Opinion Editorial | |
| Monday, December 28, 1998 | |
Trust Fund Balances Don't Help Social Security |
Last week, the Treasury Department disclosed that due to a computational error it had been paying more interest to the Social Security Trust Fund than necessary. The Trust Fund has benefitted to the tune of about $33 million per year. Although Treasury has now fixed the computational error, the Trust Fund will not be forced to relinquish its undeserved gains. What this incident illustrates is just how meaningless the whole Social Security Trust Fund really is. Social Security benefits are primarily financed with Social Security taxes. In 1997, Social Security (OASI) took in $350 billion in taxes and paid out $316 billion in benefits, for a surplus of about $34 billion. When Social Security runs a cash surplus the excess revenue is invested in a trust fund. By law, it invests solely in U.S. Treasury securities. These securities are known as "special issues" because they have certain features not contained in those sold on the open market to investors. The interest rate is calculated in a special way and when these special issues are sold to pay benefits the Treasury always redeems them at their face value. By contrast, private investors selling Treasury bonds often find that the price is less than the face value because market interest rates have risen. The interest received by the Social Security Trust Fund has now become a major revenue source (see figure). In 1997, it received almost $40 billion in interest from its portfolio of Treasury securities. This represented more than half of the $75 billion increase in the Trust Fund that year. The problem is that all of this is a paper transaction with absolutely no substance whatsoever. Even Bill Clinton admits this. As his 1999 budget puts it, trust fund assets are available to finance benefits "only in a bookkeeping sense." Unlike private pensions, "they do not consist of real economic assets." Rather, the trust fund simply represents future claims on the Treasury that will have to be financed by raising taxes, cutting benefits, or borrowing from the public. "The existence of large trust fund balances, therefore, does not, by itself, make it easier for the Government to pay benefits," it concludes. If the Trust Fund really meant something and we were concerned about increasing it, all we would have to do is issue some super-special Treasury securities paying much more than the market interest rate. Indeed, that is what Treasury has already done on a small scale. Since this obviously would accomplish nothing, it really shows just how meaningless the Social Security Trust Fund is for the soundness of the retirement system. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 28, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
