NCPA - National Center for Policy Analysis

Why The Trust Fund Doesn't Help Social Security

July 31, 2001

Having a trust fund doesn't avoid the difficult choices that stem from impending Social Security financing shortfalls, say two members of the President's Commission to Strengthen Social Security.

Every year since 1983, Social Security has taken in more in taxes than was needed to pay benefits. These Social Security surpluses were spent on other government programs in exchange for the special-issue Treasury bonds that make up the trust fund.

These bonds are non-tradable IOUs backed by the full faith and credit of the U.S. government, and they are credited with interest, which during calendar year 2000 averaged 6.9 percent.

  • The trust fund now has more than $1 trillion of these special bonds.
  • By 2016, the first year when Social Security payroll taxes will be insufficient to cover promised benefits, the trust fund balance will top $5 trillion.
  • Thus, from a simple accounting perspective, the trust fund holds sufficient reserves to cover promised benefits until 2038.

But redeeming trust fund bonds requires coming up with new money -- by raising taxes, cutting other government spending or borrowing. The annual amounts to be repaid are large and rising over time: $93 billion in 2020, $194 billion in 2025, and $271 billion in 2030 (in today's dollars).

These costs are slated to grow from 10.5 percent of taxable wages today to 13.3 percent in 2016, 17.8 percent in 2038 and 19.3 percent in 2075.

Source: Olivia S. Mitchell (University of Pennsylvania's Wharton School) and Thomas R. Saving (Texas A&M University, NCPA senior fellow), "About That Trust Fund," Washington Post, July 31, 2001.

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