The discussion of Social Security is normally a shouting match. One of the most divisive aspects of the discussion is the system’s trust fund.
At this point, the discussion of the Trust Fund is little more than a competition of dueling hyperboles. On one side, the Trust Fund is the more space efficient version of Fort Knox. On the other, it is an accounting gimmick that funnels cash to the general fund to be spent on other programs.
As is most frequently the case in the discussion of Social Security, the truth lies between the extremes. The Social Security Trust Fund is a reserve that allows the system to pay full benefits when expenses exceed revenue. It acts like a shock absorber for a car driving on a bumpy road.
That shock absorber is wearing out, and the road is getting bumpier. Here are two facts:
1. Without the Social Security Trust Fund, current law would subject benefit levels of the program to a reduction of more than 10%; and
2. The buffer of cash is dwindling. It is projected to run out in 13-18 years depending upon the forecast.
Supporters argue that Social Security has a $2.8 trillion surplus that is backed by the full faith and credit of the United States government. They act as though the sum is a massive reserve, when in fact it is tiny compared to the obligations that it is supposed to pay. Even at $2.8 trillion, it is little more than economic parsley.
The trick is that you need to know what the word “surplus” means. A “surplus” in Social Security is a balance somewhat like your checking account balance at an ATM. That value does not reflect checks written but are still outstanding. In the case of Social Security's checking account, there is roughly $10 of outstanding checks for every $1 in the account.
If you were to apply traditional accounting standards, the Trust Fund for Social Security would be worth zero. Every penny of the $2.8 trillion is committed to filling the projected gap between what the system expects to collect and what it expects to pay.
As inflated as the claims of supporters are, the critics of the trust fund probably employ a lower standard for facts. The critics’ argument is normally little more than emotional invective.
You have probably heard that the Social Security Trust Fund is a fiction, a bookkeeping device consisting of worthless IOUs which do not represent economic resources on which the program can draw.
This sounds alarming until you realize that all debt is an IOU. There is no point to make the government securities held by the Social Security Trust Fund negotiable because the Trustees have the right to redeem these securities.
Yes the Trust Fund is a book keeping device. Believe it or not, so is your 401K, which largely contains electronic references to where your money is actually held.
Here is the irony of their argument. Many of the harshest critics of Social Security have pensions which invest in these same assets without a redemption privilege. Yet, none of them complain about the worthless IOUs in their own accounts.
The Trustees of the system have defended the Trust Fund and its accounting. In short, the Trust Fund accounting reflects the law - actual law. If Social Security were an obligation of the government, then the critics would be right. However, it isn't. The federal government is a fiduciary, not a guarantor of the promises of Social Security.
The exaggerated debate of both sides serves a purpose. Supporters want to delay the discussion of reform. They would like you to believe that the problems of Social Security are a matter of simply paying back the money that is 'owed' to the system. Critics want to make the system's problems appear more urgent.
Ideology aside, voters need to understand that the Social Security Trust Fund serves one vital purpose. It represents the legal obligation of the taxpayers to Social Security.
In short, the Social Security Trust Fund is real. It stores deferred revenue. Revenue collected in the past for use today. It is, however, small. It can postpone the consequences of the politics of indifference, but cannot solve them.
No one appreciates what the Trust Fund is or what it does - just wait until it is actually gone.
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