February 17, 2005
By Brian M. Riedl
Does Social Security's solvency end in 2018 or 2042? The urgency
of reform depends heavily on this question. Yet a misunderstanding
of the Social Security trust fund is leading many to answer that
The short answer is that Social Security
almost surely will pay all promised benefits until 2042. However,
this assumes massive tax increases, spending cuts or borrowing --
beginning in 2018.
Since 1983, Social Security has been running a surplus, as the
payroll tax has collected more money than the program has paid out.
This year, the surplus was $159 billion. As the retiring baby
boomers increase the program's costs, the annual surplus will get
smaller and smaller until 2018, when the system will fall into
That's where the "trust fund myth"
comes in. This myth suggests that all of the Social Security
surpluses since 1983 have been saved in a trust fund that will
total $5.7 trillion by 2018. In the meantime, Washington is lending
this money to investors -- businesses and individuals. In 2018,
when the system first falls into deficit, these individuals and
businesses will begin repaying this $5.7 trillion back to the
federal government, and that money will make up all the program's
shortfalls until 2042. Therefore, the myth continues, taxpayers are
off the hook until 2042.
This is wrong in one critical area. Not one cent of Social
Security's surpluses was ever lent to businesses or individuals.
Think about it: Has anyone ever heard of getting a loan from Social
The surpluses were actually lent to the U.S. Treasury. The Treasury
then spent this money on regular government programs like defense,
education and welfare. So it is the Treasury that owes the Social
Security trust fund $5.7 trillion.
And where does the Treasury get its money? Taxpayers like you and
It is the taxpayers who will have to repay the Social Security
trust fund $5.7 trillion beginning in 2018.
This cannot be overemphasized: Each year, all Social Security costs
-- both the portion funded by the payroll tax, and the portion paid
out of the trust fund -- will be paid by that year's taxpayers. The
trust fund doesn't save taxpayers a dime.
The danger is not that Social Security benefits will be severely
reduced in 2018. The U.S. Treasury has been borrowing money for 200
years, and has never defaulted on its debt. This money will be paid
back to Social Security. Rather, the problem is that repaying
Social Security will require trillions of dollars in tax increases
and/or unprecedented cuts elsewhere in the federal budget -- cuts
likely to include defense, homeland security, education and health
Actually, the negative budgetary pressures will arrive before 2018.
The annual Social Security surpluses have been a major revenue
source for the federal budget. In 2004, Social Security lent its
$159 billion surplus to the Treasury to spend on regular government
programs. Without this loan, the budget deficit would have been
$572 billion instead of $413 billion. As the Social Security
surplus declines, lawmakers will have to make up that $159 billion
somewhere else or begin to cut spending.
Here is a peek into Social Security's future projections. Between
now and 2017, the Social Security surplus will continue declining,
leaving less money to lend to the Treasury and therefore enlarging
the annual budget deficits. In 2018, Social Security will cross
into the red. From that point, the program will have two budgetary
costs: First, the amount funded by the traditional payroll tax.
Second, the amount of other tax revenue needed to repay the Social
Security trust fund in order to make up that year's
This shortfall will quickly cost taxpayers hundreds of billions
annually. By 2042, the Treasury's debt to Social Security will be
fully paid off. However, taxpayers will still be on the hook for
all Social Security benefits that year and in future years, costing
each household several thousand dollars annually in additional
taxes. At that point, the choice will be between severely reducing
benefits and continually raising taxes.
Regardless of how one feels about Social Security
reform, it's important to understand that there is no pot of
money waiting to be tapped in 2018. Under the current system, each
year's increasingly expensive Social Security benefits will
continue to be fully financed by that year's taxpayers.
is Grover M. Hermann Fellow in Federal Budgetary Affairs in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Distibuted Nationally on the Knight-Ridder Tribune wire
Does Social Security's solvency end in 2018 or 2042? The urgency of reform depends heavily on this question. Yet a misunderstanding of the Social Security trust fund is leading many to answer that question incorrectly.
Entitlements, Taxes & Spending Initiative of the Leadership for America Campaign
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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