The Social Security Trust Fund has been around for 80 years. Over that time, its role within the program has changed, but the argument has remained the same. Is the Trust Fund real or simply an accounting ledger where wonks play with imaginary cash?
It has lingered for decades because there is no right or wrong answer to the question of whether the Trust Fund is real. It is a theoretical question where different assumptions lead to opposite conclusions.
The trustees of the program defend the trust fund accounting as accurate and appropriate in their statement of actuarial opinion. Long story short, the trust fund reflects current law, where benefits are reduced when programmatic revenue falls short. To these experts, the Trust Fund is quite real.
While the trustees are smart and trusted, it doesn’t mean that you have to agree with them. The ultimate answer to this question depends upon your view about the relationship between Social Security and the government. If you believe that the program is part of the government, you will come to a different conclusion than someone who treats it as an independent insurance program run by the government.
To illustrate, if you believe that the federal government will bail-out the program once the trust funds are exhausted, the inner mechanics of the program are just a shell game of I.O.MEs. The Trust Fund has no purpose if the general fund is going to step-in to fill its absence.
The disagreements take different shapes. None of the dispute is about economics. It is all about ideology.
- To the critic, a Social Security cash surplus means that the government will borrow less from investors to finance the deficit by other programs. To the supporter, Social Security is an investor.
- To the critic, there is no cash in the Social Security trust fund, and there never has been any. To the supporter, leaving cash uninvested in a pension would be irresponsible.
- To the critic, the securities aren’t real because they can’t be sold on the open market. To the supporter, there is no reason to make securities with a put-option marketable.
Here are some observations about the yins and yangs.
First, the trust funds are small relative to the task at hand, with reserves that represent roughly a nickel of solution for every dollar of problem. You can bitterly complain about the trust funds, but they are the economic equivalent of parsley. We should be focused on the $0.95 of problem rather bickering over what to call the $0.05 of solution.
Second, the money contributed to Social Security has not been spent on other programs. The Trust Funds rough value is $2.9T (ignoring the coronavirus pandemic). Of that sum, $2.2T is interest and 700B is general fund subsidies. In other words, Congress is not raiding Social Security. It has put the entire balance of the trust funds into Social Security.
Third, some of the argument blurs the lines between theory and fantasy. In order to explain the IOU concept, policy experts have created a new classification of obligations called intragovernmental debt. This is debt owed by one part of the federal government to another part. The argument goes: the debt represents an asset to part of the government (i.e. Social Security), but a liability to the part of the government that issues them (the Treasury Department). So when considered together, intragovernmental debt has no net effect on the government’s overall finances.
There are two problems: (1) the bonds held by the trust fund are only an asset to Social Security if we ignore future obligations of Social Security. (2) these bonds will have to be refinanced in the public sector at some point in the future. The refinancing of $3 T in bonds over the next 15 years will have a substantial impact on the government’s overall finances.
As a writer, I treat the Social Security trust funds as real because the trustees do. If we accept the conclusions about the program’s forecast, you pretty much have to accept the assumptions that go into creating the estimates. That vision says the program will deliver large benefit reductions to millions when the Trust Funds are exhausted.
As an individual, I tend to worry more about the consequences of a depleted trust fund and less about what to call them in the meantime.
