Social Security trust fund: a problem in disguise


A situation that must be resolved soon first requires some understanding and an honest assessment of the facts: Social Security and its trust fund.

Over the years, the Social Security Administration has collected more in payroll taxes than it has needed to spend on benefits. (Last year that wasn’t the case.) The surplus represents the trust fund.

But there is disagreement as to the economic meaning of the trust fund. From a naive and uncritical accounting perspective, there seems to be no problem. SSA purchases a special series of bonds from the U.S. Treasury, and these bonds make up the investments of the trust fund. What could go wrong with holding government bonds?

To answer that question, we have to look at what the government did with the proceeds of selling the bonds. The answer is that government spent the money. There are no bills in a vault. There are no bank deposits. There is only the promise of the U.S. Government to repay the bonds when the SSA needs them. A recent publication by Veronique de Rugy and Jason J. Fichtner of the Mercatus Center (Can We Trust the Social Security Trust Funds?) explains:

However, the way the federal government accounts for the trust funds masks the true size of costs passing on to future generations. While bonds are real assets to the private market, future generations of taxpayers or borrowers will have to cover the future redemptions of bonds issued today because the federal government has used the money it has received from Social Security to pay for education, wars, and other items. In other words, the government has already spent the money it received in exchange for the IOUs. This is explained in the president’s 2011 federal budget: “The existence of large trust fund balances, therefore, does not, by itself, increase the government’s ability to pay benefits.” (emphasis added)

But not everyone believes or understands the meaning of having spent the money in the trust fund. The SSA itself seems to, at least a little bit. A document titled Trust Fund FAQs produced by the SSA states: “As stated above, money flowing into the trust funds is invested in U.S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future.” So here we have the U.S. Government admitting that the money in the trust fund has been spent.

So is this a problem? No, says the SSA as it continues: “Far from being ‘worthless IOUs,’ the investments held by the trust funds are backed by the full faith and credit of the U.S. Government.” What the SSA doesn’t tell us here — and it’s not really its job to do so — is that the way these investments will be repaid is by one of three means: more taxes, less spending, or more borrowing.

It’s good to see the federal government at least starting to recognize the truth behind the trust fund, even if it can’t bring itself to recognize its implication. Most liberal — “progressive,” excuse me — organizations refuse to see the truth. An example is The Center for American Progress, which produced a 72-page report last December titled Building It Up, Not Tearing It Down: A Progressive Approach to Strengthening Social Security. The document mentions the trust fund many times and that the fund is invested in safe government bonds. Never does the report mention that these funds have already been spent on something other than Social Security benefits.

I can understand how CAP doesn’t want to mention this. The funds have been spent — under both Republican and Democratic administrations — to support the government spending programs that CAP supports. The fact that the spent funds in the trust fund will have to be paid back, possibly through higher taxes? High taxes and progressive taxation don’t bother CAP — that’s its platform.

Paul Krugman of the New York Times also doesn’t think the trust fund presents a problem: “The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen.”

And how does Congress honor the bonds? More taxes, less spending, or more borrowing. Or some combination.

This is the future we face if we don’t recognize the problem and take steps to start reform now.


2 responses to “Social Security trust fund: a problem in disguise”

  1. Anonymous

    Thanks for the clear analysis. I always thought it was a direct handoff from SSA to Treasury I didn’t realize the veneer of investing in government bonds was used.

    Wonder if that means the SSA is a bidder on the bond pink slips or if another system is used?

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