As mentioned in Part 1, Social Security is and always has been a pay as you go program. In other words, current benefits are paid out from current contributions (i.e. payroll taxes, aka FICA taxes, aka Social Security taxes). Money for individual retirees isn't sequestered in personal accounts. Until fairly recently an annual surplus was created due to contributions exceeding benefit payouts. These funds were held in what is referred to as the Social Security Trust Fund. Most people understand that much. However many people harbor the misconception that the Trust Fund is similar to a bank account with a pile of money setting in it, waiting for Social Security checks to be distributed.
By law, any surplus must be invested in interest bearing US Treasury bills. Just like when your bank uses the money in your savings account to make loans at interest, the Social Security administration is using the money in the Trust Fund to earn interest. Not only is this required by law, but it makes good fiscal sense to put the funds to work. The Social Security Administration could theoretically invest in the stock or bond market, with all the attendant risks, but instead, the money is invested in securities backed by the full faith and credit of the US government. The government is required to, and does, pay back the bills with interest when they mature or when the payouts exceed the contributions.
It could be looked at, pejoratively, as nothing more than an IOU that hasn't been paid back so that Congress, or the President, can "raid" the Trust Fund, leaving it unable to meet its obligations. While it's true that the cash that is freed up each year when contributions exceed benefits is used as part of the general fund, that's an incorrect way to look at it. The government typically runs an annual budget deficit, meaning that tax receipts are exceeded by expenditures. These deficits are covered by borrowing in the form of government bonds. If some of that borrowing can be from itself rather than from private individuals or even foreign governments, wouldn't that make more sense?
One of the pervasive myths is that a President or Congress, usually one that the spreader of the myth doesn't like, "stole" money from the Trust Fund in order to fund a war, or a social program, or whatever action the myth spreader is against. It's true insofar as some of the money used to pay for whatever nefarious project we're talking about came from cash obtained by selling Treasury bills to the Social Security Trust Fund. But it's untrue in that this happens every year when there is a surplus in Social Security contributions vs payouts. It's partially true that it's not been paid back, but it's untrue since it's not supposed to be paid back until the instruments mature. In each of the years since the Trust Fund has been running an annual deficit the general fund has been making up the difference by redeeming Treasury bills and/or paying interest.
They will keep doing this until there are no more Treasury bills to redeem. That's when we'll have a problem, not because money was stolen and not paid back (it was borrowed and will have been paid back) but because the annual deficits finally used up the accumulated surpluses. Even then, based on the projected contribution levels, the Social Security Administration will be able to pay around 70% of benefits just from payroll tax collections. Congress will then need to decide how to handle it. Reduce benefits? Political suicide. Increase payroll taxes? Probably not popular. Start collecting payroll taxes on 100% of income, not cutting off at a certain point. Something will need to be done, but the coming crisis isn't because someone you didn't like stole money and didn't pay it back.
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