Social Security Trust Fund Myths

By on June 2, 2013 in Current Events, Retirement with 187 Comments

The Trustees of the Social Security Trust Fund recently released the fund’s annual report.  In it, the Trustees provided information which points to the urgent need for reform.  The Trust Funds which they oversee provide a cushion for Social Security from a very harsh reality.  The system promises more than it collects.

The dependence of Social Security on that cushion is growing.  In 2010, Social Security would not have paid full benefits without the Trust Funds.  In 2021, the cost of benefits will exceed the revenue of the system forcing the government to use principal to pay benefits.   In short, the Trust Funds are not a long-term solution to the financial imbalances in the system.

Last year, the trustees projected that Social Security may pay full benefits as long as 2033, or 2027 if the economy is less robust.  Assuming that we have a good economy, this means that anyone 47 years old today expects to retire after the combined Trust Funds of the system are exhausted.  It means anyone 64 years old or younger expects to outlive the system’s ability to pay full benefits.

Given the growing importance of the Trust Funds within the system, it is important for all Americans to understand what the Trust Fund is, and how it operates.  Critics will tell you that the Trust Fund does not exist.  They will tell you that the money has been stolen, and replaced with worthless IOUs in a Trust Fund that has no economic value.  It is important to understand what they are saying because they mix fact and hyperbole in a way that is almost indistinguishable.

Is the Trust Fund well run? No. Without question, the investment policy of the Trust Fund is completely inconsistent with the goals of the system. This observation should not surprise anyone. The investment policy of the Trust Fund was created 77 years ago, and hasn’t changed despite all of the changes in the system.

The critics however go beyond the merits of how the money is invested.  In the extreme, writers suggest criminal behavior and financial malfeasance.  This is where analysis allows hyperbole pass as fact, and cliché to pass as informed opinion.

Your money has been stolen

According to the Social Security Administration, the handling of surplus cash hasn’t changed since the inception of the system.  Excess cash is lent to the government on terms that are better than those offered to private pensions.   Many of these critics have private pensions, but none of the critics say that their private pensions were robbed.  The government securities held by the Trust Funds is at least as secure as the debt held by any investor in US securities.

The Trust Funds consist of worthless IOUs

The Trust Fund does consist of IOUs.  These IOUs are called “Cash Equivalents” by professional investors.  Whether one calls them an IOU or a cash-equivalent, comparable assets are trading at historic highs.  So today, these assets, IOUs, or cash equivalents aren’t worthless.  No one says that their pension was folded into the general fund.

The assets of the Trust Fund are not negotiable   

The critics are correct.  These assets are non-negotiable.  While ‘non-negotiable’ sounds ominous, the reality is of no consequence.  These assets contain a redemption option which enables the Trust Fund to put the securities to the issuer.  The only difference of asset negotiability to the Trust Fund would be cost.  The system would pay commissions that aren’t necessary and eat spreads that serve no economic value.

 The IOUs Are Nothing But An Agreement To Pay Ourselves

Here is a typical quote.  “Instead, (these bonds) are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, make it easier for the government to pay benefits.”

The problem here is that the government does not “pay” benefits.  The government is a fiduciary for not a guarantor of Social Security.  The government collects revenue, and distributes benefits based on the revenue collected. The government has no liability for the promises of Social Security beyond the money that was borrowed from the Trust Fund. The Supreme Court held in Flemming V Nestor that there is no earned interest in Social Security. The Trustees annually warn Americans that benefits will be cut in 2033 because the general fund has no obligation to pay benefits.

The Trust Fund has no economic purpose  

The Trust Fund has both legal and financial implications.  First, it is a visible circuit breaker on benefits. Today for example, one of the few facts about the system that is widely accepted is the year in which benefits are projected to be cut – 2033. Second, Trust Fund provides a store of value. Without the Trust Fund, Social Security would not have paid full benefits in 2010. The Trust Fund provided a means to transfer resources from one year to the next such that full benefits could be paid.

This is very different for many of the other Trust Funds maintained by the government. In terms of pensions for example, these future payments are legal obligations that the government must fulfill whether the money is available in the Trust Fund or not. In that case, a bond is just a bookkeeping exercise with no economic value.

In sum, the main objection to these arguments is that they mislead people. Many readers think that Social Security would be able to provide full benefits if only the Trust Fund had ‘real’ assets. It is complete non-sense. These arguments perpetuate the idea that the funds have been stolen or raided which is just more non-sense.  Fostering these ideas only serves to harden the gridlock that we call the Social Security debate.

© 2016 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) is the founder of “Fix Social Security Now” which provides information on all alternatives in the public debate on Social Security through its site www.FixSSNow.Org.

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