NCPA - National Center for Policy Analysis

What About Social Security's Trust Fund?

July 30, 2001

Payroll tax revenues will no longer equal benefits by 2016, according to the latest report of the Social Security trustees. But isn't there plenty of money in the Social Security "trust fund" to pay benefits for decades after that?

It has been said many times, but is worth repeating, that the Social Security trust fund bears no resemblance to a private sector trust fund.

  • The original Social Security legislation of 1935 contained no provision for a trust fund; the trust fund was created in 1939, and according to historians, its sole purpose was to prevent the program from ever being scrapped.
  • The trust fund "assets" are nothing but nonmarketable Treasury securities -- promises by the federal government to fund Social Security from general revenues when payroll taxes can no longer cover current benefits.
  • Around 2038, it is expected that the OASDI trust fund will have a zero balance -- which simply means the federal government will not have the legal authority to send out Social Security checks, not that the federal government will lack the cash to pay benefits.

The "trust fund" is really more analogous to what is called budget authority, which is just legal permission for the government to spend money on something.

Exhaustion of the trust fund is nothing more than a technical budgeting problem that Congress could fix in a few hours, should nothing be done to reform Social Security before then.

The payoff of changing Social Security now, essentially, is lower taxes in the future. According to Social Security's actuaries, its "cost rate," basically the tax rate, will almost double in future years without action, from less than 9 percent to almost 17 percent (see figure).

Fundamentally, preventing this massive tax increase is the main reason to reform Social Security.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 30, 2001.

 

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