Tuesday, April 27, 2010

Fact Check: Has Social Security Begun Tapping Its Trust Funds?

Fact Check: Has Social Security Begun Tapping Its Trust Funds?

Monique Morrissey


March 19, 2010



A recent Associated Press story said that Social

Security will need to "start cashing Uncle Sam's IOUs"

because the recession is adding to the system's

financial problems. The article said "the government

will have to borrow even more money, much of it abroad,

to start paying back the IOUs, and the timing couldn't be worse."


This is simply not true. According to the Congressional

Budget Office -- the source cited in the article --

Social Security will continue to run a surplus for years

to come, with the combined old age and disability trust

funds projected to grow from $2.5 trillion in 2009 to

$3.8 trillion in 2020. See Figure.


What is true is that the economy has shed eight million

jobs, so payroll tax receipts are down 2.5% compared to

pre-recession estimates. As a result, Social Security is

projected to run a primary deficit-a measure that

excludes interest on trust fund assets -- until 2014,

when CBO expects the economy will be back at full employment.


Even though outlays will exceed payroll tax revenues,

Social Security is not about to become a net seller of

Treasury bonds, and is in fact still acquiring them to

the tune of $100 billion a year. However, the story has

taken off because it fits with the preconception that

Social Security is in crisis and its finances are suspect.


The AP article uses the notion that Social Security is

about to start tapping into savings as a hook to revisit

the famous filing cabinet in West Virginia where the

trust fund is held in the form of Treasury bonds, which

the author says are "worthless on the open market."

This is technically true in the sense that the bonds,

though similar to those held by the public, are

"special-issue securities" redeemable at face value

before they mature. But this actually makes them more,

not less, valuable.


The fact that these bonds can be redeemed for cash at

any time will come in handy when we do start drawing

down the trust fund, which will probably begin some time

after 2020. This is exactly what the trust fund is there

for - to help finance the retirement of the large Baby

Boom generation. Since Social Security has always been

funded primarily out of current tax revenues, the trust

fund balance should be close to zero under normal circumstances.


This is not to say that the system faces no challenges.

Because wages for most workers were flat even before the

recession hit, Social Security's finances have been

slipping since the system was last in balance in 1983.

The system also needs periodic adjustments to address

changes in life expectancy and other long-term trends.

Thus, CBO projects that payroll tax receipts will only

cover about 80% of promised benefits after the trust

fund is drawn down in coming decades.


To put this in perspective, future generations will

still receive higher benefits, in inflation-adjusted

terms, than retirees today because of economic growth.

Nevertheless, it would be far preferable to raise

revenues so promised benefits can be paid in full. This

can be achieved by increasing payroll taxes a modest

amount (equivalent to 0.5% of GDP)-or better yet, by

taxing earnings above $106,800, as Medicare already

does. Polls show that Americans of all ages and

political stripes would support a modest tax increase to

preserve Social Security benefits for future generations.



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