Given the recent release of the Social Security trustees' 2016 report on the status of the national retirement system, now seems like a good time to address a misconception that political candidates and ordinary citizens alike often repeat: Congress raids the Social Security trust fund and spends it on favorite pork-barrel projects.
This story evokes images of politicians striking deals behind the closed doors as they fritter away Americans' hard-earned Social Security taxes, sure to leave us destitute in our retirement years.
But that's just not accurate. The reality is that from 1983 to 2010, Social Security collected more FICA taxes from workers than the amount of actual benefits paid to retirees. This excess helped build a trust fund of $2.8 trillion by the end of 2015, a fund that will help pay for the benefits of baby boomers when they ultimately retire.
This surplus has been invested in special U.S. government bonds that are legally obligated to pay the stated, market rate of interest, and then repay the principal when they mature.
These special bonds are just part of the federal government's overall funding. The assets in the Social Security trust fund represent about 15 percent of total government debt in 2016.
Investors, retirement plans and institutions around the world buy U.S. government bonds as investments. The government mingles the proceeds from these publicly traded bonds with all its other revenue, including the special bonds in the Social Security trust fund.
You don't hear anybody complaining about Congress "raiding" T-bills, TIPS or the mutual or money market funds that invest in government bonds. If the Social Security trust fund didn't invest in these special bonds, the U.S. Treasury Department would need to sell more bonds to the public at large to finance the federal government.
Social Security's funding process takes place in full view of anybody who cares to learn about it. No deals have been made to divert money earmarked for Social Security to pay for politicians' pet projects. The buildup of the trust fund was the inevitable result of the Social Security Amendments of 1983, which bolstered Social Security's finances by raising payroll taxes and reducing benefits paid to retirees.
These changes represented a compromise between a Republican Senate, a Democratic House and a Republican President. And the entire process is public record.
Did Congress spend the proceeds of the special bonds held in the Social Security trust fund? Of course!
They spent this money on all the various operations of the federal government. Some people get riled up about government spending on obscure projects they think are worthless, but the reality is that these "wasteful" projects represent a very small portion of the overall federal budget.
To make any meaningful reduction in federal spending, Congress will need to find the courage to address the biggest portions of federal spending that together make up almost two-thirds of federal spending: defense (16 percent of the total), Social Security (24 percent) and health programs, including Medicare and Medicaid, (25 percent).
Don't worry that Congress spent the money in the Social Security trust fund. When you buy any investment, such as a stock or a bond, the entity that issues the stock or bond usually spends the money you paid for that investment. When you buy a corporate bond, for instance, the issuing company spends the money on any aspect of its business that needs funding, such as plants, equipment, computers, advertising or employees' salaries and benefits.
It's the same when you buy newly issued stock. The issuing company invests those proceeds in the business. If you invest in state and local government bonds, these governing entities spend the proceeds on their operations, including roads, rapid transit systems, sewers, computers and the salaries of government workers.
If the Social Security trust fund invested in something other than U.S. bonds, what would it invest in and where would the money go? A review of the list of possible investments shows serious challenges with any one of them:
- If the Social Security trust fund invested in U.S. corporate stocks or bonds, or bonds of state and local governments, the money would get spent, as noted above. And if the fund owned too large a slice of U.S. corporations' stocks and bonds, or state and local bonds, you might call it socialism or communism.
- Bank CDs? Current CD interest rates are lower than the rates the fund currently earns.
- The trust fund could buy commercial or residential real estate, but that would put it in the business of selecting and managing these real estate investments -- once again, raising concerns about socialism or communism.
- There's always international stocks and bonds, but you can imagine the outcry if the trust fund bought European or Chinese stocks or bonds?
The real issue with the special bonds Social Security holds is the growing level of total federal debt and whether future taxpayers can repay it, or if future bonds can be sold to pay the principal of the maturing bonds. If the federal debt were much lower, no one would be paying much attention to claims that "Congress raided the Social Security trust fund."
In fact, the Social Security trust fund has been buying the special government bonds for decades, but only in recent years have we heard about these so-called raids.
Congress didn't raid the Social Security trust fund any more than it raided T-bills, mutual funds or money market funds. Such claims just distract from the real issue of the need to manage the federal budget deficit by compromising on containing total government spending and raising taxes. That would boost confidence that future taxpayers can pay for interest and maturing principal on those U.S. government bonds in the Social Security trust fund and that retirees will be paid the benefits they're due.
It might feel good to make inflammatory accusations about unscrupulous politicians raiding the trust fund, but it certainly doesn't help make any real progress on the serious challenges Social Security faces.