Currently, contributions to Social Security are greater than payouts because members of the large baby-boom generation are currently in their prime earning years. But the baby-boomers are about to start retiring. In fact, an increase in the Social Security tax was passed just to help fund their retirement.

This money should be saved/invested in order to make it easier for the younger generation to support the baby-boomers after they retire. How could this happen? If the rest of the government budget was in balance then the current excess of Social Security contributions over payouts would result in more investment.

Here’s how a surplus produces investment: an excess of Social Security contributions over payouts (assuming the rest of the government budget in balance) would be used to reduce outstanding debt. That means buying back bonds. That means more money in the hands of former bond-holders, who clearly were interested in saving the money, not spending it. To save that money they’d buy corporate bonds or stock, or put in the bank, etc., all of which would encourage more investment in real, productive assets. Investment now means increases in productivity in the future. A more productive younger generation would have an easier time supporting the soon-to-be-large number of retirees.

That’s why it’s important to look at the real deficit that does not include Social Security contributions in excess of payouts. The current deficits indicate that the government is spending far in excess of revenues, thereby more than offsetting intended Social Security saving.  And, as the annual total deficit graph shows, the situation is not improving, even after a recession.

The reasons for the annual total deficit continuing at near-record levels — even after a recession — are not hard to find: (1) huge tax cuts; (2) Iraq war expenditures.