Upon Further Review...

At Angry Bear, pgl throws the yellow flag on Greg Mankiw:

Greg Mankiw commits an intellectual foul in my view as he graphs the ratio of the Federal government debt held by the public to GDP as if our payroll contributions to prefunding our Social Security benefits are really employment tax increases designed to pay for that tax cut for Bill Gates et al...

Is Greg Mankiw recommending this backdoor employment tax increase? If he is, his graph makes sense.

It is certainly true that "debt held by the public" does not include government liabilities held in the Social Security Trust Fund, and that deficits look a good measure larger if we exclude surpluses of payroll contributions over Social Security benefit payments:

   

   

So, Social Security surpluses do indeed finance current spending in any given year. But if those surpluses truly do represent "prefunding our Social Security benefits", then the future payments to beneficiaries will be paid out of the debt accumulated by the Social Security trust fund. And the assets of the trust fund are simply Treasury securities that the government keeps for itself. 

Where will the funds to retire those securities come from?  With no social security surpluses, the answer is general revenues -- mainly individual and corporate income taxes.  While it is possible that some future Congress will choose to address the liability posed by trust fund claims by raising payroll taxes, that is not the default.  It may be fair, of course, to warn of "backdoor" tax increases generically.  Professor Mankiw says as much:

The looming problem with fiscal policy is the longer-term outlook, which will unfold over the next several decades as the baby-boom generation retires and starts collecting Social Security and Medicare. At that point, this series will start rising rapidly unless taxes are raised or spending is reduced compared with benefits promised under current law.

But a backdoor employment tax increase? Not necessarily.

UPDATE: Brad Delong notes, with approval, Jason Furman's comments at MaxSpeak :

My friend Greg Mankiw says we shouldn't be worried about the current fiscal situation, just the looming fiscal challenge. I'm not quite sure what to make of the statement, back in the Clinton administration our argument for running large surpluses and reducing the debt was precisely to prepare for the looming fiscal challenges.

First, although Greg can defend himself on this one, I think his point was pretty close to Jason's.  Second, although there may have been arguments for running large surpluses, the only year in which non-trust-fund surpluses actually arose was 2000.  Third, the policies in place at that time were arguably very far from addressing the "looming fiscal challenges." 

Just to anticipate the response to these comments, I am not arguing for or against economic policies put into place post-2000.  The fact, clearly articulated in the Mankiw post, is that structural imbalances in entitlement programs have not been addressed.  They weren't addressed then, they are not being addressed now.