Social Security Q&A

Ellen Frank

This article is from the November/December 2001 issue of Dollars and Sense: The Magazine of Economic Justice available at

issue 238 cover

This article is from the November/December 2001 issue of Dollars & Sense magazine.

"Social Security Q&A" was inspired by a plea from Larry Siegel, a D&S reader from Monroe Township, New Jersey, for clarification of the Social Security debate. "It's driving me nuts!!" he declared. We hope this helps. Readers interested in further information can also see "The Myth of the Social Security Trust Fund," which appeared originally in D&S's May/June 1999 issue.

Is there or is there not an actual Social Security trust fund?

Since the mid-1980s, the Social Security Administration (SSA) has been collecting more in payroll taxes each year than it pays out in pension, survivor, and disability benefits. The difference between receipts and payments grew significantly in the 1990s, and now amounts to some $160 billion each year. The Social Security system is expected to continue running annual surpluses at least through 2025.

Each year, SSA turns over any surplus funds to the U.S. Treasury, which spends the funds. In return, SSA receives special-issue, non-negotiable U.S. Treasury securities, which represent an implicit promise by the U.S. government to repay Social Security when and if additional money is needed to cover benefits. These bonds are what we call the "trust fund." In 2000, the trust fund contained bonds valued at $1.2 trillion; by 2025, the accumulated surpluses should top $3 trillion.

These, of course, are projections—the surpluses (and thus the trust fund) could be larger or smaller than anticipated, depending on wage growth, population changes, the overall state of the economy, and so on. Under the SSA's "low-cost" (or best-case) scenario, the Social Security trust fund will grow continuously until late in the 21st century.

So, yes, there is a trust fund, representing the excess of payroll taxes over benefit claims, and it is "invested" in promissory notes issued by the government.

Is there actually money in the Social Security trust fund? And if not, where is it?

There is not actually "money" in the trust fund, any more than there is actually "money" in your bank account. When you open a bank account, the bank lends your money out. You exchange money for a promise from the bank to repay you, subject to whatever limitations and provisions you may have agreed to in advance. Your money is replaced with a piece of paper laying out those terms and obligations—a bank statement, passbook, quarterly notice, whatever. Your money has become a claim on a financial firm and is as good as the stability of that financial firm.

Similarly, the surplus revenues flowing into Social Security over the years have all been lent to the Treasury and spent—all, that is, except this year's $160 billion surplus. Before the attacks in September, Congress was still arguing over this money. By December, the surplus is almost certain to have disappeared in any case. (See John Miller, "The Surplus Vanishes: A New Budget Battle," p. 23.)

Some critics of Social Security use alarmist rhetoric in discussing the trust fund: The SSA is bankrupt, our hard-earned money is gone, the government has blown it all. They're right that there's no money in the trust fund. But there's nothing duplicitous in this. All money gets lent or spent and replaced with other kinds of paper claims. Banks and other financial firms don't keep money lying around either.

Then why do I keep hearing about a "crisis" in Social Security?

The problems with Social Security are not really financial in nature. They stem from the fact that, over the last 30 years or so, birth rates have declined in the United States, while life expectancies have increased. If these trends continue (and there's no reason to suppose they will not), the ratio of retirees to workers will rise. Unless the economy grows faster than the SSA predicts—unless those future workers are more productive than the SSA projects, or the workforce grows faster than expected due to immigration—the cost of supporting all these retirees will exceed the revenues that would accrue from current tax rate of 12.4% on payroll.

According to SSA's none-too-optimistic projections, the Social Security system will have enough revenue from payroll taxes alone to cover benefits at their current levels (adjusted for inflation) up until 2016. For seven years after that, there will be enough revenue from payroll taxes and interest on the bonds held by the trust fund to cover benefits at current levels. Then, in 2023, SSA will need to begin redeeming the bonds. When that happens, the system will have enough revenue—from payroll taxes, interest, and bond redemption combined—to cover legislated benefits for another 15 years or so.

The problem is this. Once we reach a point where payroll tax receipts fall below projected benefit payments—once the SSA actually needs the interest and principle from the bonds to meet its obligations—the U.S. Treasury will have to find resources to pay the SSA, just like it has to find resources to pay back any other creditor. They can do this by raising taxes, cutting spending on other federal programs, or borrowing from the private financial markets.

But if the government has to raise money to pay the SSA in the future anyway, then what's the point of collecting these surpluses today?

Good question. From a purely economic perspective, there is no point. The federal government is collecting surplus payroll taxes and then spending them, and will have to raise revenue somehow in the future to pay Social Security benefits. The bonds in the trust fund do nothing to alter this.

Realize that the bonds are non-negotiable, and SSA cannot redeem them for cash unless Congresses allocate money for this purpose. But if future Congresses choose not to repay Social Security, they can simply raise payroll taxes or cut benefits and avoid altogether the need to redeem the bonds. Understanding this, some Democrats have insisted in recent years that Social Security surpluses be used exclusively to repay debts that the government currently owes to the financial markets. This is the idea behind the so-called Social Security "lockbox."

In fact, it makes absolutely no difference to the trust fund whether the surpluses are used to repay public debt, cut taxes, or pay for expanded federal programs, any more than you, as a depositor, need concern yourself with where a bank lends your deposits. But the defenders of the trust fund apparently feel that using the surpluses to repay debt will harden the federal government's commitment to the security of future retirees. If the money has purportedly been "saved" in a rhetorical "lockbox," the reasoning goes, it will be pretty hard for opponents of Social Security to turn around 10 or 20 years from now and argue that benefits need to be cut.

Now look at this from the perspective of anti-government Republicans. They oppose higher taxes, have little faith in the ability of government to cut spending (and plenty of ideas on how to raise spending for defense and corporate subsidies), and object to the government borrowing cash from the financial markets. They are also none too keen on the idea of workers retiring into extended periods of idleness. Back in the 1930s, when Social Security was established, conservative business groups vehemently opposed it. They gave their support grudgingly, and only when then-President Roosevelt assured them that the system would be funded entirely by payroll taxes on working stiffs. General tax revenues, which are paid largely by upper-income groups, were never to be tapped for Social Security.

But if governments of the future are to honor the commitment implicit in the trust fund, then general revenues will have to be tapped. Real resources will need to be transferred to retirees, above and beyond the 12.4% payroll tax, so that retirees can survive without a paycheck. The amount needed is not that large, but it's large enough to worry those corporate and wealthy taxpayers who neither need nor want Social Security and who are likely to be asked to foot the bill.

This is why proponents of privatization are claiming that the Social Security trust fund is on the verge of collapse. The trust fund was designed to solve a potential economic problem—transferring resources to seniors in the future so that American workers can continue to enjoy retirement—with a political accounting device. Privatization boosters are today exploiting the contradictions inherent in that accounting device to attack Social Security and to justify regressive policies such as raising current payroll taxes or cutting current benefits.

But there will be a shortfall in Social Security at some point in the future. What can we do about that?

It's difficult to say for sure whether the projected shortfalls will materialize. But they may. And if they do, privatization is definitely not the answer. The economic problem of caring for a large number of retirees in the future cannot be solved with private accounts. Even if they worked as their boosters claim (and they won't—see "The Hidden Costs of Private Accounts," p. 20), private stock accounts are just another sort of accounting device. Eventually, all those private account holders are going to retire and try to sell their stock for the cash needed to buy real resources—food, shelter, health care. If the economy has not grown sufficiently to provide the resources, the stocks will rapidly become worthless.

The only real investment we can make today to strengthen Social Security is in economic growth and enhanced economic well-being. Next time your Congressional representative talks about Social Security, ask her what she's doing today to ensure that America's future workers will be healthy enough, happy enough, secure enough, and skilled enough to care for their aging parents. That's the only security we can count on.

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