The Myth Of The Missing Social Security Trust Fund by Brenton Smith, FedSmith
One of the most enduring myths of the Social Security debate suggests that the money collected for the system was spent on other government programs.
Legend holds that Social Security was running well enough on its own until politicians crept in at night to empty the cash register. Congress, those liars and cheats, took the money that we contributed to Social Security and Medicare, and spent it on other things.
The followers of this myth however aren’t just conspiracy theory crack-pots, who routinely accuse every president since Kennedy of stealing money from Social Security for other priorities. Some of these accusers are people running for the Presidential nomination of major parties. Ironically enough, some of these accusers are the people who served in the Congress that supposedly stole the money.
Today Social Security collects less in payroll taxes than it spends on benefits. Further, the system has not generated a penny of excess cash to spend on other programs since 2009.
What about the past? Originally, Social Security was designed to build a reserve of cash. Some members of Congress feared that any such reserve would not be truly “saved”. So the Social Security system was specifically changed over the 1940s to a pay-as-you-go method in which there wouldn’t be a large reserve to spend on other federal initiatives.
The downside of the pay-as-you-go strategy was insolvency. To deal with this problem, Congress adapted the financing approach to the system such that the system could build-up a reserve. Since the change, Social Security has built a reserve of $2.8 trillion, most of which was accumulate after the mid-1990s.
So where did the money go? Not to other programs.
The Social Security Administration provides information on the cashflows of the system dating back to 1937 which shows how the money was collected and spent. Since inception, Social Security has collected about 15.7 trillion dollars. That revenue falls broadly into three categories of revenue: payroll tax revenue ($13.4 trillion), general fund subsidies ($0.6 trillion), and interest on loans ($1.7 trillion).
The vast majority of the resources were spent on benefits for retirees. Clearly retirees are not “other things”. In total, benefits have cost $13 trillion or roughly 82% of all revenue ever collected. It is roughly the same amount as the system collected in payroll taxes.
The next largest use of the Trust Fund resources finances the government’s debt. This is the payment of interest, and interest on the interest. Interest does not pay for one brick in the bridge to no-where. Interest represents the cost of borrowing money. Interest today accounts for more than 60 percent of the $2.8 trillion dollar trust fund. All of which has bought nothing but time.
If the money is not repaid, it means that the money was used to pay for the time value of money, not other government programs. If it is repaid, the money will be used for benefits of retirees.
After benefit expense and the cost of time, there isn’t a lot of money left over to spend on any other programs. Our payroll tax collections have exceeded benefit expenses by less than half a trillion dollars. This figure is less than the subsidies from the General Fund. In other words, the government in the net is putting money into Social Security rather than using it out to finance other programs.
We love the storyline because the fabled scheme dovetails into what we want to believe anyway. People like Social Security. People dislike Congress. This story sells like telling a 6 year-old: yes, there is a Santa Claus.
© 2015 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.