Trust-fund debate clouds real issues

Published in The News Tribune, March 27, 2005

Much of the rhetoric about the threatened failure of Social Security is designed to alarm rather than inform, and detracts from the real issues that we should be discussing. This tactic is most evident in the claim, such as made by Krauthammer (TNT, 3-18), that the Social Security trust fund is fictitious.

The trust fund is Social Security’s “rainy day” account. It has been accumulating funds since around 1983, when Social Security tax revenue started exceeding its payments.

The purpose of this trust fund is to help pay pension and disability checks when tax revenues fall below payouts – currently anticipated to occur in 2018.

By law, any “surplus” in Social Security has to be invested in U.S. government bonds. This is for two reasons. First, investing tax revenue in the private sector raises the specter of socialism, and has always been an unpopular option. Second, federal debt is the safest way to invest future pensioners’ dollars.

As a result, Social Security’s surpluses now take the form of a trust fund consisting of almost $2 trillion in federal bonds. Misinformed and biased critics of Social Security make the unfounded claim that the trust fund is nonexistent

Their main claim is that trust fund assets – U.S. government bonds – are not real assets but simply government IOUs. Thus, there will be nothing to “draw” from when the 2018 shortfall comes, and thus we face a crisis in about a dozen years (rather than in 2042 when the trust fund, if one existed, would be depleted).

Many Americans (not to mention foreigners) own U.S. government bonds, and would be surprised to learn that they are not a “real” asset.

Government debt fails to be an asset when the government in question fails to pay it, which in the United States might happen if the current system of government were overturned, or if it were impossible for the government to raise the needed money. Both of these are highly unlikely events.

Perhaps, you say, it is different when the government owes the debt to itself?  But the U.S. government has always met its interest obligations to Social Security. Moreover, it has readily repaid in the past when Social Security’s tax revenue was insufficient to meet pension and disability payouts – which happened every year between 1976 and 1982.

And so, yes, the trust fund does consist of assets, if by assets you mean something that Social Security can draw on to meet its legal obligations.

When pushed, critics of the trust fund will make a further claim:  that these assets are, in the words of the Cato Institute’s Michael Tanner, simply “claims against future taxes”—for the federal government to pay off its debt to Social Security, goes the reasoning, it must raise taxes.

That is because the federal government spent everything that Social Security loaned it, and thus the government has nothing but the hard-earned money of citizens to fall back on to repay its debt to Social Security.

The federal debt is now around $8 trillion. Had it not been for the Social Security reserves, which has provided almost $2 trillion of this $8 trillion, the government would have had to borrow from the public instead. And yes, the federal government has “spent” all 8 trillion of these dollars.

However, when the government starts paying back Social Security in 2018, it can do this without raising taxes or cutting back on services; it can raise the funds to retire Social Security’s bonds by simply issuing new bonds to the public. Its debt would remain the same.

So the charge that the federal government “spent” the money has meaning only if the federal government spent more than it would have, had Social Security’s surpluses not been an option.  As Roger Lowenstein puts it in a recent New York Times article, “Just as lending money to a child outside a candy story may impose an impossible temptation, so the government may feel tempted [to spend] while it holds onto Social Security’s purse.”

Has the federal government been tempted into spending more because of Social Security’s surpluses? During the last 15 years, the trust fund has been accumulating annual surpluses of around $50 billion to $150 billion. Yet during this period (with the exception of the last few years, of course) federal deficits as a share of gross domestic product have been declining. This is not what one would expect if legislators had been engaged in a spending spree spurred by Social Security’s surplus.

The trust fund is not a hoax. Those who insist on claiming it is are either misinformed or disingenuous.  More importantly, they detract from three questions we should be addressing.

n  First, should public pensions be redistributive? As is, Social Security redistributes income from the wealthiest of the elderly to the poorest, and in consequence is successful in keeping the elderly out of deep poverty. If this is an important characteristic of our pension program, this should be a central issue that proponents of privatization address.

n  Second, how much of the risk to individuals of disability, early death, market fluctuation, unemployment, uneven earnings and (heaven forbid!) longevity should be borne by individuals, versus being shared more broadly by all Americans? Under Social Security, individuals bear little of this risk – in fact, Social Security provides insurance against such risks, being by design an insurance not an investment program. Is it desirable to protect individuals from these risks, or is it preferable to have individuals bear more of these risks themselves?

n  Finally, how can we structure our public pension system so as to promote private savings?

These three questions about the structure and purpose of a public pension system are what we should be discussing, not the mythical failings of the trust fund.