The Social Security Trust Fund Myth

Last Updated Feb 1, 2011 11:05 AM EST

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
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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