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social security

Phony ‘Trust Fund’ Masks Social Security’s Immediate Crisis

By Gary M. Galles 

April 22 saw the release of Social Security latest annual report. As is commonly the case, much of the attention focused on the trust funds’ forecast exhaustion dates. The good news this year was that its forecast exhaustion date, after which it can only pay a fraction of promised benefits, had been pushed back a year, from 2034 to 2035.

Michael Hiltzik at the Los Angeles Time seven took that as proof no potential program benefit cuts can be justified due to Social Security’s financial problems. And many Democrats, looking to the 2020 elections, are pushing to expand Social Security further, as if it is financially sustainable.

However, such conclusions overreach what the trustee’s report justifies. After all, when Social Security’s cumulative projected shortfall under “intermediate” economic and demographic assumptions went from $43.7 trillion last year to “only” $42.1 trillion, during a very good year which brought in more “contributions,” that does not represent robust fiscal health. It says future Americans will still have to bear a massive unfunded liability.

Denying Social Security’s Crisis

Despite that far-from-rosy scenario, Social Security acolytes point to the system’s trust funds to deny any impending crisis that might cause politicians to actually do something about those unfunded liabilities.  

If nothing needed to be done before trust funds were exhausted, asserting there is no immediate crisis might be plausible, although waiting to the last minute to “find” trillions of dollars in future citizens’ pockets does not seem like what responsible leaders would do.  

Unfortunately however, the Social Security and Medicare trust funds contain no resources set aside for future beneficiaries and so provides no assurance of anything approaching program solvency.

How can huge trust funds not really exist? When they consist of IOUs from the federal government to itself. The federal government borrows any excess of revenues over outlays in exchange for special Treasury Bonds. The dollars are then spent by the government, leaving only a fund of Treasury IOUs.  But those are not real assets. 

It is just like saving up to buy something by putting a $100 bill in a cookie jar each week, but then taking the money back out and spending it, replacing it with an IOU from you to yourself. The only way the fund can pay off is if you make the IOUs good from other sources of income—but it is the other sources of income, not the cookie jar fund, that would make those IOUs real assets.

Since the trust fund consists of federal IOUs whose proceeds have already been spent, how will the Treasury generate the funds to redeem them when they come due? It will require new taxes, reduced spending on other federal programs or program cuts, because those are the only ways the federal government can acquire the future resources necessary to live up to its trust fund commitments. In other words, the trust funds are essentially just commitments to massive future tax increases.

Taxpayer Bailouts Have Already Begun

The absence of a “real” trust fund also means that taxpayer bailouts don’t start when a trust fund is exhausted. They are necessary as soon as the trust funds must start paying down, because that forces the Treasury to start making its IOUs good then, not years later. And those dates are in the past, not the future. Previous trustee’s reports show that the first year that happened for Social Security was 2010. And results will seriously deteriorate in the future.

If the various Social Security and Medicare trust funds are actually chimeras, why do so many talk about them as if they were real every time trustees issue a report? Because that sleight-of-hand makes the “crisis” recede from public attention and diminishes the political need to consider real solutions. But the status quo is not an option, and ignoring that fact only makes things worse for future Americans. 

All of the real Social Security options are painful, due to massively under-funded promised benefits­. And the underfunding of Medicare promises is even worse. However, before we can actually start to have any kind of informed discussion of real possibilities, we need to come clean and stop deluding ourselves by hiding beneath imaginary trust fund security blankets.


Gary M. Galles is Professor of Economics at Pepperdine University.


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