The Myth of the Social Security Trust Fund

By Ellen Frank

This article is from the May/June 1999 issue of Dollars and Sense: The Magazine of Economic Justice available at

This article is from the May/June 1999 issue of Dollars & Sense magazine.

issue 223 cover

Since the 1980s, American workers have been paying more into the Social Security system than retirees are taking out. These excess payroll taxes, now running at about $100 billion per year, go to the Social Security Trust Fund, "saved" for the coming baby-boom retirement, when there will be as few as two workers for every retiree. The Trust Fund now contains some $900 billion; by 2021, it will be worth nearly $4 trillion dollars.

The Social Security Administration (SSA) — using, it should be noted, very grim forecasts of future economic growth — predicts that sometime early in the 21st century, workers’ payroll taxes will equal only three-quarters of the benefits currently legislated for retirees. To cover this potential shortfall, the SSA plans gradually to spend down the Trust Fund, until 10 or 20 or 30 years later, depending on whose numbers you believe, the $4 trillion runs out. This, in a nutshell, is the Social Security "crisis."

Supposedly to make the surplus funds grow faster and last longer, Congressional Republicans propose placing Social Security funds in the stock market. Clinton has put forth a complicated plan (see box) also intended to enlarge the Trust Fund so that it lasts through 2050. Both sides have acceded to gradual cuts in Social Security benefits — achieved by raising the retirement age to 67 and reducing annual cost-of-living adjustments — so that a larger share of today’s payroll tax dollars can be saved for the baby-boom Trust Fund.

All of these recommendations, indeed the Trust Fund itself, rest on a deceptive premise. Today’s workers are being taxed both to support current retirees and, via Trust Fund surpluses, to partially pre-fund their own retirement. Yet pre-funding a universal public pension plan is neither attainable nor desirable.

Many people, when discussing the Trust Fund, apparently have in mind a great heap of money stacked high in some underground vault. As more boomers retire, the SSA opens the vault, dusts off the cobwebs and doles out the cash. But there is no such pile of money. When excess payroll taxes come into the SSA, the cash is turned over to the Treasury which, in turn, issues interest-bearing bonds to the SSA. The Treasury then spends the cash on welfare, roads, weapons, tax cuts.

When, in 2020 or thereabouts, payroll taxes fall short of retirees’ needs, officials at SSA will begin taking their bonds back to the Treasury to redeem them for the cash with which to pay benefits. Where, in 2020, will the Treasury obtain the cash to repay the SSA? They will either have to print it, borrow it, levy additional taxes on the public of 2020 or they will have to cut benefits. There is no getting around this. Treasury, after all, spends the funds as they come in; they are not languishing in a vault. If Social Security benefits remain intact, the government will be liable to raise funds for retirement benefits in 2020. The bonds issued by the Treasury represent nothing more than a promise to do this; the public of the future will either raise the funds and keep this promise or they will renege on the obligation.

The "saving" we are doing today through Social Security does not in any way reduce the need to tax, borrow or cut benefits in the future. If the Trust Fund were to disappear tomorrow nothing would change; the baby boom retirement burden would be made neither heavier nor lighter.

Which raises an obvious question. If the excess payroll taxes being "saved" today can’t ease the burden of caring for retirees in the future, why are we paying them? The idea of "saving up," through higher payroll taxes, for the baby-boomer retirement originated with the Reagan Administration — ostensibly proposed to "save" Social Security when the system faced its last "crisis," in the 1980s. The Trust Fund surpluses were small at first, barely noticeable in the deluge of fiscal red ink of the Reagan/Bush era. Sold to the public as a method for pre-funding the impending baby-boom retirement, the Trust Fund’s real function was to disguise the shift of federal tax burdens from the wealthy to those with moderate and low incomes. Today, nearly one-third of federal revenues derive from the payroll tax, perhaps the most regressive of all federal taxes. Of this money, about one-fifth is not needed to pay current Social Security benefits. It is credited to the Trust Fund, but is destined, in fact, for general government spending.

Democratic Party defenders of this charade argue that the Trust Fund, though devoid of economic merit, is politically necessary. The Trust Fund may be an empty gesture, but it is not made in bad faith. While admittedly regressive, the funds represent an implicit assurance to current workers that benefits will be there for them tomorrow. The illusion of pre-funding instills confidence among voters that their benefits are "paid up" and thus secure. Further, the surpluses provide a veneer of financial planning which defuses right-wing attacks on Social Security. Excessive payroll taxes, in this view, are a small price to pay for political insurance against Republican attacks.

But this argument is wrong. In fact, as the Social Security surplus has grown in size and significance, public confidence in the system has been shaken and the right-wing assault has taken on new ferocity. Currently, projected federal budget surpluses for the next three years can be attributed entirely to excess Social Security taxes. For anti-government Republicans, these surpluses are a provocation, not a deterrent. They evoke greed and fear: greed for the tax cuts, corporate giveaways, and Wall Street management fees, that Social Security surpluses could pay for without exposing Republican budget politics for the fraud it is. That greed was on display this past winter, but has now been replaced by fear.

The right wing deeply abhors the Trust Fund and fears precisely the implicit contract with the future that it represents. Conservative economists understand all too clearly that the Trust Fund bonds are nothing more than a promise that society will one day be asked to keep. When the bonds come due, they worry, who will pay? Currently, Social Security benefits are financed through a tax on low-and middle-income wage earners, but this group cannot be expected alone to carry the entire burden of the baby-boom retirement.

Who else will be asked to give up income in the future so that retirees can eat? The National Association of Manufacturers, no doubt concerned that its members’ profits might be targeted, has endorsed the full and immediate privatization of Social Security, to foreclose the establishment of an uncontrolled "baby boomer entitlement." Wall Street Journal columnist Alan Murray writes ominously of the "aging baby-boomer assault on the federal budget" and the threat that "general revenues" (perhaps corporate taxes!) rather than payroll taxes, may one day be used to cover Social Security’s "accrued liabilities." Economist Milton Friedman, always a shill for corporate interests, recently proposed in The New York Times that the Trust Fund be liquidated and the Social Security system disbanded.

Recently, conservative Republicans have come to fear as well that the excess payroll taxes flowing to Social Security will be exposed for the sham they are and that workers will demand an accounting of funds purportedly saved on their behalf. In recent weeks, Congressional Republicans have been scrambling to "wall off" the Trust Fund from "raids" by the Treasury. Draping themselves in the language of financial prudence, they insist that "every penny" of the surpluses be used "to save Social Security."

In practice, this amounts to using the surpluses to repay federal debt, a ruse which effectively transfers tax dollars from wage-earners to bond-holders. The Cato Institute, alarmed that the public might actually decide to spend its own money, advocates placing Trust Fund revenues in a privately managed money market fund. Above all, Republicans in Congress are terrified that the surplus funds pouring into Social Security might actually be used on the public’s behalf.

And this, indeed, is precisely what those who believe in Social Security should be promoting. The mythical image of piles of money squirreled away on behalf of future retirees has become a serious impediment to responsible, even intelligible, discussion of Social Security. As recent Republican proposals should make abundantly clear, the language of saving and financial planning threatens to sink Social Security’s supporters into the muck of right-wing economics. It is long past time to shift the terms of the debate. The Social Security debate is not about saving or interest rates or compound 30-year rates of return. It is about who pays taxes in this country, on whose behalf that money is spent and what the obligations of government are to its citizens.

All funds being paid into Social Security will be spent, either on tax cuts, Wall Street investment accounts, debt reduction or something socially useful. The left’s task in this debate is to make this point clear and to ask, explicitly, what the money will be spent on, who will spend it and how, exactly, that spending will ease the burden of caring for an aging population.

All the Trust Funds and IRA’s in the world cannot change the fact that, in 20 years or so, the task of caring for the growing ranks of the aged will fall, inevitably, to the younger generation and will require their labor, energy and commitment. If the workers of the 21st century are ill-fed and uneducated, if the environment is ravaged, the air unbreathable, the climate hostile to health, the aged will languish, regardless of the money put aside today. As a society, the United States is not well set up to care for an aging population and there is no reason to believe that throwing money at Wall Street will improve this situation. We lack affordable and accessible housing and transportation; pollution and climate change are taking a harsh toll on the elderly; Medicare is riddled with fraud and our nursing homes are a national disgrace.

Imagine what could be done with the $100 billion plus currently flowing into Social Security each year. Imagine how secure our retirees could be made if these funds were used to construct housing, train scientists, cleanup the environment, build public health facilities, and educate future workers. The Social Security surpluses are paid by low- and middle-income workers and should be spent on programs that will benefit them and help their children to care for them as they age. Money earmarked for their future should be spent in securing that future: on schools, parks, infrastructure, the environment, our children.

Unless the funds are spent on their behalf, the bonds piling up in the Social Security Trust Fund today do nothing to help future retirees. They can, however, positively hurt today’s workers. If these regressive and excessive tax dollars are squandered, as Democrats and Republicans now propose, to pay down the national debt or reduce (progressive) income taxes, this will amount to a federally sanctioned redistribution of income from wage-earners to the wealthy (see box). Furthermore, by aggravating income inequality, these proposals will worsen, not improve, the long-term accounting imbalances of the Social Security system, since the projected cost of caring for retirees will fall on a workforce whose share of national income is shrinking. How long then before the next "crisis" is announced and further cuts proposed to "save" Social Security?

Many sincere supporters of Social Security are wary of exposing the Trust Fund charade. They fear that without the Trust Fund, the Democratic party’s political commitment to Social Security’s future will falter and the entire system will gradually collapse under continued right-wing assault. But this may happen with or without the Trust Fund. Early in the 21st century, payroll taxes may fall short of legislated benefits and, at that time, resources will be raised to support retirees or they will not be. Either Americans then will agree to care for the aged collectively or those without children to support them will be forced to work until they die. The battle over the baby-boomer retirement is of vital consequence. It will test the very meaning of our society and democracy, but it cannot, in fact, be won today.

Only today’s battles can be won today, and they must focus on who is paying taxes and how the government today can best serve the people. There is no political advantage to be gained from expediency in this debate. Those who wish to inherit a just and humane future must fight for a just and humane present.

Ellen Frank teaches economics at Emmanuel College and is a member of the Dollars & Sense collective.

Resources: Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 1998; Cato Policy Report, September 1998; Defusing the Baby-Boomer Time-Bomb, Dean Baker, Economic Policy Institute, 1998; "Clinton Plays to Aging Baby Boomers," Alan Murray, Wall Street Journal, 3/29/99.
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