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Has Social Security’s Trust Fund Been Robbed?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By John Pearson
December 8, 2015

Recently, there has been continued controversy about the Social Security Trust Fund. As stated by one candidate during the third Republican debate, held Oct. 28, 2015, “The government has lied to you and they have stolen from you. They told you that your Social Security money is in a trust fund. All that’s in that trust fund is a pile of IOUs for money they spent on something else a long time ago.”

The Social Security Trust Fund and the national debt are certainly important public finance issues. The fundamental relationship for analyzing the national debt is total national debt = trust fund debt + public debt. (Technically, the trust fund debt is part of a larger category called Intragovernmental Debt).

dollar-17527_640The trust fund debt, currently about $5 trillion, includes the Social Security Trust Fund (currently about $2.8 trillion), as well as other government trust funds. The public debt, currently about $13 trillion, includes all other government debt (debt held by individuals, corporations, state and local governments, foreign governments and the Federal Reserve board). For more information on the public debt, view the following resources:

For many years, Social Security tax receipts and interest earned on trust fund bonds have exceeded benefit payments. The excess was loaned back to the Treasury’s general fund where the money was spent. In return, Treasury has issued nonmarketable, special issue treasury securities to the trust fund. The Social Security Trust Fund is an asset from the perspective of the Social Security program but a debt from the perspective of the Treasury.

Many have charged that the Social Security Trust Fund contains worthless IOUs. It is true the special issue bonds in the Social Security Trust Fund are not marketable. They may not be sold to raise cash. They are, however, obligations of the Treasury just as much as savings bonds are obligations of the Treasury. Savings bonds are not marketable either. Would we say that savings bonds are worthless IOUs?

The more pressing question is: has the public been “robbed” and forced to pay twice for the surplus funds collected from Social Security taxes? Also, because of the alleged theft of surplus funds, is the actuarial outlook for Social Security much worse than the estimate provided by Social Security’s board of trustees?  The Board, using its “intermediate” assumptions, currently estimates the trust fund will be exhausted in 2034. Social Security benefits thereafter will have to be reduced by about 25 percent unless Congress makes benefit or tax changes. (The Social Security disability program has a separate estimate for exhaustion of its trust fund.)

On the surface it may appear the public is paying twice for the surplus in the Social Security Trust Fund. Why were surplus Social Security funds loaned to the Treasury’s general fund where the money was spent? What happened to this money?

When trust fund bonds are redeemed, the Treasury will be forced to borrow money to meet the obligation. This borrowing will increase the public debt. However, the redemption also reduces the trust fund debt by the amount of the redemption. Therefore, the total national debt does not increase (see equation in paragraph 5). Gradually, through redemptions, Trust Fund debt is reduced and converted to an equal amount of public debt.

The bottom line is that the federal government’s cumulative borrowing really is $18 trillion, whether or not the Social Security Trust Fund provided any financing. The Social Security Trust Fund loaned money to the Treasury during the period of Social Security tax surpluses. Treasury could have financed the entire $18 trillion with public debt but instead borrowed from the trust funds to finance part of the debt. The public is not paying twice for the Social Security surpluses because trust fund redemptions will not cause total national debt to increase.

In fairness to critics, it is certainly reasonable to ask why the government borrowed so much throughout the years. The $18 trillion national debt has now reached the level of the nation’s gross domestic product income (also $18 trillion). If interest rates rise, the burden of carrying such a large debt could be much greater than in today’s low interest rate environment.

Throughout the years, critics have claimed Social Security is a government Ponzi scheme that would eventually collapse and leave a future generation with no benefits. I recall hearing such claims back in the early 1970s. Such claims were wrong then and I believe they are wrong now. Social Security is funded by a very substantial payroll tax (12.4 percent of the first $118,500 of earnings) and a dedicated trust fund. It is far from being a government Ponzi scheme.

The good news is the Social Security retirement program appears to be properly financed until 2034, the year the Social Security Trust Fund is projected to be exhausted. Full benefits required by law have been paid every year since 1935. These benefits can continue indefinitely beyond 2034 if Congress will make relatively modest program adjustments.


Author: John Pearson recently retired from a lengthy career in the federal government where he was a program analyst. He has an MPA and a bachelor’s degree in economics. He now writes columns reflecting on his experience in government. His email is [email protected].

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