The Social Security Trust Fund Myth

Worried about your Social Security benefits? You should just forget about the debate regarding when the Social Security trust fund will be drained. At least that's the conclusion of an excellent post from earlier this week from CBS MoneyWatch editor-in-chief Eric Schurenberg. I agree with Eric's recommendation -- this post just adds my two cents worth about the Social Security trust fund.

Our political leaders continue a long tradition of using words to describe Social Security that give you an impression that is different from reality. Normally, when you hear the words "trust fund," you think of an arrangement where money and investments have been set aside that are dedicated to a specific purpose, such as providing retirement benefits. And typically, the money and investments in a trust fund are separate from the entity that sponsors the trust fund. The trust funds supporting your 401k and pension benefits operate this way.

But the Social Security "trust fund" is invested in special government bonds issued by the federal government. Principal and interest on these bonds must be repaid by future generations, according to law. The bonds in the Social Security trust fund are counted both as an asset of the trust fund and as a liability, since they are part of the total federal debt. Basically, one hand of the government owes the other hand, and the investments in the "trust fund" are not separate from the entity that sponsors the trust fund.

In the distant past, Social Security was a "pay-as-you-go" system, where current tax collections paid for current benefits. The Social Security trust fund idea gave us the illusion that we were advance funding Social Security benefits, in a manner similar to the private pension system. In reality, though, Social Security is still pay-as-you-go, with the difference being that future generations will pay for both the benefits outlay and the repayment of principal and interest on the special government bonds in the trust fund.

Some people are outraged by the operation of the Social Security trust fund, using inflammatory language to describe our politicians as having "raided" the trust fund. I don't happen to be outraged. I realize and accept that the government has a variety of revenue sources, including FICA taxes, and a variety of expenditures, including Social Security benefits. There is -- and never has been -- any real link between our Social Security benefits and the FICA taxes that we pay. What the Social Security trust fund does represent is a legal obligation for our government to repay the principal and interest on the special bonds in the trust fund. I have faith that these bonds will be honored -- provided that future generations can afford to repay the bonds.

The debate on the Social Security trust fund is really a distraction from the real debate, which is how much can we and our children afford to pay, considering all the taxes we currently pay? When does the total federal debt get too big, including the part of the federal debt that represents the Social Security trust fund?

When you think about it, the real Social Security trust fund is the trust that our children and grandchildren will be willing and able to pay all their taxes, including FICA taxes, and that they will be willing and able to pay interest and principal on all the federal debt, including the special government bonds in the Social Security trust fund. If this happens, our Social Security benefits will be secure.

If you read the tea leaves of President Obama's State of the Union address, it appears that Social Security's financing and benefit provisions won't be addressed until after the 2012 election. According to his speech, there are more important issues to be dealt with immediately, including kick-starting the economy, creating jobs, and the wars in Iraq and Afghanistan. That may be.

But please, Mr. President, don't kick the can much farther down the road. We need focused leadership from you -- endorsements of specific recommendations on how to improve Social Security's funding and the benefit changes that need to be made. The recommendations from your bipartisan Deficit Commission were a good place to start. The security of our Social Security benefits depends on effective and responsible leadership.

Image from iStockphoto contributor jhorrocks
More on MoneyWatch:

• The Real Risk to Social Security
• What's the "Return"on Your Social Security Taxes?
• 3 Big Myths About Social Security
• Is Social Security a Ponzi Scheme?
• Deficit Commission Proposals: What They Could Mean for Your Retirement
• Social Security and the Federal Debt: Why You Should Be Worried

[RBeigher]

Why does this author worry about future generations being able to repay the Social Security Trust fund debt? Debt is debt and as he correctly points out the debt owed to the trust fund is an obligation that must be repaid just as any other debt taken on by the United States government. Workers have paid in to the trust fund, which currently holds 2.6 trillion dollars of the national debt. What if that money were owed to China, Great Britain, or any other foreign investor, would he be just as worried about future generations being able to repay those loans. It is ridiculous to be concerned, that "future generations" will be unable to repay Social Security for the money borrowed from it by the government. When that debt is repaid, it will really be finally paying for the Bush tax cuts, the wars in Iraq and Afghanistan and any other deficit spending done by our government.

[jgodiska]

Why doesn;t the SS system act like a bank of the people. A SS credit card at 12 % interest. We would be paying ourselves back the interest. No fat cat bankers.
Borrow a thousand when you need a new appliance. A 100 bucks a month will be deducted from any SS benefit or payroll check, for a period of 12 months. Quick payback. None of this minimum stuff. 12% doubles your money in 7 years, considering compound interest. And this would be no new taxes except in the mindso of the Publicans who want to Kill SS. Stupiud rich people out of touch with the bread and butter Americans.
AND---let anybody invest in the SS system at a return of 8 % for them. We keep 4 % for our part, and they get a rate of return better than Wall Street. WOuld you invest your money in a guaranteed 8 % rate of return? Let those codgers on Wall Street sqirm for wanst.