Pundit Wire

Death to Social Security Trust Funds

Social Security card that has had all identifying information blacked out.

The annual report of the Social Security trustees predicting when the various funds (retirement, Medicare and disability) will be depleted has become a meaningless rite of Spring that provides more heat than light. The news is always viewed as bad and ignored, a response that’s helpful only to those who have a vested interest in suggesting that our government is dysfunctional.

The reality is that our government is quite functional in the operation of these programs. Millions of people regularly receive the benefits they’ve been promised via mechanisms that have very modest administrative costs.

But the trust funds that pay these benefits have become meaningless artifacts that needlessly complicate efforts to make sure future benefits are adequately funded. For historic reasons, the system has a structure that allows today’s workers to purchase future benefits by paying taxes that are used to provide benefits to those already receiving benefits. Eligibility for benefits is contingent on a work history.

Because the employment taxes are based on wages, those with high earnings pay much more than those with lower earnings. But everyone receives the same Medicare benefits* and while retirement and disability benefits rise with income, the system relies on formulas that provide a greater return on taxes paid by low-income workers.

In any event, today’s workers can’t receive future benefits in the absence of taxes paid by tomorrow’s workers. The impossible goal of the trust funds is to create a balance that guarantees benefits for 75 years. We’re not smart enough to deal with that time frame (think about it – creating a policy during the Civil War provide benefits during the Great Depression).

Until now, the funds have generally collected more in taxes annually than they pay out in benefits, leading to a surplus that is socked away to earn interest and pay for future benefits. This surplus is invested in the world’s safest bonds – those issued by the United States Treasury. So the fund surplus helps finance the deficit from other Federal spending. These funds comprise a substantial part of our national debt.

It isn’t clear why the trust funds make sense in today’s environment. In the decades ahead, the Federal government will have to find funds to repay the trust fund borrowing – which probably means finding added revenue by either raising taxes or borrowing elsewhere. Improbably it could mean cutting other spending, but that’s extremely unlikely.

In the years ahead, it is likely the government will simply borrow money to repay the trust funds which will then use these dollars to pay promised benefits. Why this makes more sense than simply borrowing the money needed to fund budget deficits – including Social Security benefits – is a mystery to me.

It may be time to simply abolish the funds and pay for promised benefits via the budget using the same mechanism that’s now used to finance other promised benefits, like pensions and health care for retired government workers and military retirees.

Abolition of the trust funds could have several benefits. It would allow a broader debate about public priorities when budgets are created by ending untouchable categories (think also of the gas tax and the high trust fund) that discourage flexibility. For tens of millions of taxpayers who pay more in employment taxes than income taxes – and particularly the millions who pay no income taxes at all – it would bring them into a system of shared civic responsibility while undercutting the conservative argument about 45 million low-income workers who now pay no income taxes at all.

The trust funds are now nothing more than an anachronistic diversion that adds confusion to the conversation about how we’re to pay for what we get. Getting rid of them would be a positive step.

For 16 years, Jim Jaffe worked for House Democrats who served on the Ways and Means Committee, apprenticing with Representatives Green, Gibbons and Gephardt before working for Chairman Dan Rostenkowski.

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  • coberly

    The Trust Fund is part of the legal separation of Social Security from the general budget.

    eliminating that separation would turn Social Security into just another welfare program.

    This would destroy the very thing that has been Social Seurity’s main strength for seventy five years.

    The confusion is created by the people who have always wanted to kill Social Security.

    We could end the confusion by simply “funding” Social Security for the reasonable future as by CBO Options 2 or 3.

    • jim jaffe

      well, if you see military pensions or the generous civil service pension I receive as welfare programs, then I see your point.. but they don't seem that way to me or other annuitants.

      the very thing that has been Social Security's main strength for 75 years is that it has efficiently paid benefits to millions of people.

  • coberly

    Jaffee is right that "funding" SS for 75 years is nonsense. But he plays into the hands of the people who have created the lie about the looming Death of Social Security by calling for abolishing the Trust Fund which is part of what keeps Social Security legally separate from the general funds. Ending that separation would turn Social Security into welfare as we knew it.

    We could fund SS for the reasonable future with CBO Option 2 or 3.

    The problem is not with the Trust Fund. The problem is there are no politicians who bother to talk sense about it.

    • jim jaffe

      again, it isn't clear to me that benefit comes from keeping social security legally separate from general funds. it is clear that it leads to a situation where nearly half the workforce is paying no income tax (thanks to the Bush tax cuts) and is thus insulated from the debate about appropriate tax levels. if you want a government by autopilot where expensive and painful wars and extraordinary and potentially dangerous deficits can be safely ignored by a majority of the population, you should be pleased by the glide path we're on.