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Misunderstanding Social Security's Trust Fund
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Richard C. Leone,
Greg Anrig,
The Century Foundation,
3/9/2005
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The headline of Tuesday's
New York Times story about Social Security's trust fund was, "At
Heart of Social Security Debate, a Misunderstanding." The article itself
proves the point by misunderstanding the trust fund.
The unrebutted claims in the article include: "the trust fund is…less
than a solemn obligation backed by the full faith and credit of the United States;"
"it doesn't really bind the Congress," "cutting spending or borrowing
to meet Social Security promises is no different from doing so to pay for troops
or prescription drugs under Medicare or any other government expense,"
"once benefits exceed annual tax revenues, the government will have to
increase taxes, cut spending elsewhere or issue more bonds if it decides to
pay full Social Security benefits," and "trust fund or no trust fund,
bonds or no bonds, Social Security is only one program with a claim on the federal
budget."
All of those assertions convey the strong impression that Social Security's
trust funds don't really matter. But they matter a great deal. Because they
are held exclusively in U.S. Treasury securities, backed by the full faith and
credit of the federal government, future Congresses will be bound to pay the
interest and principal on those securities before authorizing payments "on
any other government expense." U.S. Treasury obligations are viewed worldwide
to be the safest possible investment - the federal government throughout its
long history, including deep recessions and times of war, has always paid interest
and principal on its debt. Presumably, members of Congress could not ignore
the enormous political and economic implications of a bond default to the trust
fund. Indeed, it would take an economic calamity of unthinkable magnitude for
the federal government to default on any of its obligations, in which case Social
Security's future would be among the least of our worries. In that scenario,
the value of investments in private accounts would plummet as well.
Any future expectation of redeeming a security depends on the capacity of the
lender and force of law. The market tells us that the best bet to fulfill those
conditions is the United States government, whose securities have the lowest "risk
premium." In other words, the likelihood of payment is simply better than
anything else. After all, what alternatives are there? Putting the money in a
mattress? Would it be safer in corporate stocks or bonds? A bank would just lend
it out, the way the government does, but to less reliable credit risks.
It's true that the government borrows and uses the proceeds for other expenses.
Under the Clinton administration, the Social Security surpluses put the government
in the black and enabled it to pay down debt. Today, with the overall budget
in much worse shape, Social Security's surplus reduces the size of the federal
budget deficit, which in turn helps to keep interest rates lower than they would
otherwise be. Even after 2018, when Social Security's trustees forecast that
payroll taxes will no longer exceed payments owed to beneficiaries, the trust
fund's interest will be more than enough to cover the gap. Under the trustees'
conservative projections, the trust fund will continue growing for another 10
years, from $5.3 trillion in 2018 to $6.6 trillion by 2028.
It was President Ronald Reagan who signed into law in 1983 the reforms endorsed
by the Greenspan Commission that created the large and growing trust funds.
The explicit promise made to the American public was that workers would now
owe higher payroll taxes to finance the trust funds so that they could be confident
that their Social Security benefits would be available to them upon their retirement.
As Reagan said at the signing ceremony, "This Bill demonstrates for all
time our nation's ironclad commitment to Social Security.…It assures those
who are still working that they, too, have a pact with the future. From this
day forward, they have our pledge that they will get their fair share of benefits
when they retire."
Simply put, Congress is bound to pay the interest and principal on Social Security's
trust fund, which means that the system will be able to continue paying promised
benefits in full until sometime between 2042 and 2052, depending on the forecast.
There should simply be no misunderstanding about that.
Richard C. Leone is president and Greg Anrig, Jr., is vice president for programs
at The Century Foundation.
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