Diary

The Myth of the Social Security Trust Fund

It is disturbing to hear continued referral to the mythical “Social Security Trust Fund.”  Senate Majority Leader Harry Reid, most significantly, cites this fund as proof that Social Security is not bankrupt and in urgent need of reform, because the “Trust Fund” has sufficient money to pay full benefits thru the year 2035.  I suspect he knows that this is a lie, but says it anyway as a convenient way to demagogue Republican efforts at reform, while avoiding responsibility himself.  What is even more disturbing is to hear Conservatives fall into the trap of blaming officials of “raiding” the Trust Fund, or agitating to “protect” the trust fund.  They may be well-intentioned, but have been misled. 

Let me state this as clearly as I can:  The Social Security Trust Fund is a Myth. 

Always was, always will be.  In fact, not only does the “fund” not exist, but it CANNOT exist.  Allow me to explain these two points in detail, through logical argument. 

1)  The Social Security Trust Fund does not exist. 

So what is this mythical trust fund?  If you go to the official government web site, http://www.ssa.gov/oact/progdata/assets.html, they will tell you that the Trust Fund held $2.6 Trillion in assets as of December 31st, 2010.  But what are those assets? 

“The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of Public Debt. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:
• Special issues—available only to the trust funds
• Public issues—marketable Treasury bonds available to the public.
The trust funds now hold only special issues, but they have held public issues in the past.”

This is the “fund” that Harry Reid hopes to tap in order to pay future benefits. 

Now let’s use a hypothetical situation to illustrate how the Trust Fund assets work. 

Situation A:  If there were no trust fund.  To pay benefits to retirees and disabled, the Government has to get the money from somewhere.  These are their only sources:

• Current revenues (Social Security Taxes, Income Taxes, and other tax and fee revenues – but of course these are not currently enough and raising taxes could sink the economy). 
• Borrow money (sell more Treasury bonds on the open market, as long as someone will buy them, and sink us further into national debt)
• Print money (with all the economic implications of inflation and currency devaluation)

Sounds bad, yes?  But maybe we have that Mythical Trust Fund to help us! 

Situation B:  Use the Trust Fund.  To pay benefits to retirees and disabled, the Government has to cash in the trust fund assets.  These assets are the most secure and reliable assets in the world – US Government Treasury securities.  Essentially a promise to pay with the full faith and credit of the US Government behind it.  Sound good?  But for Social Security to cash these in to pay benefits, the Tresury has to pay out the cash for these bonds.  They have only 3 ways they can do this: 

• Current revenues (Social Security Taxes, Income Taxes, and other tax and fee revenues – but of course these are not currently enough and raising taxes could sink the economy). 
• Borrow money (sell more Treasury bonds on the open market, as long as someone will buy them, and sink us further into national debt)
• Print money (with all the economic implications of inflation and currency devaluation)

Do you notice any difference between Situation A and Situation B?  Neither do I! 

You see, all of the “assets” in the Trust Fund are promises from the Government to pay to the Government.  That is not an asset – it is a myth. 

2) The Trust Fund cannot and should not exist

So, my illustration above shows that a promise from the Government to pay itself is not an asset.  But certainly Social Securty has taken in more money than it has paid over the past few decades.  To the tune of $2.6 Trillion.  This money has been “loaned” to the Federal Government (via issuing the mythical “Special Issue Treasury Bonds”) so that the politicians could use this to prop up their spending habits.  Instead of trying to sell an extra $2.6 Trillion in Treasury Bonds in the financial markets to cover the tax shortfall, they issued those bonds to the Trust Fund.  And they spent it all, PLUS issued even more bonds to sell on the open market.  To a total of our $14.2 Trillion National Debt. 

I can hear the mis-led screaming now – “they raided the Social Security Trust Fund!!!” (extra exclamation points for yelling). 

Well, what else should they have done with that money?  Shouldn’t that money have been “saved” by putting it into a Trust Fund that is separate from US Treasury Bonds, so that it would be a “real” asset instead of a myth? 

NO!!! (my own exclamation points for yelling). 

Should the government have invested this money by purchasing Chinese Treasury Bonds?  Saudi Bonds?  This is what the “Sovereign Wealth Funds” from various countries do.  But do we really want the US Government to hold such large portions of another country’s “Promise to pay”?  Should the US Government be the largest foreign investor in the world?  Especially when we are at the same time the largest debtor in the world (US National Debt)?  The political implications are huge. 

Perhaps, instead, they should purchase stock in a major US Company that would have actual assets and revenues to earn a return on investment.  Perhaps General Motors and Chrysler (oops – they already did).  And that experience shows how bad an idea it is for Government to own a large (remember, we’re talking about investing $2.6 Trillion) stake in a private companies that they effectively become publicly owned.  Government ownership of production is called Communism.  And it leads to political diversion of production to political rather than economic ends.  Such reversal of our respect for private property is anathema to the capitalist system and our principles of free enterprise. 

And yet the Government cannot put so much money in a bank account and save it up.  The only thing they can do, is use the money for current expenditures, or to pay down the US Debt (purchase back US Treasury Bonds).  There is no way to build up a Trust Fund. 

So there you have it.  The Social Security Trust Fund does not exist, and it cannot exist.  It is a myth.