Friday, February 12, 2016

Clarifying the Social Security "Trust Fund"

Don’t you get tired of people arguing that Social Security is not an “entitlement,” that they paid in and it’s their money being held in a “trust fund” for their retirement?  The word entitlement makes it sound like they weren’t paying in, and when politicians refer to the FICA tax as a contribution, that statement reinforces the idea.  But that is not what is really going on.  The contributions of retirees are long gone; and the government has its own definition for the term “trust fund.”  Common assumptions are wrong, and a little research and critical thinking explain why.

Social Security was set up such that the contributions of today, from today’s workers, are used to pay the retirees of today.  They may pass through some imaginary trust fund, but all they do is pass through.  In the past the contributions went partially to the current retirees and partially to build a reserve, but there are no longer enough workers to support the number current of retirees.  Now it takes all the money collected, plus interest from that trust fund to meet today’s obligations.  That’s right, every penny “contributed" by workers today is passed directly to retirees.  There is not an account with your name on it (and there never was).

To defend those statements, here is an excerpt from the 2016 Budget of the United States, page 30: 
As a result of reforms legislated in 1983, Social Security had been running a cash surplus with taxes exceeding costs up until 2009. This surplus in the Social Security trust fund helped to hold down the unified budget deficit. The cash surplus ended in 2009, when the trust fund began using a portion of its interest earnings to cover benefit payments. The 2014 Social Security Trustees’ report projects that the trust fund will not return to cash surplus, but the program will continue to experience an overall surplus for several more years because of the interest earnings. After that, however, Social Security will begin to draw on its trust fund balances to cover current expenditures.
 Note above that the Social Security surplus “helped to hold down the unified budget deficit.”  It’s all in one pool, not a separate, distinct fund.  This situation was confirmed when, during the debate about the raising the debt ceiling in the summer of 2011, the President said he could not guarantee the Social Security checks would go out on time.  Why didn’t Congress counter with:  “That’s just a scare tactic, because the money is in a separate trust fund”?  They didn’t say that, because it’s not true.

Furthermore the government means something different and directly admits it on page 374 of the same document: 
The Federal Government uses the term “trust fund” differently than the way in which it is commonly used…the Federal Government owns and manages the assets and the earnings of most Federal trust funds and can unilaterally change the law to raise or lower future trust fund collections and payments or change the purpose for which the collections are used. [Emphasis added]
So don’t tell me it’s your money that you paid in and you have a right to it.  The money you paid in is long gone.  The money your children are paying in is going out as fast as it’s coming in.  And the government can change the rules whenever they want to and use the money for whatever they want to.  In other words, the trust fund is “simply an accounting measure, specifying how much money the federal government owes the program out of general revenues, not an actual asset that can be used to pay benefits.”

Of course, Social Security could have a real trust fund so that people who pay in get back their money with interest during retirement.  It would be run more like people expect it to be run, but after 80 years running on a pay-as-you-go basis, it would cost almost $25 trillion to retrofit it in that way.

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