The Social Security (Not To Be) Trust(ed) Fund

by | Aug 15, 2008 | Cash Flow, Weekly Column | 1 comment

money-gone.jpgAn August 1, 2008 story by Laura Meckler in The Wall Street Journal included the following quote that got my blood boiling. She said: “Beginning in 2017, the government will start paying out more in Social Security benefits than it collects in taxes and will have to start drawing on the trust fund, money stored in government bonds, to pay promised benefits. By 2041 actuaries predict the trust fund would run out of money and the government would be unable to pay full benefits.”

This, like many other news items about Social Security, is both factually accurate and terribly misleading. Referring to a “trust fund” leads readers to think there is a pool of money, like a savings account, that will actually run out in the near future. In reality, there is no pool of money to run out, only a pile of IOU’s where both the borrower and the lender are the United States government.

The “Social Security trust fund” isn’t a real trust fund any more than a million-dollar promissory note is an asset when you are both the borrower and the lender. There is no separate entity that holds tangible assets which can be spent down. Calling it a “trust fund” is just a smoke-and-mirrors way of feel-good accounting for the fact that the government spends 100% of what it collects in Social Security taxes every year. It doesn’t save a penny for future obligations.

Money collected in Social Security taxes is first used to pay current Social Security recipients. However, the extra amount that exceeds these current obligations isn’t “stored” in an investment account; it is spent.

The technical explanation for this is that the “extra” amount is “loaned” to the U. S. Treasury and spent as part of the general budget of the federal government. The “trust fund’’ is given an IOU (an interest-bearing U. S. government bond) to represent what the government just spent. Again, however, all this is bookkeeping. No actual money is transferred to or held in the fund.

As of today, more money comes in as Social Security taxes than is paid out in benefits. The difference, plus the interest from the government bonds, is tracked and referred to as the total balance in the Social Security “trust fund.”lock-box.jpg

Beginning in 2017, the U. S. Treasury will have to pay out more in Social Security benefits than it takes in from Social Security taxes. The payments to Social Security recipients will come out of the general budget, as they do now, but the corresponding taxes won’t keep up with them. This is often referred to as “drawing on” or “drawing down” the trust fund.

Since there is no real trust fund, however, it can’t really be drawn down. In other words, when the “trust fund” tells the Treasury it wants to convert its bonds to cash, where is the Treasury going to get the money to repay the bonds? Well, where does any government get its money? From taxpayers.

The bottom line is that the principal and interest paid on the bonds held by the trust fund will come from future tax increases paid by citizens. The term “trust fund” only confuses the issue. It would be more accurate to think in terms of the “Social Security pocket.” Adding money to or subtracting money from the trust fund is just moving that money from one U. S. Treasury pocket to another. Regardless of the pocket it is kept in, every penny paid into or taken out of the trust fund comes from us, the taxpayers.

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