What Happened to the $2.6 Trillion Social Security Trust Fund? (Madoff would be proud)

Forbes.com ^ | July13 ,2011 | Merrill Matthews

[Hojczyk]

Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades. It must be one or the other.

Here’s why: Social Security has a trust fund, and that trust fund is supposed to have $2.6 trillion in it, according to the Social Security trustees. If there are real assets in the trust fund, then Social Security can mail the checks, regardless of what Congress does about the debt limit.

President Obama’s budget director, Jack Lew, explained all this last February in USA Today:

“Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries. … Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”

Notice that Lew said nothing about raising the debt ceiling, which was already looming, and it shouldn’t matter anyway because Social Security is “entirely self-financing” and off budget. What could be clearer?

Unconvinced, syndicated columnist Charles Krauthammer wrote a subsequent column questioning Lew’s assertions. “This [Lew’s] claim is a breathtaking fraud. The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction. … In other words, the Social Security trust fund contains—nothing.”

[kabar]

You are correct sir. Both parties have been responsibile for creating these myths about SS, which is really a Ponzi scheme.

[Will88]

All you've said is that SS receipts go through the Trust Fund where they are either paid to SS recipients or spent on general fund programs.

Calling what is nothing but a depository account for SS receipts the TF is just another government slight-of-hand. Normally something put in a TF will be there for a significant period of time.

The residual left in the TF is nothing but the non-negotiable, promissory notes from the US government.

And, it is correct to say that current SS benefits are not paid out of any TF, even if the feds choose to call the SS depository account a TF. The TF is composed of the surplus SS receipts over the decades, which were spent and replaced with promissory notes.

What you've described very clearly is government accounting games and a misnamed depository account for SS receipts and disbursements.

[ctdonath2]

When people stop buying trillions of dollars per year of our bonds the “special issue” bonds in the so called Social Security Trust Fund will be totally worthless.

Not quite. The left hand, owing the right hand, will just print cash and hand that over. Hyperinflation is the eventual result of this policy.

[kabar]

SS is a Ponzi scheme with or without the trust fund. It is unsustainable actuarily. The folks at the top of the pyramid get more out of it than those at the bottom. In 1950 there were 16 workers for every retiree; today there are 3.3; and by 2030 there will be two.

Why Social Security is a Ponzi Scheme

[jackv]

Can we then sue the government for stealing our money all these years??

[Farnsworth]

Government ponzi schemes are OK I guess.

To bad we cant sue the government for our money back

[BooBoo1000]

To understand what happened to the funds you have to realize that the Viet Nam war was the first war we were ever involved in that did not ask for Public Support, All of the rest were financed by War Bonds Gov Loans Etc. Lyndon Johnson, wanted to fund the “ Great Society” while funding the Viet Nam war, and there was not enough cash. One of his Democratic Cohorts, said look at that vast cash cow down in Baltimore, the S/S fund, whey don't we borrow it, and replace the money with a special Government Bond, that no one else can buy that pays 2% interest??? There in is the absolute truth as to what happened to our money. Now the Government is unable to redeem the bonds, as they are broke. So we become part of the National Debt.

[ctdonath2]

Interesting. What form was the money stored in prior?

[kabar]

The residual left in the TF is nothing but the non-negotiable, promissory notes from the US government.

The non-market, interest bearing T-bills in the SSTF and other government trust funds like HI, federal pensions, etc. are included in the $14.3 trillion national debt under "Intragovernmental Holdings" as distinct from the public debt, which is about $10 trillion. Yes, the IOUs do represent an unfunded liability just like the ones in the public held debt. Both have the full faith and credit of the USG behind them. The difference is that the trust fund IOUs must be redeemed by the USG. They are not real assets in the sense that we could sell them to China or they can be transferred to another owner.

The trust funds are a vehicle to maintain the fiction of these entitlement programs. There are laws that say once you use up all of the IOUs, benefits must be cut to reflect revenue. So even if all of the IOUs in SS are exhausted, benefits would still be paid out of the revenue stream.

What you've described very clearly is government accounting games and a misnamed depository account for SS receipts and disbursements.

CBO: Trust Funds and Measures of Federal Debt

"The federal government uses several accounting mechanisms for linking earmarked receipts (money designated for a specific purpose) with corresponding expenditures; some of those mechanisms are trust funds (such as the Social Security trust funds), others are special funds (such as the fund the Department of Defense uses to finance its health care program for military retirees) or revolving funds (such as the Federal Employees Group Life Insurance fund). Although trust funds are designated as such by law, there is no substantive difference between trust funds and the other types of funds.

When trust funds and other government funds have receipts in excess of amounts needed for current expenditures, they are credited with nonmarketable Treasury debt known as government account series securities. At the end of 2009, about $4.3 trillion in such securities was outstanding, mostly credited to the Social Security trust funds. (That amount can serve as a measure of how much receipts, including interest, have exceeded outlays over time for the programs financed through those funds.) The value of the outstanding securities (that is, the debt held by government accounts) is combined with the amount of debt held by the public (described in Chapter 1) in two measures of the government’s debt: gross federal debt and debt subject to limit.

In total, the federal budget has more than 200 trust funds, although most of the money is credited to fewer than a dozen of them. Among the largest trust funds are the two for Social Security (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance [DI] Trust Fund) and the funds dedicated to Medicare’s Hospital Insurance (HI) program (also known as Part A), civil service retirement, and military retirement.

When a trust fund receives payroll taxes or other income that is not needed to pay benefits immediately, the Treasury credits the fund and uses the excess cash to reduce the amount of new federal borrowing that is needed to finance the governmentwide deficit. That is, if other tax and spending policies are unchanged, the government borrows less from the public than it would in the absence of those excess funds. The reverse is the case when revenues for a trust fund program fall short of expenses. Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.

[Blood of Tyrants]

Yep, it is the mother of Ponzi schemes. Tens of trillions of dollars taken from the people with the promise that it will be there when they retire, except the politicians have been using it to fund their pet projects from the very beginning and putting worthless IOUs that must be paid back by the people who the politicians stole it from in the first place.

[Will88]

Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.

You are very knowledgeable concerning government functions, and I've stated that same conclusion in different words several times.

I have a brother who's worked as an engineer for the government his entire work career (GS scale). He thinks that his government retirement fund is different from SS, or that the funds have not been spent and replaced with promissory notes. I doubt that's the case. Have government employee retirement funds been 'managed' the same as SS?

[detective]

“The left hand, owing the right hand, will just print cash and hand that over. Hyperinflation is the eventual result of this policy.”

In this scenario not only are the “special issue” bonds worthless but they cause the strongest currency in the history of the world to also become worthless.

[kabar]

Tens of trillions of dollars taken from the people with the promise that it will be there when they retire, except the politicians have been using it to fund their pet projects from the very beginning and putting worthless IOUs that must be paid back by the people who the politicians stole it from in the first place.

You got it. The best and most succinct, descriptive, and accurate statement I have ever read on the subject. I love it. I would only add that most of it will be paid back by the children, grand children, and great grandchildren, great-great grandchildren, etc. of the people they stole it from. Those of us currently on the entitlement programs are getting back far more than we ever paid in. Is this a great country or what?

[kabar]

You are very knowledgeable concerning government functions, and I've stated that same conclusion in different words several times.

The statement I referenced came from the Congressional Budget Office. I wish Reps would quote it when they argue with the Dems on the entitlement programs. I worked for the USG for 36 years.

I have a brother who's worked as an engineer for the government his entire work career (GS scale). He thinks that his government retirement fund is different from SS, or that the funds have not been spent and replaced with promissory notes. I doubt that's the case. Have government employee retirement funds been 'managed' the same as SS?

Yes, there are trust funds for civil service and military retirement funds. They can be poached for funds as wll. Right now, they are in fairly good shape in terms of revenue versus outgo.

[detective]

The Social Security system has many flaws, but it could be sustainable and financially sound if the money paid in was enough to support the future liabilities and the politicians could be trusted to keep it separate and not use the money to support the general growth of government.

Maybe any government system that is dependent on honest and responsible politicians is bound to fail.

[kabar]

The Social Security system has many flaws, but it could be sustainable and financially sound if the money paid in was enough to support the future liabilities and the politicians could be trusted to keep it separate and not use the money to support the general growth of government.

Not really. There is not a direct link between revenue and benefits. The system is not sustainable as currently structured. If you take a look at how many times payroll taxes have been raised, the pay caps increased every year, raising the retirement age, changing COLA formulae, etc. you will see there is some attempt to keep the system solvent, but the baby boom cohort will overwhelm it if taxes are not raised, benefits reduced, or both.

Contribution and Benefit Base

Social Security Tax Rates

[Norseman]

I think you’d agree that changes in the non-public debt held by the social security trust fund is to an extent a measure of the health of the system.

When the balances are increasing, income to the trust fund is exceeding outgo. The more rapid the increase, the better the shape of the fund. Then, one day, the increase slows, indicating that outgo is starting to overwhelm income (tax receipts). Finally, the increase stops altogether, indicating that outgo equals tax receipts.

And finally, we reach the present state, where outgo exceeds income, the non-public debt has to be cashed in at the Treasury, and it’s only a matter of time before the Trust fund is depleted unless changes are made to restore the overall financial viability of the social security system by some combination of raising taxes and/or cutting benefits.

So, a large non-public balance in the trust fund is a good thing, but the more important measure is whether that balance is increasing or declining, and how fast.

At least that’s how I see it.

[detective]

“the baby boom cohort will overwhelm it if taxes are not raised, benefits reduced, or both.”

That was my point. The system is flawed but if revenues are kept at a level that supports benefits the system would be sustainable. The system will have to be tweaked as the underlying assumptions change.

Much of it depends on the level of economic growth.

This is just moot anyway because the system has been screwed up and any attempt to fix it will be sabotaged by the politicians. In a political sense, not a theoretical sense, you are 100% correct.

[Ruy Dias de Bivar]

Here is what was promised in 1964 during the Johnson administration, from the SSA’s own website...

http://www.ssa.gov/history/ssa/usa1964-2.html

Self-Supporting

“The program is designed so that contributions plus interest on the investments of the social security trust funds will be sufficient to meet all of the costs of benefits and administration, now and into the indefinite future—without any subsidy from the general funds of the Government. Both the Congress and the Executive Branch, regardless of political party in power, have scrupulously provided in advance for full financing of all liberalizations in the program.”

And here is where YOUR money really went. Read and weep.

http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html#n4

[kabar]

I guess you could look at that way, but the trust funds represent an unfunded liability. If they are growing, we are probably taxing the people too much (surpluses) and if they are declining, then we are not taxing them enough to support the program.

The reality is that even if the SS Trust Fund contained real assets, the program will still go bust in 2036, i.e., the SSTF will use up all of its "assets."

I attended a week long seminar on SS some time ago. We had all kinds of folks from GAO, CBO, OMB, Congressmen, think tanks, SS Trustees, and even a Nobel Prize winner in economics discuss their various proposals to fix or change the system. One interesting suggestion I heard from a long term SS Trustee (public member) was to make SS a line item in the federal budget and get rid of the SSTF. This would force Congress to address the real costs of the program, which they have for so long used as a cash cow. I agree with him. Let's get rid of these phony trust funds.