Social Security Trust Fund
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The Social Security Trust Fund is the United States federal government's means of accounting for workers' and employers' paid-in contributions to the Social Security system and benefits paid out to retired or disabled workers or their survivors, as well as administrative expenses. More importantly, it also provides the legal basis for making benefit payments in the future when FICA contributions will be less than aggregate benefit payments. (The controversy over its meaningfulness is a topic of the sustainability of the unified Federal budget). Contributions that are in excess of current payments to beneficiaries the amount not yet needed for Social Security purposes, is invested in securities issued by the government; those securities constitute the assets of the Trust Fund.
The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. In the early 1980s, however, expenditures were expected to exceed the revenues in the immediate future. In addition to fixing the short-term problem with tax increases, the Commission headed by Alan Greenspan took the projections which indicated that the eventual retirement of the numerous members of the post-World War II baby boom would cause expenses to exceed revenues. Accordingly, the Social Security tax was increased in 1983 so that it would be greater than necessary to pay for current expenditures, thus accumulating a reserve that could be drawn upon when necessary. The surplus is accounted for in the Social Security Trust Fund. As of the end of calendar year 2004, the accumulated surplus stood at approximately $1.7 trillion. [1] Projections are that current receipts will continue to exceed expenditures until 2018 or 2019. Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds. [2] The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office). However, if the US economy performs better than the pessimistic economic assumptions and projections used by the SSA and CBO, the trust funds may remain solvent indefinitely.
On February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. One consequence was increased public attention to the nature of the Social Security Trust Fund. Unlike a typical private pension plan, the Social Security Trust Fund does not hold any marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The Office of Management and Budget has described the distinction as follows:
These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense.... 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, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)
Other public officials have argued that the trust funds do have financial and/or moral value. "If one believes that the trust fund assets are worthless," argued former Representative Bill Archer, then similar reasoning implies that “Americans who have bought EE savings bonds should go home and burn them because they’re worthless because the money has already been spent.” 2/ At a Senate hearing in July 2001, Federal Reserve Chairman Alan Greenspan was asked whether the trust fund investments are “real” or merely an accounting device. He responded, “The crucial question: Are they ultimate claims on real resources? And the answer is yes.” 3/
From the point of view of the Social Security trust funds, the holdings of "special" government bonds are an investment that returned 5.5% to the trust funds in 2005. , pp 4-5 The trust funds cannot resell these "special" government bonds on the secondary bond market, although the interest rate is determined based on market interest rates. Instead, the "specials" can be sold back to the government at face value, which is an advantage when interest rates are rising.
To escape paying either principal or interest on the "special" bonds held by the trust funds, the government would have to default on these obligations. This cannot be done by executive order. The Congress would have to pass legislation to repudiate these particular government bonds. This action by Congress could involve some political risk.
The week after his State of the Union speech, Bush downplayed the importance of the Trust Fund:
Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. [3]
These comments were criticized as "lay[ing] the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds". [4]
On the other hand, Bush has referred to the system going "broke" in 2042. That date arises from the anticipated depletion of the Trust Fund, so Bush's language "seem[s] to suggest that there's something there that goes away in 2042." [5] Specifically, in 2042 and for many decades thereafter, the Social Security system can continue to pay benefits, but benefit payments will be constrained by the revenue base from the 12.4% FICA (Social Security payroll) tax on wages. According to the Social Security trustees, continuing FICA tax revenues at the rate of 12.4% will enable Social Security to pay about 74% of promised benefits during the 2040s, with this ratio falling to about 70% by the end of the forecast period in 2080. [6] Whether this means the system is "broke" is a debate for linguists and politicians.
If part of the payroll tax is diverted to fund private accounts, Social Security's trust funds will exhaust before 2042, and the system's ability to fund benefit payments after the trust funds are exhausted would fall significantly below 74% (the percent of benefits paid would depend on the amount of payroll taxes diverted to private accounts). Social Security could pay full benefits through the forecast period (i.e. through 2080) if any of the following were enacted: an immediate cut to all benefits of 13%; an increase of 16 percent in payroll taxes (i.e. by nearly 2 percentage points, bringing the FICA tax to 14.4% of payroll); or some combination of tax increases and benefit reductions. [7]
Supporters of Bush's call for significant change in the Social Security system often refer to the Social Security Trust Fund as "really only an accounting mechanism" and dismiss the 2042 date as irrelevant. [8] Opponents of Bush's plan are more likely to argue that the Trust Fund assets are legally available to the Social Security Administration, with the result that "the total amount received by Social Security beneficiaries is not subject to the annual Congressional appropriation process." [9]
[edit] Is the Trust Fund Real? (economic perspective)
From an economic standpoint, the question of whether the trust fund is fact or fiction comes down to whether the trust fund contributes to national savings or not. If an individual deposits $1000 of his salary into a bank account, then he is saving money. His bank account is real. On the other hand, if he deposits $1000 into his bank account, then goes to the bank to take out a $1000 loan and uses the loan to buy a new plasma TV, then this individual actually hasn't saved a dime. He fiddled with the bank, but he spent his $1000 on a plasma TV. His bank account exists in the legal sense (it exists), but not in the economic sense because it does not represent any savings.
Similarly, people who believe the trust fund is fake think that government spending is higher and/or income tax rates are lower than they would be if the trust fund didn't exist, and therefore the trust fund is not saving money. They believe Social Security taxes and the trust fund have allowed higher government spending and/or income tax cuts that wouldn't otherwise have occurred. They believe the Social Security taxes have been spent.
People who believe the trust fund is real think that government spending and tax rates aren't changed by the existence of the trust fund. They believe Social Security taxes have gone to paying down government debt. (They believe government debt would be even higher if the trust fund didn't exist.) They believe the Social Security taxes have been saved.
[edit] References
1/ Mamta Murthi, J. Michael Orszag, and Peter R. Orszag, "The Charge Ratio on individual accounts: Lessons from the UK Experience," Birkbeck College Working Paper 99-2. March 1999
2/ As quoted in “The Truth is Out There,” by Kevin McCormally, Kiplinger’s Personal Finance Magazine, March 1999.
3/ As quoted in The Washington Post, “Decisions on Social Security Loom,” August 17, 2001.
