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