could Washington still run out of money by the June 5 default deadline even with a deal that effectively sailed through the House and enjoys widespread support in the Senate?

To be clear, Valliere says, the proponents of the Biden-McCarthy deal have the votes to pass it. But in the “bizarre world of Senate rules,” even one member can object to a bill, he warns, potentially tying it up for as long as a week.

According to Valliere, all eyes will be on the Senate’s “noisy dissidents” in the coming days, among them Lindsey Graham of South Carolina and Rand Paul of Kentucky. Another objection could come from Tim Kaine, a Virginia Democrat, who wants to strip special approval of a new pipeline from the bill.

Why a Delay Could Be Serious Business

As Valliere points out, the Treasury’s cash balance fell to just $37.4 billion on Tuesday, and as such, budget experts believe the June 5 default date is “very real.”

“If there’s no Senate deal by Monday, the Treasury Department would have to scramble,” Valliere says. The debt managers might then tap into the trust funds for highways or Social Security, “selling bonds to avoid default and then buying them back once the Senate passes the bill.”

While that would avoid default, Valliere says, a serious question could arise: Would this be the last straw for the credit agencies, which could downgrade U.S. debt ratings?

As Valliere recalls, Standard and Poor’s downgraded U.S. debt in 2011 after passage of a deal to avoid default, and the same thing could happen again. While not as catastrophic an event as an outright no-deal default, such a downgrade could increase future borrowing costs.

How Social Security Could Lose Out

While the proposed limits on food assistance programs and the lack of a new work requirement for Medicaid recipients may be getting most of the attention from the general public amid the ongoing debt ceiling debate in Congress, one element of the deal is raising the ire of retirement industry experts for its roundabout potential to harm the Social Security program.

Specifically, experts like the Social Security League’s Mary Johnson and Boston University’s Laurence Kotlikoff are raising the alarm about the deal’s treatment of funding for the Internal Revenue Service, and the possibility that the already resourced-strapped agency will have to endure substantial budget cuts in the years ahead.

Their fears for Social Security are based on the fact that the retirement income insurance program is funded by tax revenues. With fewer resources to employ IRS agents and to conduct audit activities, they warn, there is a real chance that the Social Security program will miss out on future revenues that it would otherwise have been able to expect.

As the experts warn, the Social Security program is already on track to see its main trust fund used to pay retirement benefits go bust in the early to mid-2030s, and any reduction in anticipated revenue going to the program will just deepen and accelerate the insolvency issue.

“I would argue that the IRS funding is sorely needed to address customer service needs, speed up refunds, and to go after tax fraud,” Johnson wrote to ThinkAdvisor in an email on Wednesday. “The public, and older adults, generally support efforts to reduce fraud and recover back taxes.”

How the Deal Could Hamper the IRS

As reported by Reuters, Bloomberg and other outlets, the budget deal would shift $10 billion each in fiscal years 2024 and 2025 in already-pledged funding away the Internal Revenue Service.

For context, this represents a little less than a quarter of the total $80 billion in new funding awarded to the IRS in Democrats’ signature Inflation Reduction Act of 2022.

At the time of the bill’s passage, party leaders suggested the added IRS funding would effectively pay for itself while also helping programs such as Medicaid and Social Security, because the infusion of resources would allow the IRS to conduct substantial audit activities and otherwise ensure the collection of taxes owed by wealthy Americans.

For its part, the White House says it believes the IRS can manage in the near term, but agency leaders may need to seek more funding from Congress for future years, officials have said.

According to Reuters, the text of the House of Representatives legislation released on Sunday showed the deal would take back just $1 billion from the IRS, but the White House has reportedly agreed to sizable additional cuts as part of the appropriations process that will take place over the next two years.

What It Means for the IRS and Social Security

While Johnson says she appreciates the critical importance of the debt ceiling and budget deal, she argues that cutting funding from the IRS will ultimately prove counterproductive.

“The proposed cuts to IRS funding will actually increase the deficit long term,” Johnson says. “The Congressional Budget Office has estimated that the IRS would potentially collect far more than we would spend in the new IRS funding [under the Inflation Reduction Act]. Thus, if the GOP was seriously interested in reducing the deficit, they would not insist on cutting IRS spending or collection efforts.”

Johnson suggests the “optics” of the deal for those members of the GOP who are pushing IRS funding reductions imply they “aren’t interested in going after tax cheats,” a sentiment echoed by Kotlikoff.

“In fact, they appear to be making it easier for taxpayers to cheat,” Johnson says. “The worry about all this impacting tax revenues going into the Social Security and Medicare trust funds is correct. Fewer audits would mean less revenue going into both trust funds.

“I believe the case can be made that these cuts could have a more negative impact than [new limits on] food stamps, which are likely to be smaller in scope and savings,” Johnson says.

Kotlikoff’s comments were even more scathing, and he once again encouraged all advisors to study these issues, and to see the debt ceiling fight for what it really is: a clear sign that the federal tax system and the Social Security system are both “beyond broken.”

To that end, he encouraged advisors and the public at large to think carefully about the idea of cutting funding directed to the SSA’s administration and operations — whatever one thinks about the long-term future of the program.

(Image: Shutterstock)

John Manganaro

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