Thursday, January 20, 2005


Social Security 101

Since 1983, the Social Security System has been taking in more each year in payroll taxes and interest earnings than it pays out in benefits and administrative expenses, and the excess receipts ($153 billion in 2003 alone) constitute the Social Security Trust Fund. This accumulation of excess funds has grown to over $1.5 trillion (end of 2003) to prepare for the retirement of the baby-boomers, when Social Security expenditures will exceed payroll taxes, drawing down the Trust Fund. At the end of 2003, the Trust Fund was earning an annual return of 6% on $1.5 trillion, or $90 billion a year.

By law, the Trust Fund can only invest in US Treasury bonds, so in essence the funds are just transferred to the general funds of the US government, which issues IOUs to the Trust Fund. If these excess revenues had been invested elsewhere, say in the stock market, the US government would have had to borrow more money to fund its regular operations. So if it weren't for the Trust Fund, the current US National Debt of $7.6 trillion would be $1.5 trillion higher, or $9.1 trillion. Instead of owing that additional money to the Japanese government, for example, it owes that money to Social Security.

As soon as expenditures begin to exceed receipts (currently projected in 2028; search for the chart labeled KEY DATES FOR THE TRUST FUNDS and look at the column labeled OASDI), including payroll taxes and interest earned on the Trust Fund, The Social Security System will have to start calling in the IOUs, so the Federal government will have to pay its obligations to SSA from its general revenues. According to the latest projections, the IOUs will have all been called in, and the Trust Fund exhausted, in 2042. At that point, the Social Security System will have to borrow money from the federal government, raise payroll taxes, or cut benefits to avoid bankruptcy.

The government owes the Social Security system the money represented by these IOUs just as it owes a person who buys a US Savings Bond. If the Trust Fund is "worthless" or "on paper" or "doesn't exist", as some critics of the current system charge, then so are the Savings bonds, Treasury securities, and other federal obligations ($7.6 trillion worth) held by individuals, financial institutions, foreign governments, etc.

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