TIME GOES BY | Social Security Part 2: The Trust Fund

by Ronni Bennett

With a few fine exceptions, you would not know from most of the news media – print, television and online – or from Republican politicians that Social Security does not contribute to the deficit and is generally in good shape. It is not, as they claim, “broke.”

With $2.6 trillion in Trust Fund assets that will guarantee payment of full benefits until 2037, their argument is hard to make, but they tortuously and unrelentingly bang away at it. So today, we are going to lay out the facts of the Trust Fund and how it works.

(Actually, there are two trust funds: the old-age and survivors insurance (OASI) trust fund and the disability insurance (DI) trust fund. Although legally distinct, we will not be in error, for our purposes today, to refer to them as the Trust Fund.)

I know this is kind of wonky, but the enemies of Social Security are determined and it's going to be a tough battle to preserve the program. Those of you who care and write about the program – and everyone else, too - need to have the facts so we know when they're blowing smoke our way.

A couple of weeks ago, I spent nearly an hour on the telephone with Webster Phillips, a senior legal representative and Social Security analyst for the National Committee to Preserve Social Security and Medicare (NCPSSM). Today's post is based on that conversation and various documents that Webster pointed me to. (Any errors are mine.)

Before drilling down into details, my overall question was: Why do Social Security opponents keep saying there is nothing in the Trust Fund except worthless IOUs? The simple answer is that they are wrong. Here's how the Trust Fund works:

• All Social Security revenue - which consists of payroll taxes (FICA), taxation of benefits and interest on Trust Fund holdings – is deposited in the Trust Fund.

• All Social Security benefits – old age, survivors insurance, disability - and administrative expenses are paid from the Trust Fund.

• When revenue exceeds payouts, the surplus is invested – by law – in interest-bearing U.S. Treasury securities. These can be redeemed when needed to pay benefits.

This is the point where anti-Social Security zealots argue that the system is broke. One argument is that the federal government has “raided” the Trust Fund - a “misuse” of funds, they say - and it is empty.

As the Center on Budget and Policy Priorities (CBPP) explains, using Trust Fund assets is not a “raid,” it is how government finances are managed – something Social Security detractors misunderstand – willfully or otherwise:

“...a Social Security cash surplus allows the government to borrow less from the public [i.e. U.S. individuals and institutions, the Federal Reserve, foreign investors] to finance the deficit...

“The Treasury always uses whatever cash is on hand – from Social Security contributions or other earmarked or non-earmarked sources to meet its current obligations before engaging in additional borrowing from the public.”

As the writer of the CBPP report goes on to note,

“There is no sensible alternative to this practice. After all, why should the Treasury borrow funds when it has cash in the till?”

The other main argument for Social Security being broke is that the Treasury securities in the Trust Fund are worthless. That is true only if you believe the Chinese, Japan, the U.K. and dozens of other countries are idiots to hold U.S. Treasury securities and are expecting to lose their money.

Here is part of what the Social Security Act says about the Trust Fund securities assets:

”...the obligation shall be incontestable in the hands of the Trust Fund to which it is issued, that the obligation is supported by the full faith and credit of the United States, and that the United States is pledged to the payment of the obligation with respect to both the principal and interest.”

When Social Security revenue falls below outlay, those Treasuries must be redeemed. The CBPP report again:

“When Social Security needs to start cashing in its holdings of Treasury securities to meet its benefit obligations, the federal government will have to increase its borrowing from the public, or raise taxes or spend less.

“That will be a concern for the Treasury – but not for Social Security, as long as the solvency of the federal government itself is not called into question. Social Security will be able to sell its bonds just as any private investor might do.”

So here is what I think about the people trying to weaken or kill Social Security: they want to continue to cut corporate and high-earning individuals' taxes, fire or cut salaries for public employees, fund various wars (I'm getting nervous about Libya) and bail out banks.

Now that the time has arrived to begin using the Social Security Trust Fund (i.e., redeem some of the securities using general funds), they must demonize recipients - elders and the disabled - as greedy geezers to cut benefits and hand the savings over to the already rich.

The ones who understand how Social Security and government funding operate know exactly what they are doing and are making that choice deliberately. Put crudely: money for wealthy, good; money for elders, bad.

Those in Congress who do not understand how it works (it would be an interesting exercise to require the 87 new tea party representatives to take a test on this stuff), go along with their ideological brethren because - well, you know, all government is bad.

FYI: one-half of U.S. retirees receive at least 90 percent of their income from Social Security. The average Social Security benefit is $14,000 per year.

Next – soon – we will discuss rational proposals to secure Social Security far into the future.

TIME GOES BY | Social Security Part 2: The Trust Fund