|The Social Security
Social Security is
headed for bankruptcy! Benefits for future generations of retirees will
have to be cut unless something is done soon! This alarmist view is
offered by pundits as well as politicians who should know better. It is a mixture of myths and
How the Trust Fund
Payroll taxes not needed
for Social Security benefit payments are used to buy non-negotiable Treasury bonds which earn interest at a market rate. The bonds are held in the Social Security Trust Fund. The
proceeds from the sale of the bonds are credited to the Treasury
general fund and are thus available to spend on other government
The Trust Fund has no bank account of its own. All payments to SS
beneficiaries are made out of the Treasury general fund, which is held in
commercial bank accounts. The
Treasury continually replenishes the general fund with the proceeds
from taxes and the sale of securities to the public when tax
revenues fall short. The Treasury does not seek to accumulate
balances in its general fund. It holds only what it needs to
As long as SS tax revenues exceed payouts, the
Trust Fund balance will increase. When the revenues are no longer sufficient to
cover benefit payments, the Trust Fund balance will be debited by the amount
of the shortfall. while the Treasury continues to pay the beneficiaries out
of the general fund.
What Happens When
the Trust Fund is Depleted?
SS benefits be reduced when the Trust Fund is depleted?
No, because the
benefits are established by law which sets the rules for how much
individual retirees are paid. Those rules are independent of the
Trust Fund balance. Unless Congress changes the rules, the Treasury will continue to pay retiree
benefits according to existing law.
Then what is the significance of the Trust Fund? In effect, nothing. It is an essentially meaningless exercise. The balance simply reflects the excess of
total SS tax revenues over total benefit payouts. The
interest paid on the bonds merely extends the period before the Trust
If the Trust Fund were abolished, it would have no effect on SS benefits.
The public should recognize that the Treasury will have to borrow what it needs to pay SS
benefits when SS tax revenues are insufficient.
will be a bulge in the outstanding debt as baby boomers draw
their maximum benefits. Other things equal, the peak level of the
debt/GDP ratio during that period could be reduced only by increasing
taxes from any source, reducing SS benefits, or increasing the growth rate of the GDP.
Proposed Fixes for the
In the rush to
"fix" Social Security, many proposals have been offered. One is
to invest some of the trust assets in the stock market based on the belief that
the assets would earn a higher average return. Presumably that would
reduce the projected funding gap when the baby boomers start drawing
Investing the trust fund
in the stock market would increase the budget deficit since the funds
would no longer be available to the Treasury for current expenditures.
Other things equal, the shortage would have to be covered by the net sale of
Treasury bonds to the public. In effect, the public would simply be swapping
some of its equity holdings for new T-bonds.
The Potential Future
While Social Security is
not in any real trouble, social security (small s) could become a
problem some day. The problem has nothing to do with trust fund
accounting or payroll taxes. Rather, it relates to the size of the
working population producing goods and services relative to those who are not
in the labor force. Due to the baby boomer effect and improved longevity,
the ratio of retirees to workers will be increasing. Whether that will
reduce average living standards depends on the rate of increase of worker
Ultimately how well we live as a
nation depends upon the productivity of the work force and the number of
dependents that force supports. Retirees cannot eat stocks or bonds in
trust funds. What people need to live on must be produced by their
contemporaries. In a real sense, retirement benefits for the economy as a
whole are supplied on a pay as you go basis. The solution then for
potential future shortages is to provide long term capital investment in
infrastructure and R&D to enhance productivity, not to simply build up
artificial trust fund balances.