Social Security Trust Fund

From Academic Kids

The Social Security Trust Fund is the United States federal government's means of accounting for workers' paid-in contributions to the Social Security system that are in excess of current payments to beneficiaries. This excess, the amount not yet needed for Social Security purposes, is invested in securities issued by the government, and those securities constitute the assets of the Trust Fund.

The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. In the early 1980s, however, expenditures were expected to exceed the revenues in the immediate future. In addition to fixing the short-term problem with tax increases, the Commission headed by Greenspan took the projections which indicated that the eventual retirement of the numerous members of the post-World War II baby boom would cause expenses to exceed revenues. Accordingly, the Social Security tax was increased in 1983 so that it would be greater than necessary to pay for current expenditures, thus accumulating a reserve that could be drawn upon when necessary. The surplus is accounted for in the Social Security Trust Fund. As of the end of calendar year 2004, the accumulated surplus stood at approximately $1.7 trillion. [1] (http://www.ssa.gov/OACT/STATS/table4a3.html) Projections are that current receipts will continue to exceed expenditures until 2018 or 2019. Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds. [2] (http://www.philly.com/mld/philly/news/columnists/larry_eichel/10671774.htm) The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office).

On February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. One consequence was increased public attention to the nature of the Social Security Trust Fund. Unlike a typical private pension plan, the Social Security Trust Fund does not hold any marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The Office of Management and Budget has described the distinction as follows:

These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense. ... They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)

The week after his State of the Union speech, Bush pointed to these facts in language that downplayed the importance of the Trust Fund:

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. [3] (http://www.whitehouse.gov/news/releases/2005/02/20050209-15.html)

These comments were criticized as "lay[ing] the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds". [4] (http://www.talkingpointsmemo.com/archives/week_2005_02_06.php#004757)

On the other hand, Bush has referred to the system going "broke" in 2042. That date arises from the anticipated depletion of the Trust Fund, so Bush's language "seem[s] to suggest that there's something there that goes away in 2042". [5] (http://www.washingtonpost.com/wp-dyn/articles/A16984-2005Feb11.html)

Supporters of Bush's call for significant change in the Social Security system often refer to the Social Security Trust Fund as "really only an accounting mechanism" and dismiss the 2042 date as irrelevant. [6] (http://www.heritage.org/Research/SocialSecurity/em940.cfm) Opponents of Bush's plan are more likely to argue that the Trust Fund assets are legally available to the Social Security Administration, with the result that "the total amount received by Social Security beneficiaries is not subject to the annual Congressional appropriation process." [7] (http://research.aarp.org/econ/fs40r_ss_trust_1.html)

Reference

  • Mamta Murthi, J. Michael Orszag, and Peter R. Orszag, "The Charge Ratio on individual accounts: Lessons from the U.K. Experience," Birkbeck College Working Paper 99-2. March 1999
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