Does the Social Security Trust Fund Really Exist?
By James D. Agresti
April 17, 2014
In a memorable scene from the classic sitcom Sanford and Son, a legal predicament led Fred Sanford to consider hiring a man who was peddling cut-rate attorney services. When Sanford and the man met, the conversation that ensued went something like this:
Sanford: So, you’re a lawyer?
Man: That depends on who you ask.
Sanford: I’m asking you.
Man: If you ask me, I’m a lawyer.
Sanford: Then who says you’re not a lawyer?
Man: The state of California.
This exchange epitomizes the situation with the Social Security Trust Fund, because the legal and practical realities sometimes clash. Both liberals and conservatives have taken advantage of this paradox to make duplicitous claims about the Trust Fund and its finances.
First, there can be no doubt the Trust Fund legally exists. It was established by a 1939 law that is still in effect, which declares, “There is hereby created on the books of the Treasury of the United States a trust fund to be known as the ‘Federal Old-Age and Survivors Insurance Trust Fund’….” (A second trust fund was created for Social Security’s disability program in 1956, but for the sake of simplicity, Social Security’s two trust funds are commonly spoken of as if they were one.)
More significantly, the Social Security Administration has provided clear public accountings of both funds since their inception, which are mirrored in the books of other federal agencies. Consider, for example, the Treasury Department’s Monthly Statement of the Public Debt, which includes line items for the “Federal Old-Age And Survivors Insurance Trust Fund” and “Federal Disability Insurance Trust Fund.” This official accounting shows that as of March 31, 2014, these funds have combined assets of $2.763 trillion.
Now, let’s consider the practical side. The only reason the Trust Fund has assets is because the Social Security program had surpluses in previous years. However, these surpluses were loaned to the very entity that Social Security is a part of: the federal government. This is because federal law has always required that Social Security loan its surpluses to the federal government.
The key to understanding this unintuitive reality is a simple fact: the finances of the Social Security program are separated by law from the rest of the federal government’s finances, as shown in this diagram:
As is well known, the federal government has spent all of the money it has borrowed from the Social Security program (and then some). Thus, as explained in blunt terms by the Clinton administration’s 2000 budget proposal, the Social Security Trust Funds:
do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they 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.
In keeping with this practical reality, the White House Office of Management and Budget, Congressional Budget Office (CBO), and many other organizations frequently report on federal finances as if the Social Security Trust Fund did not exist. They do this by merging all federal finances into a single budget, even if they are separated by law. In the words of a 2010 CBO report:
The Congressional Budget Office (CBO), the Administration’s Office of Management and Budget, and other fiscal analysts generally focus on the total deficit rather than on the deficit with or without particular trust funds. That comprehensive view of the government’s fiscal activities is often called the “unified budget.”
This unified view of federal finances effectively erases the debt that the federal government owes to Social Security. Hence, the Obama administration has argued that the money owed to Social Security “is debt that the federal government ‘owes to itself’ — and, as such, does not represent a ‘fiscal burden’.” Furthermore, the administration said that measures of federal debt that include the Trust Fund are not “meaningful” and have no bearing on “the federal government’s ability to pay its obligations.”
Beyond such explicit statements, numerous budget figures cited by the White House, other federal agencies, and virtually all media outlets are based on this accounting method in which the trust funds of Social Security (and other programs) are treated as if they do not exist. Perhaps the most notable of these figures is the annual federal budget deficit. This oft-cited statistic is based upon a unified view of federal finances, and thus, contrary to popular perception, it is not the same as the annual rise in national debt.
This is where political double-talk comes into play, because the same organizations and people who sometimes disregard the Social Security Trust Fund also talk about it as if it contained hard assets. For example, in 2013 the White House stated that the Social Security Trust Fund is projected to “be depleted by 2033.”
Likewise, in 2011 President Obama insisted that “Social Security is not the source of our deficit problems,” and in 2012 his press secretary claimed that “Social Security is not currently a driver of the deficit.” Given that Social Security’s expenses have exceeded its taxes every year since 2010 and are projected to do so for foreseeable future, those claims necessarily assume that the Trust Fund is covering these shortfalls. This contradicts other statements from the White House that disregard the Trust Fund.
This hypocrisy also manifests when talking about the national debt. In September 2012, noted economist Dean Baker claimed that the national debt would not reach 90% of our nation’s gross domestic product until around 2020. At the time he wrote this, the debt was already well above that level, clocking in at $16 trillion or 101% of GDP. So how did Baker come up with a lower figure for the debt? By excluding all of the money owed to the trust funds of Social Security, Medicare, and other such programs. In other words, Baker’s figure for the national debt assumes that these trust funds don’t truly exist.
In stark contrast, less than a year earlier Baker wrote that the Social Security “trust fund currently holds $2.6 trillion in government bonds” and that Harry Reid was “exactly right” to say that “Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have.”
Those are quintessential cases of liberals talking out of both sides of their mouths, and conservatives are just as guilty.
For a prime example, Paul Ryan’s recent budget proposal states that “any value in the balances in the Social Security Trust Fund is derived from dubious government accounting. The trust fund is not a real savings account.” Yet, in November 2011, Ryan stated, “Today marks an infamous day in American history. It is the day that the national debt has surpassed the $15 trillion mark.”
This $15 trillion debt figure includes $2.6 trillion owed to the Social Security Trust Fund, which means that Ryan’s statements conflict with each other. If the balances in the Trust Fund are not “real” as Ryan claims, then the national debt did not reach $15 trillion in November 2011. He can’t rationally have it both ways.
Hence, whether one speaks about the Trust Fund from a legal perspective or a practical perspective, consistency is the watchword. Given that government agencies sometimes use different perspectives for prominent data they publish, it can be difficult to stay totally consistent when discussing these issues. However, jumping back and forth between perspectives to serve political agendas is disingenuous.
So does the Social Security Trust Fund really exist? That depends upon who you ask, but you stand a much better chance of getting a straight answer from Fred Sanford’s would-be lawyer than anyone in Washington.
Nice to see a balanced report of the issue which addresses the distortions of both sides of politics.
Seems to me that the government always has the right to define its own terms, like “surplus” for instance. when they talk of Social Security “surpluses” are they defining a “surplus” as the amount of revenue that is in excess of benefits paid pout? I suppose that’s one way to look at it, but what about Social Security’s obligations to those on Social Security now, over their expected lifetimes? When actuaries calculate the necessary funding of a defined benefit pension plan, they take into consideration the promised future benefits to current retirees, life expectancy of those pension beneficiaries and minimum interest rate earnings. It seems to me that Social Security’s pension plan is insufficiently funded to meet its obligations to current beneficiaries. If those future promised benefits are not funded, there is no “surplus”.
In order to make up for the difference between Social Security payments and Social Security taxes, using asset from the Trust Fund, the Treasury has to sell bonds to the public. If there were no Trust Fund, the Treasury would have to sell bonds public. The actions are exactly the same whether the Trust Fund exists or not. From an economic and realistic perspective, there is no Trust Fund.
Or, think of it this way. Every week, I write a $1,000 check from my own account, made out to me. I store these checks in an extremely secure and fireproof safe. I do this religiously until I am 65 years old. Have I saved anything for my retirement?
Why was the government allowed to “borrow” from this fund in the first place? Can they just stop the borrowing?
One easy way to understand the true nature of the Social Security Trust Fund is to consider a comment by President Obama made during the recent debt ceiling debate with respect to monthly Social Security checks. He stated that failure to raise the debt ceiling would “hold up” Social Security benefits. Why, you ask, would a “solvent” trust fund be instantly affected by a debt ceiling cap on the general obligations of the federal government? The answer is simple. The government securities held by the Social Security Trust Fund are “special issue securities” which the fund CANNOT sell independently on the open market. In other words, they are worthless in any normal accounting sense. In reality, Social Security payments come from current receipts, which must necessarily include new borrowing, as President Obama has clearly stated.
“For a prime example, Paul Ryan’s recent budget proposal states that “any value in the balances in the Social Security Trust Fund is derived from dubious government accounting. The trust fund is not a real savings account.” Yet, in November 2011, Ryan stated, “Today marks an infamous day in American history. It is the day that the national debt has surpassed the $15 trillion mark.”
This $15 trillion debt figure includes $2.6 trillion owed to the Social Security Trust Fund, which means that Ryan’s statements conflict with each other. If the balances in the Trust Fund are not “real” as Ryan claims, then the national debt did not reach $15 trillion in November 2011. He can’t rationally have it both ways.”
No this analysis does not look correct. In the first statement he is pointing out that the balances are largely fictitious because they are only IOU’s with no real assets tied to them. This implies that paying back those IOU’s will require either tax revenues from the general fun or monetary debasement. In the second statement, his budget takes into account that there is genuinely nothing in the Trust Fund, and that therefore if it is being used to pay out Social Security checks, that money must be coming from general spending, which adds to the debt.
Both statements appear to be true. What is the problem here?