Executive Summary: The Social Security Trust Fund Fraud

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Executive Summary: The Social Security Trust Fund Fraud

February 22, 1999 4 min read Download Report
Daniel Mitchell
Former McKenna Senior Fellow in Political Economy
Daniel is a former McKenna Senior Fellow in Political Economy.

Defenders of the current Social Security system claim that huge future deficits in the program are not a cause for concern because money in the Social Security Trust Fund can be used to finance all promised benefits until 2032. Moreover, because President Clinton has proposed that a significant share of projected budget surpluses be diverted to the Trust Fund, supporters argue that this move would allow benefits to be fully financed through 2049.

The implication is that Social Security can continue for another 50 years without a tax increase. Therefore, argue supporters of the status quo, there is no need for fundamental reform, such as privatization.

Yet these assertions are based on a gross misrepresentation. The Social Security Trust Fund is a deception. It contains no genuine assets, only government bonds--IOUs that have no value beyond a promise to impose higher taxes on future workers. Even the Clinton Administration admits that the Trust Fund is fraudulent, stating in its proposed budget for fiscal year 2000 that:

These [Trust Fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, make it easier for the government to pay benefits. [Emphasis added.]

Other government agencies and officials acknowledge that the bonds held by the Social Security Trust Fund are meaningless. The Congressional Research Service (CRS) notes that "Simply put, the trust funds do not reflect an independent store of money for the program or the government...."

What, then, is the purpose of the Trust Fund? According to the Congressional Budget Office, "Trust Funds have no particular economic significance; they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use."

The bonds have no independent value because, as the CRS notes, "When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another."

The Comptroller General of the United States recently testified to this effect: "[An] increase in assets to the SSTF [Social Security Trust Fund] is an equal increase in claims on the Treasury. One government fund is lending to another. These net out on the government's books."

An actuary from the Social Security Administration admitted that the Trust Fund is a fiction, writing in 1990 that "in the more relevant area of actually obtaining cash to pay promised benefits in the future, the trust funds accomplish nothing...."

In reality, the Trust Fund's holdings simply measure that one part of the government--the Treasury--owes money to another part of the government--the Social Security Trust Fund. 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.

A group of government actuaries acknowledged this fact, writing that "we are not accumulating a true trust fund and are instead merely accumulating a right to future government revenues."

As the U.S. General Accounting Office (GAO) explains, "While the Trust Funds' Treasury Securities [bonds] are assets of the Social Security program, they are also liabilities for the rest of the federal government that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing other federal expenditures."

It should also be obvious that the interest "paid" to the Trust Fund is equally meaningless. It is true that the bonds in the Trust Fund receive interest, but that interest income takes the form of additional IOUs. In other words, the original IOUs result in more IOUs. The CRS refers to the supposed interest payments as "paper income."

The GAO concurs:

The interest credited to the trust fund...is an internal transaction of the government. One part of the government (the Treasury) credits the interest to another part (the trust fund), so the two transactions offset one another and have no budgetary effect.

The President's plan is a disappointing diversion, an accounting gimmick instead of real reform. As the Comptroller General recently testified, "Without the President's proposal, payroll tax receipts will fall short of benefit payments in 2013; with the President's proposal, payroll tax receipts also fall short of benefit payments in 2013."

Privatization is the only way to solve Social Security's financial woes while also increasing retirement income for today's workers. The concept of individual accounts has bipartisan support in Congress. Moreover, about two dozen nations around the world have shown that private retirement systems are feasible. As evidence mounts that the White House plan is phony, baby boomers can only hope that the Administration will abandon gimmicks and embrace real reform.

Daniel J. Mitchell, Ph.D. is a McKenna Senior Fellow in Political Economy in The Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


Daniel Mitchell

Former McKenna Senior Fellow in Political Economy