A Second Look at Social Security's "Trust Fund"

COMMENTARY Social Security

A Second Look at Social Security's "Trust Fund"

Feb 14, 2002 2 min read
COMMENTARY BY

Former Senior Research Fellow in Retirement Security and Financial Institutions

David is a former Senior Research Fellow in Retirement Security and Financial Institutions.
"When it comes to waging war on terrorism, the president has our total support," says Rep. John Spratt Jr., D-S.C., a member of the House Budget Committee. "But national security and homeland security need not come at the expense of Social Security."

Rep. Spratt isn't the only one using this approach to criticize President Bush's proposed budget. Senate Budget Committee Chairman Kent Conrad, D-N.D., and various news organizations have issued similar warnings. The president's proposed budget "jeopardizes the future of Social Security," The New York Times said, because its trust fund "would be siphoned away."

Actually, it would do nothing of the sort. Congress could go out tomorrow and spend every dime of the Social Security surplus, and it wouldn't affect the program's future security one bit. Or they could wall it off -- put every penny in the proverbial "lockbox," for that matter --and the program's future would still be about as financially sound as an Enron profit report.

The reason is as simple as it is startling: There is no Social Security "trust fund" -- at least, not in any conventional sense of the phrase. The taxes that come out of your paycheck on a regular basis aren't deposited into an account with your name on it, as many people believe. The money is immediately paid out as benefits to current retirees, and whatever is left over is mixed together with other tax funds and used to finance other government programs.

The same thing will happen when you retire: People who are working at the time will be paying your Social Security benefits.

For the past 20 years, Social Security has collected more in taxes than it has paid in benefits. But the extra money hasn't been set aside for your retirement -- it's been spent. When the government ran deficits, as it did for most of these years, the Social Security "surplus" was spent on other government programs. When the overall budget began running surpluses in 1998, these funds went toward paying down the national debt.

So what's in the Social Security "trust fund"? Special government bonds that function, basically, as IOUs. When Social Security starts running deficits, as it's projected to do beginning in 2016, it will have to start redeeming those IOUs.

By 2021, according to current projections, the government will have to redeem some $100 billion a year in IOUs (in today's dollars without inflation) to pay promised benefits. By 2026, the price tag will reach more than $200 billion a year. By 2031, it will exceed $300 billion annually. And by 2038, the "trust fund" will run out of "money" completely.

Of course, federal lawmakers won't allow that to happen. But to keep paying current retirees, they'll have no choice but to hike taxes, slash benefits or legislate another delay in the retirement age.

Yet there is another choice. President Bush's Social Security commission, chaired by Sen. Daniel Patrick Moynihan, D-N.Y., recommended personal retirement accounts that would let workers build up true nest eggs for themselves. Unlike Social Security, these accounts would really exist, with each worker's name affixed to genuine assets that could be passed on to his or her heirs.

We'll no doubt be hearing a lot in the future about the prospect of setting up such accounts, and reasonable people can disagree about how they should be structured. But before we get to that stage, we have to jettison this fiction that Social Security has a real-world trust fund that must be protected if the program is to survive.

Indeed, it is that misperception, and not the president's budget, that "undermines the security of the nation's social safety net," as The New York Times puts it. For it allows Congress to think that reform efforts can be safely postponed. They can't. And the sooner we recognize the "trust fund" for what it is, the sooner we can start having an honest debate.

 

David John is a senior policy analyst for Social Security at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

Distributed nationally on the Knight-Ridder Tribune wire