February 23, 1999

February 23, 1999 | News Releases on Social Security

Social Security 'Trust Fund' Relies on Accounting Gimmicks

WASHINGTON, FEB. 23, 1999-Congress can't save Social Security from bankruptcy by placing part of the budget surplus into the Social Security "trust fund" as the Clinton administration proposes because the fund is nothing more than an accounting gimmick, according to a new paper by The Heritage Foundation.

Most of the money raised through payroll taxes to fund Social Security is paid out immediately in the form of benefits, writes Daniel J. Mitchell, Heritage's McKenna senior fellow in political economy. But for more than a decade Social Security has taken in more money than it needs to pay benefits. The surplus goes to the Treasury Department, where it is spent on other government programs. In return, the Treasury gives the trust fund IOUs.

Mitchell uses a hypothetical example to illustrate how the trust fund works: A family saves $1,000 a year to pay for a child's college education. But every year the parents withdraw the money to use on their annual vacation to the Bahamas and leave an $1,000 IOU in its place. Unfortunately, the IOUs are worthless once the tuition is due, Mitchell says. To pay for college, the parents will be forced to earn more money, cut back expenses or borrow the tuition.

The Social Security trust fund holds no real assets, Mitchell writes, only promises by one agency of government (the Treasury) to repay money borrowed from another (the Social Security Administration). Once Social Security goes broke in 2013-when it begins to pay out more in benefits than it collects in taxes-the only way to pay benefits will be by imposing higher taxes on workers. "Indeed, the best possible interpretation of the trust fund is that the IOUs are a measure of how much in taxes will have to be raised in the future," he writes.

As the administration notes in its budget for 2000, the trust fund balances "are claims on the Treasury" that "will have to be financed by raising taxes." The U.S. General Accounting Office, the government agency that audits federal programs, labels the fund a federal "liability" that "will have to be financed by raising taxes, borrowing from the public or reducing other federal expenditures." Several other government agencies have admitted that the fund is essentially meaningless.

The only way to "save" Social Security and to ensure a safe and prosperous retirement for future retirees is through privatization, Mitchell says. Numerous other countries, including Britain, Australia, Poland and Mexico, have at least partially privatized their pension systems by allowing workers to invest their retirement income in individual accounts controlled by workers. The administration should "abandon gimmicks," Mitchell suggests, and follow these nations' example, which shows that privatization is both popular and feasible.

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