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Social Security, Part 2: The Social Security “Trust Fund”


Many politicians talk of a Social Security trust fund, some even calling it a “lockbox.” This evokes images of a giant vault full of money stacked to the ceiling, or perhaps a huge savings account holding onto cash for when it’s needed. But what is this trust fund, what’s in it, and what do the answers to these questions portend for federal policy discussions?

Many of us assume our Social Security taxes are held by the federal government, and then when we retire the money is given back to us. This is not the case. Social Security functions like so: People currently working have money taxed from them, and this money then goes out as payment to people currently retired. It’s strictly a pay-as-you-go system with no funds held for any one person. The fact that we don’t own our Social Security taxes or future benefits has been confirmed by the Supreme Court. Workers aren’t being taxed for their own future benefit, and retirees aren’t simply getting back the money they put in.

For years, there were lots of workers compared to the number of retired persons, so the program brought in more taxes than it paid in retiree benefits. This surplus is what is called the trust fund. However, over the last few decades the ratio of workers to retirees has declined significantly. In 1955 there were 8 workers for every retiree, while in 2010 there were less than three, and the ratio is projected to fall to two and then one.

As the worker-to-retiree ratio has fallen, the amount of the current taxes hasn’t been enough to cover benefits paid to current retirees, so Social Security administrators have dipped into the accumulated surpluses. This situation has happened periodically over the years, but always quickly rebounded to surpluses. However, in 2010 the deficits became permanent. Every year since then, and every year for at least the next 75 years, the Social Security program will be running a deficit.

So the question then becomes: Didn’t all those years of surpluses get saved in the trust fund so there’s enough money to cover current shortfalls? The answer is: sort of.

The problem with the program’s surpluses is in the very term “trust fund.” There is no vault with stacks of money. There isn’t really a savings account either. What the Social Security administrators have done is invest the surpluses in treasury bonds. These bonds are considered the safest investments in the world, and they earn the fund interest, so there isn’t anything necessarily wrong with this strategy. Private investment accounts all over the world also buy treasury bills for these same reasons. The problem with the Social Security Administration doing it is that it isn’t a private investment account. SSA is a government entity, so in effect, one government agency is lending money to another government agency, and calling it an asset. It’s simply taking money from one pocket, putting it in the other pocket, and assuming you’ve got more than when you started. Especially troubling is that the federal government is already spending more than it takes in, meaning its own pockets were empty to begin with.

So every year that Social Security has to dip into its “reserves” means those benefits are being paid using the income taxes that the federal government normally uses for defense, education, energy and all the other things it does. Eventually, even the reserves will be gone, and Social Security will officially be unable to pay all of its promised benefits. The date Social Security’s trustees project this to happen is 2033, just 20 years from now. At that point, the “trust fund” will be gone and Social Security taxes will only be sufficient to pay about 75 percent of retirees’ benefits. The remaining shortfall will have to come from regular income taxes, further increasing the nation’s debt.

Each year, Social Security issues a Trustees Report outlining the program’s revenues and expenses, detailing the deficits, and projecting when the fund will be depleted. The report also makes policy suggestions for solving the program’s problems. For years this report has called for immediate action, arguing that the sooner changes are made the less painful those changes will be. However, nothing has been accomplished. Our elected officials need an informed electorate who understands what Social Security’s problems are, and they also need the will to see proper adjustments through to the end.

Dig Deeper:

Social Security, Part 1: The Basics

Social Security, Part 3: The Easy Fix

Social Security Trustee Report

Wall Street Journal: Why $16 Trillion Only Hints at the True U.S. Debt

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