Funmurphys: the Blog

Social Security Problems

The Social Security Trust Fund is going south because it is neither secure, a trust, or a fund. It is an accounting device, deliberately chosen to allow politicians to say one thing but do another.

Social security has always been funded on a pay as you go basis. The government levies an income tax on most people (there are those who are exempt because they are covered by other plans) and hides half of it by having the employer pay it. This money goes into the general fund with all the other tax dollars, and social security is paid to its recipients just like all the other stuff government spends money on.

There is no investment. There is no trust fund. All the money from the social security payroll tax is spent, and then the government writes an IOU to itself in the form of a bond.

The beauty of the system is that the same entity that agrees to pay the bond in order to meet its social security obligation is also the entity that determines its social security obligation. If the government decides it would rather cut benefits than default on the bonds, raise taxes, or borrow, then benefits are cut. Social security recipients have no legal claim on the money. It isn't theirs, and it isn't owed to them in any legally binding sense.

Contrast that with a pension fund. As the obligation is incurred by the company while the worker is employed, the company (legally) must set aside money to cover the payment in the future based on expected returns. The company holds the money in trust for its retirees, and the retirees do have a legal claim to the money and are legally owed the money. The trust money is invested so that it grows while the worker is employed and even after she starts drawing a pension.

The two systems are nothing alike. And no company can legally run a pension fund like the government runs social security.

The problem with any pay as you go system, like social security, is that you have to have enough people paying in so that they can support those who are receiving the money. And in a few short years, namely 2016, there won't be enough people paying in due to demographics. So at that point, we will turn to the Social Security Trust Fund, and instead of cold hard cash, we will find promises. And then our elected representatives will be forced to decide what mix of borrowing, tax increases, benefit reductions and other budget item reductions we will adopt to allow us to continue to pay Social Security.

And we will confront the exact same choice to the penny with our vaunted Social Security Trust Fund or without it. Having this fund does absolutely nothing for us but lull us into a false sense of security. You can't rob Peter to pay Paul if you're Peter.

If we took the excess social security taxes (to current social security obligations) and instead of the government spending it and giving itself an IOU, we legally transferred it to future recipients, to be actually invested, when 2016 rolls around and we open the lock box and find IOU's, we could reduce the money the government would have to scrounge (again by raising taxes, borrowing, or reducing benefits and other government services) by the amount of money that was transferred to the then future, now current, recipients, thus achieving what the Social Security Trust Fund and all that Lock Boxes in the world are designed to do but cannot do.