Social Security

Pension or Welfare?

Misleading the Public: How the Social Security Trust Fund Really Works

September 2, 2004 

As political leaders debate how best to fix Social Security, many policymakers are focusing on the wrong issue. Their sole concern seems to be the date when the Social Security retirement and survivors trust fund will run out of its paper assets. This mistaken emphasis misses the fundamental point about Social Security's problems: 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. Far too soon, payroll taxes will be insufficient to pay all of the promised benefits. Unless Congress promptly takes action, taxpayers will have to pump hundreds of billions of additional tax dollars into Social Security to pay the promised benefits. 

Any "money" remaining in the trust fund is converted into special-issue Treasury bonds, which are really nothing more than IOUs. In addition, the Treasury pays interest on the trust fund's balance by crediting the trust fund with additional IOUs. These are also strictly accounting entries, and again no money changes hands. 

After crediting the trust fund with the proper amount in IOUs, the government spends the extra Social Security tax collections just like any other tax revenue--to finance anything from aircraft carriers to education research.

DYI:  From day one when President Franklin Roosevelt signed into law Social Security any excess was immediately placed into the general budget then allocated out to all of the different government agencies.  When anyone talks about government trust funds what they are really referring to are IOU’s.  If through taxes when these IOU’s are redeemed and can be paid for then no harm and no foul.  However, if there is a short fall the government will have to issue new debt [borrowed money] to pay off the IOU.

Social Security since inception is an income transfer program taking monies from one generation and giving it to another.  Simply put it is welfare.  From day one it never had any attributes or characteristics of a retirement plan despite the program’s use of pension terminology all to camouflage and confuse as to its true nature.  Social Security over the past 84 years has been a huge slush fund for politicians to spend on all types of programs in the hope of buying votes to secure his or hers reelection.

Social Security’s trust fund [IOU’s] is slated to run out in 2034.  This projection does not provide for the real possibility of recession/depression.  Obviously any thinking individual would have to factor in two possibly three economic downturns thus exhausting the trust fund at a far greater clip.  By current law Social Security is a standalone program – self funding – when those IOU’s run out benefits will have to be dropped by 25% placing the program back into actuarial balance.  Will Congress change the law allowing dipping into general funds to maintain current benefits?  My gut reaction is that they will as they will be not willing to take the heat from current retirees.  I wouldn’t be surprised due to economic downturns the 2034 date arrives somewhere in the mid 2020’s.      

DYI