The Myth Of The Missing Social Security Trust Fund

The Myth Of The Missing Social Security Trust Fund
By U.S. Government [Public domain], via Wikimedia Commons

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.

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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.

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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.

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  1. I know a lot more about Social Security than you think I do having been a claims authorizer for many years. But I am not an official spokesperson for Social Security. What I was addressing and you took off on a tangent was the financing of Social Security and how it thru borrowing can shift tax burdens. For instance, as I understand it, The International Monetary Fund gets its funding in part from subscriptions (kind of like a deposit) from the U.S. Treasury along with other governments. But, there is no direct tax to provide that money. So the Treasury gets the money from other funds in it’s possession. In effect borrowing it in part from the Social Security Trust fund. This money is used to make lender of last resort loans to governments that have trouble paying their own international obligations. Such as bonds and loans held by international banks. This tends to ensure that the internatonal banks get paid and don’t lose money. But the part of the money that was borrowed from Social Security actually came from taxes on the first $112,000.00 or so of earned income from wages and self employment. If a direct tax had to be passed to pay for the subscriptions to the IMF (which seems to be subsidizing international banks) would it be more appropriate to tax the banking industry or the wage earning populace while excluding capital gains, imputed interest, corporate profits, etc.. Then when it comes time to pay the money back none of the programs or agencies the money was borrowed to support will be charged with it. It becomes an unfunded obligation which will be taken care of by cutting benefits, raising the retirement age, etc. Are you following what I am saying here?

  2. Bill, I’ve put a lot of time into this. All of the information is online, you just have to be able to find it and decipher the “governmentspeak.” All comes from the SSA with backup from people who have done similar research published in articles in respected magazines and newspapers.

    Not sure why you are discussing illegals and other things that are pretty irrelevant to the overall failure we know as SS.

    Here’s how the program works, the short version. The government takes money from you in December. On the 3rd of January, they send out your money to current beneficiaries. When there was a surplus it was swapped for “special low interest non-marketable bonds” held by the SSA. Today, the deficit is covered by more borrowing from the general fund.

    Now let’s go a step deeper. How does the SSA calculate benefits? Well, for the first $15,000 you make, you get 93% credit towards benefits. The next $45,000 you get 35% credit (you don’t get credit for 65% of what you earned), and anything over $60,000 to the cap you get 15% credit for (you don’t get credit for 85% of what you earn). To match the income cap, their is a benefit cap of about $2500/mo currently. If you recall, to get that, you had a whole lot of income not counted. I’m assuming that if you had a 401K and found out that after first quarter, 65% of your contributions didn’t make it into your account, you would be somewhat miffed. When you saw that 85% wasn’t making it in, you would be even more miffed, and rightly so. Then, the upper income people are taxed on their SS benefits.

    Now, the “solutions” that have been proposed. Essentially, you have been told that SS can pay out 75% of benefits, but you and I both know that this won’t be “across the board.” The “rich” people will either be denied benefits or get sharply reduced benefits. “Rich” will be defined as people who own a house or have retirement savings outside of SS. Basically, the system will promote the idea of not saving and not preparing for retirement so they can get the benefits they were forced to pay for. This is how socialism fails.

  3. If there is no cash, there is no value.

    You aren’t going to get a bunch of communists and socialists (the socialists are in both parties) to cut spending and shrink the government they rely on for their power Not going to happen. Remember how the Dems threw an absolute hissy fit in the 90s when the real Republicans talked about merely slowing spending growth? They got so ridiculous they lost the election.

    SS is failing due to math. $25-30 trillion short. Medicare is pretty much double that. I do agree with you, we need to completely restructure and limit government power, but that means hard decisions and politicians won’t do that because people won’t elect responsible politicians, too many people want free stuff.

  4. Depends my dear Bert. Massive cuts could fix that. I notice you are fixated on the current state of things, not the theory of how SS was intended to be financed. I wouldn’t say there is no value but there is no cash.

  5. I never said it was a freebie. What is your background that you think you know how the program works? Did you ever process claims for Social Security? Did you ever work for the Social Security Administration? Did you ever unscramble earnings records because an illegal used someone elses number? Did you ever have to make a judgement whether someone really retired or just continued working while reporting the income as other than earned income? Just what makes you think you know how the program works?

  6. It is more sinister, especially when you know how the program works. No offense, but you really don’t. The rich get completely hosed on SS, it’s not the “freebie” you think. They pay a whole lot more for what they get and they will be the ones who get hosed even more when the government admits it’s out of money.

    You are right about the illusion though. There is no “investment” nor any real “trust” fund, it’s all borrowed money. When you understand that, you understand socialism.

    BTW, how much more sinister can you get than taking someone’s retirement money away and giving it to someone else days later so they have less opportunity to save for their retirement?

  7. I think it is more sinister than just an accounting gimmick. You have to realize that the taxes for Social Security have always come only from wages and self-employment and only from income up to a limit. If these programs supported by the borrowed money had to be supported only with taxes politicians might have a really hard time getting the public to accept taxes which are not imposed on all levels of income and only on wages and self-employment. But as long as it is “borrowed” the illusion that it is an investment can be maintained.

  8. We have a structural deficit. ANY additional spending is merely borrowed money. The trust fund is repaid by more borrowed money.

    You are correct, there are no real assets in the trust fund, only a gimmick. There is no value there. None.

  9. The trust fund debt is a bona fide debt of the US gov’t. There is no requirement that it be repaid by trading for general obligation debt. It can come from tax revenues as well. Having assets in the trust fund would be the mindless act because the value would be ravaged by inflation over time.

  10. The money that comes into the treasury for SS benefit payments is only in the system for a few days or weeks before being paid out.

    The $2.8 trillion doesn’t exist as an asset, it’s merely an amount that has to be borrowed to be redeemed. It’s a mindless accounting gimmick.

  11. Craig, slow down a second. Clear your mind, then think. The SS surpluses paid for everything from airplanes to welfare, interest to aspirin. It was spent like any other government money. If you wish to be honest, far more went to welfare than to wars but I believe your ideology won’t permit you to really think this through.

    Here are the cold, hard facts. The monies are being paid back, especially since SS is in a negative cash flow position. The bonds are being redeemed by further borrowing by the general fund for the principle and the fabricated “interest” which is merely more money borrowed as an obligation for future taxpayers. The whole thing is merely a scam. This will become more apparent when this artificial “trust fund runs out of money” lie plays out. It’s already out of money…the entire thing is a gimmick for people unwilling to see the truth. In a few years, “rich” people will have the benefits they have paid for taken away, and much of the middle class will have theirs reduced to allow more benefits to the poor. Intergenerational welfare, where those that saved for retirement and were responsible are punished to reward those that didn’t.

  12. It was always “pay as you go” since it started out a generation behind. “Advance funded” in your description is merely wordplay. Funding days or weeks in advance is not “advance funding”, it’s “pay as you go.”

  13. The “full faith and credit of the US” becomes more and more meaningless every year. The Trustees have no option as to what they purchase. It is limited to “special low yield non-marketable bonds” held by the SSA.

  14. Bill, the “trust” fund bonds are being paid back through additional borrowing by the general fund. It’s nothing but a pathetic accounting gimmick at this point that politicians are using to buy time before they have to fix anything.

    Never trust politicians with your money, your life, or your freedoms. You will lose every time.

  15. I hesitate to accept any article published in a magazine as factual without verification so I looked up the information on a government site. You are right about paper forms. Quoting ” Section 201(d) of the Social Security Act states,
    Each obligation issued for purchase by the Trust Funds under this subsection shall be evidenced by a paper instrument in the form of a bond, note, or certificate of indebtedness issued by the Secretary of the Treasury setting forth the principal amount, date of maturity, and interest rate of the obligation, and stating on its face that 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 principal and interest. The Managing Trustee may purchase other interest-bearing obligations of the United States or obligations guaranteed as to both principal and interest by the United States, on original issue or at the market price, only where he determines that the purchase of such other obligations is in the public interest.”

  16. They most certainly are issued in paper form. See USA Today 2-28-2005. The short term certificates may be done on computer but once a year they are rolled into a long term paper bond. SSA holds these. That there is a balance is expected . That will shrink as the boomers draw down over 20 years.

  17. When Social Security tax is collected it is intermixed with other U. S. Treasury collections and the Social Security Trust Fund is credited with having the money on deposit in the form of special securities in the books of the U.S. Treasury I have never read anywhere that actual bonds of any form are actually issued. just an accounting entry. Some of these special securities are redeemed every time Social Security pays benefits or expenses. The amount collected in excess of payments made over the years is the balance in the Social Security Trust Fund. The Trust fund is really a record of money borrowed by the U.S. government and not paid back. As long as the Trust Fund has a balance it means that some portion has never been paid back.

  18. So far it has been paid back. SSA has redeemed bonds the past several years to make benefit payments and those have been paid. It remains to be seen if the remaining $2.8T will be timely repaid. Failure to do so would be a default of the US gov’t and a severe financial shock.

  19. The author says my SS money was used to pay interest on government debt and that money has not been repaid. The debt was not a debt of the SSA but rather mostly from things like defense spending. So, my SS money is being used to subsidize other government programs that Congress did not adequately fund. They purposely borrowed the money to fund other things (mostly defense/wars) and have not yet paid it back. So, please don’t try to tell me that it is a myth that my SS money has been shifted to other things and never repaid.

  20. I beg to differ with the article in that pursuant to the SS Act of 1935 excess SS funds are invested in treasury obligations. Cash from that purchase are transferred to the general fund
    and spent on all general fund items. Although not earmarked for “other programs” that is
    exactly what the trust fund money is spent on — all other programs. Secondly, the SS system
    was designed as “advanced funded” not pay-as-you-go. Advance funded means that slightly
    more is taken in than spent. The “reserve” as it is called here is the trust fund invested in
    treasury obligations by law.

  21. A very common question with a simple answer. SS and Medicare are self-funded closed systems while welfare is open — at the pleasure of Congress. This means the funding for SS and Medicare is limited while for welfare it is not.

  22. How can a funded program run out of money while there always seems to be plenty of cash (aka. more debt) for welfare and billion dollar gifts to countries that hate us…?
    We can’t even take care of our poor, disabled, veterans, elderly and

    sick but sure take care of the ones who choose to never work and become a burden on society’s’ criminal justices system.

    If we could fine someone out there that could flip that coin…
    This Old USA would be a much better place to live….

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