February 17, 2005 | Commentary on Federal Budget
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 deficit.
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 Security?
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 me.
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 programs.
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 shortfall.
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.
Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Distibuted Nationally on the Knight-Ridder Tribune wire