Government Spending

How Can You Tell When an Imaginary Trust Fund Disappears?


Social Security benefit payments will exceed the program's revenue this year, six years earlier than expected, due to the recession's impact on payroll taxes and early retirement. But the crisis is not immediate, The New York Times reports, because the program can still draw on its $2.5 trillion "trust fund," which is not expected to run out until 2037. Whew.

Wait a minute. There's a trust fund? Well, no, not really, the Times concedes in the 14th paragraph:

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. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.

Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

For accounting purposes, the system's accumulated revenue is placed in Treasury securities.

Translation: The government already has spent all of this money (and then some). All that is left in the "trust fund" is IOUs from one part of the government to another. And guess who has to make good on those IOUs? While there is budgetary significance to this accounting fiction (since Social Security cannot legally continue paying benefits after its notional reserve is officially exhausted), all this talk of a trust fund tends to obscure reality.

For example, the Times says there are "only three choices" when the imaginary trust fund disappears: "raise taxes, lower benefits or bail out the program by tapping general revenue." Note that the first and third choices amount to the same thing: The government takes more of our money. For that matter, the program is already "tapping general revenue" in the sense that taxes must be used to repay the money the government has "borrowed" from Social Security.

Another point you might miss by focusing on the nonexistent trust fund is that Social Security is not a pension. As the Times notes in passing by referring to the program's "pay-as-you-go" structure, it is a system of transfer payments, from young workers to old retirees. Yet the Times claims the tax and benefit changes of the 1980s were driven by the fear that Social Security could be transformed "from a respected, self-sustaining old-age program into welfare." It already is welfare, with the perverse twist that the recipients are more affluent than the people funding their benefits. Proposals to privatize the system aim to change this situation by transforming intergenerational transfers into genuine retirement savings.

Brian Doherty noted the imminence of this year's "tipping point" in Reason last year. In a 2005 column, I welcomed George W. Bush's half-hearted attempt at partial privatization. More on Social Security reform here.