NCPA - National Center for Policy Analysis

Trust Fund Balances Don't Help Social Security

December 28, 1998

Last week, the Treasury Department disclosed that due to a computational error it had been overpaying interest to the Social Security Trust Fund. The Trust Fund has benefited 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, the trust funds are invested solely in U.S. Treasury securities which are known as "special issues" because they have certain features not contained in those sold on the open market to investors.

The interest received by the Social Security Trust Fund has now become a major revenue source. 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. 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.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 28, 1998.

 

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