Another Blog Post About Social Security

Here's another is my series of blogs about the Social Security Trust Fund:

Every person who is currently working has payroll taxes deducted from their paycheck. This money goes into the Trust Fund.

Every person who is currently receiving benefits receives a check (or automatic deposit) that is drawn from the Trust Fund. 

Until recently the cumulative payroll deductions were greater than the benefits paid out, resulting in a surplus in the Trust Fund. 

Hold that thought.

The operating budget of the United States Government is funded by various taxes. Money goes out according what is allocated in the budget submitted by the president and approved, with any revisions, by Congress. In most years, the allocated expenditures exceed the tax receipts, this is the deficit. 

Congress has to make up the difference, which is done by borrowing money. The government, unlike private individuals, does not go to the bank to take out a loan. The government issues securities such as Treasury bonds, which can be purchased by individuals and businesses. The government pays them back (with interest) after a set time period. 

Let's go back to the Social Security Trust Fund.

At the end of 2020 there was a $2.9 billion surplus in the Trust Fund. 

This does not mean that there is $2.9 billion cash setting in a bank vault, or even a bank account somewhere. By law, the surplus in the Trust Fund is converted to Treasury bonds, which pay interest from the general budget to the Trust Fund, but are repaid upon maturity. 

This is where the general fund deficit and Trust Fund surplus cross paths.

If Congress needs to borrow money to fund the deficit (let's set aside for now the question of whether deficit spending is sound fiscal policy) it wouldn't make fiscal sense to borrow all of it from the public if there is government money being generated by Trust Fund surpluses. And that's what happens every year there is a Trust Fund Surplus - the ledgers at the Social Security Administration record a reduction in their cash account and an increase in their cash receivables account. 

What about all that money that Congress, or Bush, or Obama, or whoever, "raided" from the Trust Fund to pay for the Iraq War, or to fund the Contras or the Affordable Care Act? It's a myth, a misunderstanding of how the Trust Fund works. There is no cash to be raided from the Trust Fund and diverted to a president's pet projects. 

Of course it could be argued that a deficit was unnecessarily inflated, knowing that the Trust Fund Surplus could be utilized, but the Trust Fund Surplus was going to be converted to Treasury Bonds regardless, so it's not a very persuasive argument. 

So what's all this about there being nothing left in the Trust Fund in just a few years? 

Unfortunately, that's true. For all my talk about surpluses, the Trust Fund isn't running surpluses any longer. The surpluses were due mainly to there being more working people than retired people. For a few years, that has been reversed. Interest on the Treasury bonds has kept the prospect of an annual deficit at bay, but pretty soon the Trust Fund will be cashing in those bonds in order to pay out all benefits at current levels. It's estimated that all bonds will be cashed out in around 12 years. Does this mean that Social Security is out of money? No, but it is projected that the income from payroll tax will only be able to pay out benefits at around 70% of current levels.

This is a problem. Not only because Congress will have to take one or more of the following actions:

1. Decrease what Social Security recipients receive
2. Prop up the trust fund with tax revenue
3. Increase the payroll tax (including removing the upper limit on wages subject to payroll tax)
4. Increase the retirement age

But with the possibility of funding the deficit with Trust Fund surpluses removed the downsides of deficit spending (which I won't get into here) will be exacerbated. 

But bottom, line, Congress needs to take some kind of action, and soon. 

And by action, I mean something other than pointing fingers at the other side and misrepresenting their positions.