Social Security Trust Fund

Social Security Trust Fund

The Social Security Trust Fund is the means by which the federal government of the United States accounts for excess paid-in contributions from workers and employers to the Social Security system that are not required to fund current benefit payments to retirees, survivors, and the disabled or to pay administrative expenses. More importantly, the trust fund also contains the securities that will be redeemed to make benefit payments in the future when contributions derived from payroll taxes and self-employment contributions no longer are sufficient to fully fund then-current benefit payments. ("The controversy over its" meaningfulness "is a topic of the sustainability of the unified Federal budget"). Paid-in contributions that exceed the amount required to fully fund current payments to beneficiaries are invested in securities issued by the federal government. The securities issued under this scheme constitute the assets of the Social Security Trust Fund. Because under current federal law these securities represent future obligations that must be repaid, the federal government includes these securities within the overall national debt.cite web | url =| title = Four Questions and Answers about the Social Security Trust Funds, the National Debt, and Sound Fiscal Policy | publisher = The Social Security Network | date = July 6 2005 | accessdate = 2007-06-28] The portion of the national debt that is not considered "publicly held" represents the obligations incurred by the government to itself, the bulk of which consists of the government's obligations to the Social Security Trust Fund.

tructure of the Social Security Trust Fund

Though widely used, the term "Social Security Trust Fund" is something of a misnomer, as the Social Security Administration of the United States actually oversees two separate funds that hold federal government debt obligations related to what are traditionally thought of as Social Security benefits. The larger of these funds is the Old-Age and Survivors Insurance (OASI) Trust Fund, which holds in trust those funds that the federal government intends to use to pay future benefits to retirees and their survivors.cite web | url = | title = Old-Age and Survivors Insurance Trust Fund | publisher = Social Security Administration | date = November 9, 2007 | accessdate = 2008-03-28] The second, smaller fund is the Disability Insurance (DI) Trust Fund, which holds in trust those funds that the federal government intends to use to pay benefits to those who are judged by the federal government to be disabled and incapable of productive work, as well as to their spouses and dependents.cite web | url = | title = Disability Insurance Trust Fund | publisher = Social Security Administration | date = November 9, 2007 | accessdate = 2008-03-28]

History of the Social Security Trust Fund

(Historic information incomplete... Please provide sourced information)

The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. In the early 1980s, however, the financial projections of the Social Security Administration indicated near-term revenue from payroll taxes would not be sufficient to fully fund near-term benefits (thus raising the possibility of benefit cuts). The federal government appointed the Greenspan Commission, headed by Alan Greenspan (who had not yet been named Chairman of the Federal Reserve), to investigate what changes to federal law were necessary to shore up the fiscal health of the Social Security program.cite web | title= 1994-96 Advisory Council | url= | publisher=Social Security Administration | accessdate=2008-03-28] In addition to recommending tax increases to alleviate the short-term funding problem, the Greenspan Commission projected that the system would be solvent for the entirety of its 75-year forecast period. The changes to federal law enacted in 1983 pursuant to the recommendations of the Greenspan Commission increased the Social Security payroll tax so that revenues derived from the tax would exceed the amounts needed to fully fund current benefits, thus causing a reserve to accumulate, which could be drawn upon when necessary. The resulting surplus is accounted for in the Social Security Trust Fund. As of the end of calendar year 2006, the accumulated surplus stood at just over $2 trillion. [] Projections are that current receipts will continue to exceed expenditures until 2017 (according to Charles Blahous, Special Assistant to the President for Economic Policy). Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds. [] The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office). However, if the US economy performs better than the economic assumptions and projections used by the SSA and CBO, the trust funds may remain in surplus indefinitely.

Recent Attention to the Social Security Trust Fund

On February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. One consequence was increased public attention to the nature of the Social Security Trust Fund. Unlike a typical private pension plan, the Social Security Trust Fund does not hold any marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The Office of Management and Budget has described the distinction as follows:

These [Trust Fund] balances are available to finance future benefitpayments and other Trust Fund expenditures – but only in a bookkeepingsense.... They do not consist of real economic assets that can be drawndown in the future to fund benefits. Instead, they are claims on theTreasury that, when redeemed, will have to be financed by raising taxes,borrowing from the public, or reducing benefits or other expenditures. Theexistence of large Trust Fund balances, therefore, does not, by itself, haveany impact on the Government’s ability to pay benefits. "(from FY 2000 Budget, Analytical Perspectives, p. 337)"

Other public officials have argued that the trust funds do have financial and/or moral value. "If one believes that the trust fund assets are worthless," argued former Representative Bill Archer, then similar reasoning implies that “Americans who have bought EE savings bonds should go home and burn them because they’re worthless because the money has already been spent.” [As quoted in “The Truth is Out There,” by Kevin McCormally, Kiplinger’s Personal Finance Magazine, March 1999.] At a Senate hearing in July 2001, Federal Reserve Chairman Alan Greenspan was asked whether the trust fund investments are “real” or merely an accounting device. He responded, “The crucial question: Are they ultimate claims on real resources? And the answer is yes.” [As quoted in The Washington Post, “Decisions on Social Security Loom,” August 17, 2001.]

From the point of view of the Social Security trust funds, the holdings of "special" government bonds are an investment that returned 5.5% to the trust funds in 2005. [ , pp 4-5] The trust funds cannot resell these "special" government bonds on the secondary bond market, although the interest rate is determined based on market interest rates. Instead, the "specials" can be sold back to the government at face value, which is an advantage when interest rates are rising.

To escape paying either principal or interest on the "special" bonds held by the trust funds, the government would have to default on these obligations. This cannot be done by executive order. The Congress would have to pass legislation to repudiate these particular government bonds. This action by Congress could involve some political risk and, because it involves the financial security of older Americans, seems unlikely.

An alternative to repudiating these bonds would be for Congress to simply cap Social Security spending at a level below that which would require the bonds to be redeemed. Again, this would be politically risky, but would not require a "default" on the bonds.

The week after his State of the Union speech, Bush downplayed the importance of the Trust Fund:

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. []

These comments were criticized as "lay [ing] the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds". []

On the other hand, Bush has referred to the system going "broke" in 2042. That date arises from the anticipated depletion of the Trust Fund, so Bush's language "seem [s] to suggest that there's "something" there that goes away in 2042." [] Specifically, in 2042 and for many decades thereafter, the Social Security system can continue to pay benefits, but benefit payments will be constrained by the revenue base from the 12.4% FICA (Social Security payroll) tax on wages. According to the Social Security trustees, continuing payroll tax revenues at the rate of 12.4% will enable Social Security to pay about 74% of promised benefits during the 2040s, with this ratio falling to about 70% by the end of the forecast period in 2080. [] Whether this means the system is "broke" is a debate for linguists and politicians.

The Trust Fund and Payroll-Tax-Funded Private Retirement Accounts

If part of the payroll tax is diverted to fund private accounts, the Social Security Trust Fund would be exhausted before 2042, and the federal government's ability to fund benefit payments after the Trust Fund is exhausted would cause the percentage of fully-funded benefits paid to fall significantly below 74% (the percent of benefits paid would depend on the amount of payroll taxes diverted to private accounts). Social Security could pay full benefits through the forecast period (i.e. through 2080) if any of the following were enacted: an immediate cut to all benefits of 13%; an increase of 16 percent in payroll taxes (i.e. by nearly 2 percentage points, bringing the FICA tax to 14.4% of payroll); or some combination of tax increases and benefit reductions. []

Supporters of Bush's call for significant change in the Social Security system often refer to the Social Security Trust Fund as "really only an accounting mechanism" and dismiss the 2042 date as irrelevant. [] Opponents of Bush's plan are more likely to argue that the Trust Fund assets are legally available to the Social Security Administration, with the result that "the total amount received by Social Security beneficiaries is not subject to the annual Congressional appropriation process." []

An Economic Perspective on the Structure of the Social Security Trust Fund

From an economic standpoint, the question of whether the trust fund is fact or fiction comes down to whether the trust fund contributes to national savings or not.cite journal
last = Nataraj
first = Sita
coauthors = John B. Shoven
title = Has the Unified Budget Undermined the Federal Government Trust Funds
journal = National Bureau of Economic Research, Inc, NBER Working Papers: 10953
date = 2004
url =
] If $1 of Social Security taxes increases national savings by $1, the trust fund is real. If $1 of Social Security taxes increases national savings by $0, the trust fund is not real. A substantial body of economic research argues that the trust funds have led to only a small to modest increase in national savings and that the bulk of the trust fund has been spent.cite journal
last = Nataraj
first = Sita
coauthors = John B. Shoven
title = Has the Unified Budget Undermined the Federal Government Trust Funds
journal = National Bureau of Economic Research, Inc, NBER Working Papers: 10953
date = 2004
url =
] [cite journal
last = Samwick
first = Andrew A.
title = "Social Security Reform in the United States."
journal = National Tax Journal
volume = LII
issue = 4
date = 1999
] [cite journal
last = Feldstein
first = Martin S.
coauthors = Jeffrey B. Liebman
title = "Social Security"
journal = National Bureau of Economic Research Working paper 8451 (September)
date = 2001
] [cite news
last = Greenspan
first = Alan
title = Economic Outlook and Current Fiscal Issues.
publisher = Testimony before the Committee on the Budget, U.S. House of Representatives
date = March 2, 2005
] Others suggest a more significant savings effect. [cite book
last = Diamond
first = Peter A.
coauthors = Peter R. Orszag
title = "Saving Social Security: A Balanced Approach
publisher = Brookings Institution Press
date = 2004
location = Washington, D.C.

If the Social Security Trust Fund causes government spending to be higher and/or income tax rates to be lower, then the trust fund is not contributing to national savings. No money is being saved. On the other hand, if government spending and tax rates aren't affected by the existence of the trust fund, then the trust fund has contributed to national savings. If trust fund increases national savings, then it really is a trust fund and has fulfilled its purpose. This has been the subject of considerable controversy.

An interesting comparison concerns the secondary market for third world debt, where traders have actually assigned dollar values (generally as a percentage of face value) to the obligations of certain third world governments. According to some, the "value" of the Social Security trust funds hinges critically on the federal government's ability to pay back the money that it has borrowed from Social Security. This would be true if the U.S. Social Security trust fund held debt of foreign countries, but as is, it is an incorrect and misleading comparison because the federal government is lending to itself. If you write an I.O.U. to yourself and count this as an asset, this presents very different issues than if someone else writes you an I.O.U.

The economic question is NOT whether the bonds represent legal obligations that will be fulfilled, the economic question is whether the U.S. bonds held by Social Security represent savings by allowing Social Security taxes collected in the past to reduce the need for taxes in the future. Was $1 of taxes collected in 1980 saved so that it could be spent on a retiring baby boomer in 2020 (without tax increases)? If the only way for the federal government to repay the bonds held by Social Security is by raising taxes in 2020, this suggests that the money collected in 1980 was spent on other government activities, not Social Security. Those who believe the trust fund is real would say that tax increases would have been even higher without the trust fund.

The following two scenarios help illustrate the concept. Depending on which scenario is right, Social Security is either an accounting fiction or represents real economic savings.

Scenario 1 (Trust Fund is an accounting fiction):
*1980: $1 payroll tax collected in 1980
*1980: $1 lent by Social Security to the federal government
*1980: Federal government increases spending on government programs by $1
*2020: Federal government raises taxes by $1 plus interest to repay the loan to Social Security
*2020: $1 plus interest transferred from Federal Government to Social Security.

Scenario 2 (Trust Fund represents real economic savings):
*1980: $1 payroll tax collected in 1980
*1980: $1 lent by Social Security to the federal government
*1980: Federal government increases spending on government programs by $0
*2020: Federal government raises taxes by $0 to repay the loan to Social Security. Any tax increases that occur in 2020 would have happened anyway without Social Security.
*2020: $1 plus interest transferred from Federal Government to Social Security.


1/ Mamta Murthi, J. Michael Orszag, and Peter R. Orszag, "The Charge Ratio on individual accounts: Lessons from the UK Experience," Birkbeck College Working Paper 99-2. March 1999

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