Almost overlooked in the news this week is the fact that Social Security will pay out more in benefits this year than it receives in contributions from payroll taxes. It had been thought that this milestone would not be reached until 2017 or later.
The New York Times article Social Security to See Payout Exceed Pay-In This Year reports on this. The news article doesn’t come right out and tell us not to worry, but it does report on the large balance in the Social Security trust fund. This balance, the article says, will be used to make up the difference between payroll tax contributions and benefits paid out.
The problem is that there really is no trust fund, at least not in any economically meaningful sense. The Times article does contain this: “Although Social Security is often said to have a ‘trust fund,’ the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time.” But the article doesn’t tell us the entire story behind this accounting device. We’ll have to look somewhere else for that.
An article from the Heritage Foundation (Misleading the Public: How the Social Security Trust Fund Really Works) explains the workings of the trust fund:
There is no cash in the Social Security trust fund, and there never has been any. The Social Security trust fund is merely an accounting device filled with IOUs that future taxpayers must repay. … Private-sector trust funds invest in real assets ranging from stocks and bonds to mortgages and other financial instruments. However, the Social Security trust funds are only “invested” in a special type of Treasury bond that can only be issued to and redeemed by the Social Security Administration. … In short, the Social Security trust fund is really only an accounting mechanism. The trust fund shows how much the government has borrowed from Social Security, but it does not provide any way to finance future benefits. The money to repay the IOUs will have to come from taxes that are being used today to pay for other government programs.” (emphasis added)
At the Cato Institute, a 1999 article Pointless Debate over Social Security Trust Fund also explains the truth behind the trust fund:
Starting in 2014, the situation will reverse. Social Security will no longer run a surplus but instead will run a deficit. Social Security will begin spending more on benefits than it is taking in through taxes. To continue to pay those benefits, it will have to start redeeming the bonds in the trust fund. But, as President Clinton’s own fiscal year 2000 budget admits, those bonds are not real economic assets. Rather, “they are claims on the Treasury that … will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” … There is no way to actually leave the Social Security surplus in Social Security. The surplus must be used to purchase bonds, the purchase of the bonds will generate revenue for the government, and that revenue must be spent. … Social Security taxes should be invested in real financial assets, not government promises to raise future taxes. (emphasis added)
In 2008 Allan C. Sloan wrote:
How can I say that, given Social Security’s $2.3 trillion (and growing) trust fund? It’s because the fund owns nothing but Treasury securities. Normally, of course, Treasury securities are the safest thing you can hold in a retirement account. But Social Security’s Treasuries won’t help cover the program’s cash shortfall, because Social Security is part of the federal government. Having one arm of the government (Social Security) own IOUs from another arm (the Treasury) doesn’t help the government as a whole cover its bills.
Here’s why the trust fund has no financial value. Say that Social Security calls the Treasury sometime in 2017 and says it needs to cash in $20 billion of securities to cover benefit checks. The only way for the Treasury to get that money is for the rest of the government to spend $20 billion less than it otherwise would (fat chance!), collect more in taxes (ditto), or borrow $20 billion more (which is what would happen). The spend-less, collect-more, and borrow-more options are exactly what they would be if there were no trust fund. Thus, the trust fund doesn’t make it any easier for the government to cover Social Security’s cash shortfalls than if there were no trust fund. (emphasis added)
As you can see by the dates mentioned in these articles from the past, the day of reckoning for Social Security arrived earlier than predicted.
Liberals dispute the true nature of the trust fund, contending that there really is money in the fund that can be used to pay benefits.