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Home Publications Blogs Beat the Press Social Security Trust Fund: It's Real

Social Security Trust Fund: It's Real

Thursday, 12 August 2010 04:42

Allan Sloan is a thoughtful business columnist whose work is generally quite insightful. His piece on the Social Security trust fund is not up to his usual standards.

There is nothing mysterious or shady about the trust fund. It is an asset to the Social Security system, which means that it can be used to pay benefits. Of course, as Sloan points out, its assets are U.S. government bonds, which are liabilities for the federal government, just like the government bonds held by banks, corporations and the general public.

To see the basic logic, imagine that we had a huge private pension fund to which we all contributed a portion of our wages. Call it "Private Social Security" or PSS. Suppose that PSS had an investment policy of investing its excess contributions entirely in Treasury bonds, just as Social Security does.

At some point, PSS plans to stop accumulating money and will instead begin to sell off its Treasury bonds to meet its benefit obligations. When it begins selling these bonds, the government will have to find other buyers for its debt. This could lead to higher interest rates for the federal government, as a major buyer for its debt has now become a seller. However, no one would describe this as a problem for PSS. It is selling its bonds just as any other bondholder might do. As long as it has bonds to sell to pay its benefits, we would consider PSS to be fine in terms of its ability to meet its obligations, unless the solvency of the federal government itself was called into question.

Now, let's take away the "P." What is the problem with the Social Security trust fund selling off its bonds to pay benefits? This is exactly the way the program was designed. It quite deliberately accumulated government bonds during the years that the baby boomers were in the work force with the intention that they would be sold off when baby boomers retire to help fund their benefits.

It's true that the government must find other buyers for these bonds, or alternatively raise taxes or spend less. But, that would be equally true in the case of PSS. This is an issue for the government, but not for either the PSS pension fund or Social Security. 

And, this is not just semantics. By definition workers, and only workers, pay Social Security tax. It is a payroll tax that is capped at just $106,000, so the chairman of Goldman Sachs pays no more in Social Security tax than a senior teacher or firefighter who may also hit the wage cap. By contrast, most of the general budget is financed through personal and corporate income taxes, which disproportionately come from higher income taxpayers. So it matters hugely that the bonds held by the trust fund are repaid from general revenue, as opposed to coming from additional Social Security taxes.

It is often claimed that the Social Security surplus has been used to hide the government deficit. It is not clear what is meant by this, but the government certainly has not been doing the hiding. Every government budget document directly shows the budget deficit, excluding the surplus from Social Security. If anyone has used the surplus to hide the deficit it would be the reporters who convey information about the deficit to the public.



Comments (14)Add Comment
Our largest asset
written by Scott ffolliott, August 12, 2010 8:01
To many of us Social Security is not only an insurance program but also our largest asset. It hurts to see the rich bankers and their government helpers try to take away this asset little by little.
written by skeptonomist, August 12, 2010 9:04
A good explanation of the nature of the Trust Fund - it is a crime that people are allowed to write about economic matters in major newspapers without understanding this, or deliberately distorting it.

But how the Trust fund has been used to hide deficits is quite clear. The yearly "deficit" is normally reported in terms of the "unified" budget which in effect counts the money going into the Trust Fund as general income, as if it were not a liability. The true deficits which represent the government obligations were recently over $200B higher. Hiding the true size of deficits in this way is a bipartisan activity for all incumbent politicians. It is used by Democrats when they refer to the "huge" surpluses of the late Clinton years - these were actually tiny if the Trust Fund obligations are to be honored. Of course reporters, pundits and bloggers are not obliged to use the misleading "unified" deficit numbers supplied by politicians.

The national debt is usually reported correctly, counting the Trust Fund as a liability.
the logical flaw
written by pete, August 12, 2010 9:07
Problem is if PSS buys treasuries, there are others who are going to pay off the bonds...with SS its the same folks. Suppose PSS buys bonds in the company for which everyone works. Then the company essentially is going to pay the pension. That's the analogy to SS. Suppose the SS bonds were paper and went up in flames, the government would still pay social security benefits..it would absolutely change nothing. The fund is an unnecessary accounting gimmick, not really fraud, but designed to fool people into thinking there is some real money there...but clearly there is not, just government checks, backed by more debt, taxes or inflation....just as if they were buying airplanes. And since the courts have ruled that SS payouts are not linked to SS taxes...the fund is simply silly.
written by izzatzo, August 12, 2010 9:42
By contrast, most of the general budget is financed through personal and corporate income taxes, which disproportionately come from higher income taxpayers. So it matters hugely that the bonds held by the trust fund are repaid from general revenue, as opposed to coming from additional Social Security taxes.

Oooooh boy, we got 'im now, get Erskine Bowles and Alan Simpson on the line pronto Bubba, this is a no brainer for some campaign slogans that will push us so far into the win column for the elections they won't even need to count the votes.
Social Security Trust Fund: It's NOT Real
written by Wisdom Seeker, August 12, 2010 1:34
The Federal Government is running a deficit of over 30% of its budget right now. Even IF the emergency stimulus funding and war funding are wound down, and even IF the underlying non-government economy recovers to pre-recession levels (which is far from likely in the next 5 years), the Federal Government will still have a substantial deficit of at least 10% of spending. It is at this point that the Social Security Trust Fund will start being drawn down.

Now what revenue will the Fed Govt be using for repayment of the Social Security Trust Fund bonds as they are redeemed, exactly???

Will the overindebted, overburdened and underemployed members of the younger generations really work their tails off to provide gold-plated retirement packages for their parents and grandparents? Does it make sense for the oldest to live high on the hog while huge fractions of the nations children live in poverty?

Methinks that when Fed Gov't needs to raise revenues to meet those Social Security Trust Fund obligations, or issue bonds to do the same, there will be huge tax protests and/or a revolt by the bond markets (as happened under Clinton's regime when the budget was last put into reasonable balance).

So it seems quite likely that instead of earning our way out of this hole, we are going to be forced to PRINT THE MONEY. Which will simply devalue everything for all of us.

The other choice, of course, is to under-represent inflation in the CPI used to COLA the Social Security outlays. Then the politicians can appear to keep their promises, while the actual social security funds buy less and less for the recipients...
Thank you for setting this straight
written by LJM, August 12, 2010 3:12
I read that article and it made my brain hurt:(
To Wisdom Seeker
written by OJC, August 12, 2010 7:05
Social Security/Medicare/Medicaid is a closed system; all income is from payroll taxes and interest on the trust fund; it goes to beneficiaries and management, with any surplus to the trust fund. The trust fund lends its income to the treasury, which uses it and pays the trust fund interest, as is usual with loans. (This is by law.) If we were to refuse to repay the trust fund we would be guilty of theft, a condition I can't see the US or its population accepting.

say it aint so joe...
written by pete, August 12, 2010 7:16
Sounds nice, but ain't true...no link between taxes, the fund and the payout....could lower the payments, make 100 the retirement age, etc. etc.

In your scenario, theft occurs if they raise the age, change the growth, increase the tax rate, etc. etc....i.e., they have already stolen...big "theft" in the mid 80s, raising the tax, increasing the age....

Again, no link.

Indeed, all economists would agree that for pro growth strategies the flat tax (so called social security tax) should be higher, much higher, on more income, and the disincentive marginal rates lower.
Let me complete my thought.
written by OJC, August 12, 2010 7:37
Soc Sec being a closed system, it has NO effect on deficits, debt, or anything that worries us. We could do anything, short of stealing the trust fund, without making the slightest difference.

written by scott, August 12, 2010 9:13
"the government will have to find other buyers for its debt. This could lead to higher interest rates for the federal government, as a major buyer for its debt has now become a seller."

Considering that costs of SS and Medicare are not pegged to inflation, but exceed inflation your prescription offers a solution that vanishes like Zeno's hypothesis.
"Debt held by the Public" or "Net Interest" omit the bonds held by SS
written by AndrewDover, August 12, 2010 9:47
Skeptonomist is completely correct about the use of social security taxes to mask the deficits in reporting. It happens in debt reporting too.

Dean made the same kind of error when he claimed:
"According to the Congressional Budget Office, the government is projected to spend $298 billion in interest in 2012."

His support is that table 1.2 of http://www.cbo.gov/ftpdocs/112...ml#1045449 says $198 billion. But 198 is "Net Interest" not "Interest". The difference is that the interest that accrues on the trust funds like social security (another 119$ billion) is not counted.

For example the actual "Net interest was $197 billion in 2009. However
http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm shows the actual interest paid as $338 billion.

You can be logically consistent and treat the trust funds as part of a larger government or seperately. But you can't can't claim interest flowing into the SS trust fund as income for the fund without recording also as an expense for the general fund.

Dean gets it wrong again when he says:
"So it matters hugely that the bonds the bonds held by the trust fund are repaid from general revenue, as opposed to coming from additional Social Security taxes."

Additional social security taxes lead to MORE bonds held by the SS trust fund, NOT the repayment of bonds held by the SS trust fund.
Ack Basswards
written by diesel, August 12, 2010 9:59
Yeah, Dr. Baker, why do you keep picking on the chairman of Goldman Sachs? Can't you discuss an issue without attacking an innocent bystander? From your cozy academic perch it's easy to criticize the poor slob on Wall street who is just trying to make ends meet. First he's exposed to the harsh glare of the media spotlight and now the pointed laser of your hyper-partisan comparison. Why don't you try and be a little more fair and balanced? Also, your lame explanation of SS really sucks. Everyone knows that it's really just a ponzi scheme.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.