Social Security Trust Fund
Encyclopedia
In the United States
, the Social Security Trust Fund is a fund operated by the Social Security Administration
into which are paid contributions from workers and employers under the Social Security
system and out of which benefit payments to retirees, survivors, and the disabled, and general administrative expenses are paid.
Most of the fund is considered float and can be invested in securities issued by the federal government. These securities can be redeemed as needed to make benefit payments in the future when contributions derived from payroll taxes and self-employment contributions no longer are sufficient to fully fund then-current benefit payments. (The controversy over whether the U.S. government is capable of doing this is a topic of the sustainability of the unified Federal budget
.)
Because under current federal law these securities represent future obligations that must be repaid, the federal government includes these securities within the overall national debt. The portion of the national debt that is not considered "publicly held" represents the obligations incurred by the government to itself, the bulk of which consists of the government's obligations to the Social Security Trust Fund.
The trust funds are "off-budget" and treated separately in certain ways from other federal spending, and other trust funds of the Federal Government. From the U.S. Code:
The trust funds run surpluses in that the amount paid in by current workers is more than the amount paid out to current beneficiaries. These surpluses are given to the U.S. Treasury (and thus become part of the general federal budget) in exchange for special U.S. government securities, which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit.
system, meaning that payments to current retirees come from current payments into the system.
In 1977, President Jimmy Carter and the 95th Congress increased the FICA tax to fund Social Security, phased in gradually into the 1980s. In the early 1980s, financial projections of the Social Security Administration indicated near-term revenue from payroll taxes would not be sufficient to fully fund near-term benefits (thus raising the possibility of benefit cuts). The federal government appointed the National Commission on Social Security Reform, headed by Alan Greenspan
(who had not yet been named Chairman of the Federal Reserve
), to investigate what additional changes to federal law were necessary to shore up the fiscal health of the Social Security program. The Greenspan Commission projected that the system would be solvent for the entirety of its 75-year forecast period with certain recommendations. The changes to federal law enacted in 1983 pursuant to the recommendations of the Greenspan Commission merely advanced the time frame for previously scheduled payroll tax increases (though it raised slightly the payroll tax for the self-employed to equal the employer-employee rate), changed certain benefit calculations, and raised the retirement age to 67 by the year 2027. As of the end of calendar year 2010, the accumulated surplus stood at just over $2.6 trillion. Projections are that current receipts will continue to exceed expenditures until 2017. Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds.
George W. Bush
made Social Security a prominent theme of his State of the Union Address
. One consequence was increased public attention to the nature of the Social Security Trust Fund. Unlike a typical private pension plan, the Social Security Trust Fund does not hold any marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The Office of Management and Budget has described the distinction as follows:
Other public officials have argued that the trust funds do have financial and/or moral value. "If one believes that the trust fund assets are worthless," argued former Representative Bill Archer, then similar reasoning implies that “Americans who have bought EE savings bonds should go home and burn them because they’re worthless because the money has already been spent.” At a Senate hearing in July 2001, Federal Reserve Chairman Alan Greenspan was asked whether the trust fund investments are “real” or merely an accounting device. He responded, “The crucial question: Are they ultimate claims on real resources? And the answer is yes.”
From the point of view of the Social Security trust funds, the holdings of "special" government bonds are an investment that returned 5.5% to the trust funds in 2005. The trust funds cannot resell these "special" government bonds on the secondary bond market, although the interest rate is determined based on market interest rates. Instead, the "specials" can be sold back to the government at face value, which is an advantage when interest rates are rising.
To escape paying either principal or interest on the "special" bonds held by the trust funds, the government would have to default on these obligations. This cannot be done by executive order. The Congress would have to pass legislation to repudiate these particular government bonds. This action by Congress could involve some political risk and, because it involves the financial security of older Americans, seems unlikely.
An alternative to repudiating these bonds would be for Congress to simply cap Social Security spending at a level below that which would require the bonds to be redeemed. Again, this would be politically risky, but would not require a "default" on the bonds.
The week after his State of the Union speech, Bush downplayed the importance of the Trust Fund:
These comments were criticized as "lay[ing] the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds".
However, even right-leaning politicians have been inconsistent with the language they use when referencing Social Security. For example, Bush has referred to the system going "broke" in 2042. That date arises from the anticipated depletion of the Trust Fund, so Bush's language "seem[s] to suggest that there's something there that goes away in 2042." Specifically, in 2042 and for many decades thereafter, the Social Security system can continue to pay benefits, but benefit payments will be constrained by the revenue base from the 12.4% FICA (Social Security payroll) tax on wages. According to the Social Security trustees, continuing payroll tax revenues at the rate of 12.4% will enable Social Security to pay about 74% of promised benefits during the 2040s, with this ratio falling to about 70% by the end of the forecast period in 2080.
According to some, the "value" of the Social Security Trust Fund hinges critically on the federal government's ability to pay back the money that it has borrowed from Social Security. Ability to repay is a key driver of the secondary market for third world debt
. It's nonetheless been argued that the economic question is not whether the U.S. bonds held by Social Security represent legal obligations that will be fulfilled but whether the Trust Fund represents savings that help preclude a need to raise taxes in the future even if current taxes collected cannot support the benefits paid. This may not settle the economic question, however, since it has been contended that if the government would have paid as much or more to borrow from other sources were it not for the Fund, lower government spending was not enabled and there was accordingly no economic contribution to government savings. Complicating an analysis is the the point of view adopted (if the fund lends to the rest of government at a below-market rate of interest, it represents a loss to future Social Security beneficiaries under a narrow view, but possibly a gain under a larger view since the government gains from the low cost funding and the fiscal health of the government stands behind the ultimate solvency of Social Security). Comparative borrowing assessments may also affected by crowding out
effects.
Was the money added to the fund in 1980, for example, saved so that it could be spent on a retiring baby boomer in 2020 without a tax increase? If the only way for the federal government to repay the bonds held by Social Security is by raising taxes in 2020, this suggests that the excess money collected in 1980 was spent on other government activities, not saved by Social Security. However, if bonds are repaid by other borrowing, then the fund could be viewed as just one of many potential lenders to the federal government. Using this point of view, having to replace the Trust as a lender because it is recalling its loan is not evidence that the money was simply spent, but rather that lenders have shifted. If there are tax increases, those who believe the trust fund is real might also note that tax increases could have been even higher without the trust fund.
The following two scenarios help illustrate the concept. Depending on which scenario is right, Social Security is either an accounting fiction or represents real economic savings.
Scenario 1 (Trust Fund is an accounting fiction):
Scenario 2 (Trust Fund represents real economic savings):
It is instructive to note that the $2.5 trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees.
(1) The government may issue debt by selling treasuries. Thus $1 in debt to the Social Security Trust fund is replaced with $1 in debt to a different lender. This scenario would increase the tax burden on future generations if the interest rate is higher on the new debt. If the new debt is more expensive and government revenues do not increase sufficiently either through taxes of economic growth, the government would be forced to cut spending on other programs (such as Defense, Education, Research) or else default on all or part of the debt.
(2) The government may raise taxes. If taxes are raised across the board, ironically, by reducing take home pay for workers, the government could make it harder for the younger, working generations to invest and save for retirement. However, if taxes are raised only on those whose earlier tax cuts were partially offset by these excess FICA contributions, namely those taxpayers whose marginal rates were reduced from 74% to as little as 28% during the Reagan Administration, the younger, working generations will not lose any ability to save or invest.
(3) The government may monetize trust fund obligations by transferring the treasuries held by the Trust Fund onto the Federal Reserve balance sheet. In such a transaction, the bonds would become "assets" on the Fed's balance sheet, and the Fed would create money "out of thin air" to purchase the bonds from the government. Under such a scenario, the bonds are converted into cash, which would then be used by the government to cover social security payments. This scenario would likely lead to increased inflation, as it would inflate the money supply without directly increasing the amount of goods and services produced by the economy as a whole.
While there are many options for financing social security in the short- and long-term, there is no existing government program which can instantly change the demographic aspects that affect the sustainability of social security. The program's sustainability depends upon the payout rates and Social Security tax rates, the number of workers supporting each retiree, the rate of productivity growth among the remaining workers and the mechanics of how the excess contributions to the Trust Fund are handled (e.g. a "lock box" and for what sort of asset). In order to support the same living standard as before, as the ratio of retirees to workers temporarily increases due to the retirement of the Baby Boomers, the productivity among the working population must increase and/or Social Security Trust fund savings must be used. Productivity has consistently increased, but it is unclear if the rate of increase will be adequate going forward. This productivity growth, and/or consumption of savings, is required because there are fewer workers available to produce the same amount of goods and services. If productivity does not rise fast enough to offset the loss of productive workers, and if accumulated savings in the trust fund are not adequate to fill this gap, then per-capita benefits would decline.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the Social Security Trust Fund is a fund operated by the Social Security Administration
Social Security Administration
The United States Social Security Administration is an independent agency of the United States federal government that administers Social Security, a social insurance program consisting of retirement, disability, and survivors' benefits...
into which are paid contributions from workers and employers under the Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
system and out of which benefit payments to retirees, survivors, and the disabled, and general administrative expenses are paid.
Most of the fund is considered float and can be invested in securities issued by the federal government. These securities can be redeemed as needed to make benefit payments in the future when contributions derived from payroll taxes and self-employment contributions no longer are sufficient to fully fund then-current benefit payments. (The controversy over whether the U.S. government is capable of doing this is a topic of the sustainability of the unified Federal budget
Unified budget
In the United States a unified budget is a federal government budget in which receipts and outlays from federal funds and the Social Security Trust Fund are consolidated. The change to a unified budget resulted in a single measure of the fiscal status of the government, based on the sum of all...
.)
Because under current federal law these securities represent future obligations that must be repaid, the federal government includes these securities within the overall national debt. The portion of the national debt that is not considered "publicly held" represents the obligations incurred by the government to itself, the bulk of which consists of the government's obligations to the Social Security Trust Fund.
Structure
The "Social Security Trust Fund" comprises two separate funds that hold federal government debt obligations related to what are traditionally thought of as Social Security benefits. The larger of these funds is the Old-Age and Survivors Insurance (OASI) Trust Fund, which holds in trust special interest-bearing federal government securities bought with surplus OASI payroll tax revenues. The second, smaller fund is the Disability Insurance (DI) Trust Fund, which holds in trust more of the special interest-bearing federal government securities, bought with surplus DI payroll tax revenues.The trust funds are "off-budget" and treated separately in certain ways from other federal spending, and other trust funds of the Federal Government. From the U.S. Code:
EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS
Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104Stat. 1388-623, provided that:
Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of -
(1) the budget of the United States Government as submitted by the President,
(2) the congressional budget, or
(3) the Balanced Budget and Emergency Deficit Control Act of 1985.
The trust funds run surpluses in that the amount paid in by current workers is more than the amount paid out to current beneficiaries. These surpluses are given to the U.S. Treasury (and thus become part of the general federal budget) in exchange for special U.S. government securities, which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit.
History
The Social Security system is primarily a pay-as-you-goPAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
system, meaning that payments to current retirees come from current payments into the system.
In 1977, President Jimmy Carter and the 95th Congress increased the FICA tax to fund Social Security, phased in gradually into the 1980s. In the early 1980s, financial projections of the Social Security Administration indicated near-term revenue from payroll taxes would not be sufficient to fully fund near-term benefits (thus raising the possibility of benefit cuts). The federal government appointed the National Commission on Social Security Reform, headed by Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
(who had not yet been named Chairman of the Federal Reserve
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
), to investigate what additional changes to federal law were necessary to shore up the fiscal health of the Social Security program. The Greenspan Commission projected that the system would be solvent for the entirety of its 75-year forecast period with certain recommendations. The changes to federal law enacted in 1983 pursuant to the recommendations of the Greenspan Commission merely advanced the time frame for previously scheduled payroll tax increases (though it raised slightly the payroll tax for the self-employed to equal the employer-employee rate), changed certain benefit calculations, and raised the retirement age to 67 by the year 2027. As of the end of calendar year 2010, the accumulated surplus stood at just over $2.6 trillion. Projections are that current receipts will continue to exceed expenditures until 2017. Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds.
Recent attention
On February 2, 2005, PresidentPresident of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
made Social Security a prominent theme of his State of the Union Address
State of the Union Address
The State of the Union is an annual address presented by the President of the United States to the United States Congress. The address not only reports on the condition of the nation but also allows the president to outline his legislative agenda and his national priorities.The practice arises...
. One consequence was increased public attention to the nature of the Social Security Trust Fund. Unlike a typical private pension plan, the Social Security Trust Fund does not hold any marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government". The Office of Management and Budget has described the distinction as follows:
These [Trust Fund] balances are available to finance future benefit
payments and other Trust Fund expenditures – but only in a bookkeeping
sense.... They do not consist of real economic assets that can be drawn
down in the future to fund benefits. Instead, they are claims on the
Treasury that, when redeemed, will have to be financed by raising taxes,
borrowing from the public, or reducing benefits or other expenditures. The
existence of large Trust Fund balances, therefore, does not, by itself, have
any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)
Other public officials have argued that the trust funds do have financial and/or moral value. "If one believes that the trust fund assets are worthless," argued former Representative Bill Archer, then similar reasoning implies that “Americans who have bought EE savings bonds should go home and burn them because they’re worthless because the money has already been spent.” At a Senate hearing in July 2001, Federal Reserve Chairman Alan Greenspan was asked whether the trust fund investments are “real” or merely an accounting device. He responded, “The crucial question: Are they ultimate claims on real resources? And the answer is yes.”
From the point of view of the Social Security trust funds, the holdings of "special" government bonds are an investment that returned 5.5% to the trust funds in 2005. The trust funds cannot resell these "special" government bonds on the secondary bond market, although the interest rate is determined based on market interest rates. Instead, the "specials" can be sold back to the government at face value, which is an advantage when interest rates are rising.
To escape paying either principal or interest on the "special" bonds held by the trust funds, the government would have to default on these obligations. This cannot be done by executive order. The Congress would have to pass legislation to repudiate these particular government bonds. This action by Congress could involve some political risk and, because it involves the financial security of older Americans, seems unlikely.
An alternative to repudiating these bonds would be for Congress to simply cap Social Security spending at a level below that which would require the bonds to be redeemed. Again, this would be politically risky, but would not require a "default" on the bonds.
The week after his State of the Union speech, Bush downplayed the importance of the Trust Fund:
Some in our country think that Social Security is a trust fund – in other words, there's a pile of money being accumulated. That's just simply not true. The money – payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust.
These comments were criticized as "lay[ing] the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds".
However, even right-leaning politicians have been inconsistent with the language they use when referencing Social Security. For example, Bush has referred to the system going "broke" in 2042. That date arises from the anticipated depletion of the Trust Fund, so Bush's language "seem[s] to suggest that there's something there that goes away in 2042." Specifically, in 2042 and for many decades thereafter, the Social Security system can continue to pay benefits, but benefit payments will be constrained by the revenue base from the 12.4% FICA (Social Security payroll) tax on wages. According to the Social Security trustees, continuing payroll tax revenues at the rate of 12.4% will enable Social Security to pay about 74% of promised benefits during the 2040s, with this ratio falling to about 70% by the end of the forecast period in 2080.
An economic perspective
From an economic standpoint, the question of whether the trust fund is fact or fiction comes down to whether the trust fund contributes to national savings or not. If $1 added to the fund increases national savings, or replaces borrowing from other lenders, by $1, the trust fund is real. If $1 added to the fund does not replace other borrowing or otherwise increase national savings, the trust fund is not "real." Some economic research argues that the trust funds have led to only a small to modest increase in national savings and that the bulk of the trust fund has been "spent." Others suggest a more significant savings effect.According to some, the "value" of the Social Security Trust Fund hinges critically on the federal government's ability to pay back the money that it has borrowed from Social Security. Ability to repay is a key driver of the secondary market for third world debt
Developing countries' debt
The debt of developing countries is external debt incurred by governments of developing countries, generally in quantities beyond the governments' political ability to repay...
. It's nonetheless been argued that the economic question is not whether the U.S. bonds held by Social Security represent legal obligations that will be fulfilled but whether the Trust Fund represents savings that help preclude a need to raise taxes in the future even if current taxes collected cannot support the benefits paid. This may not settle the economic question, however, since it has been contended that if the government would have paid as much or more to borrow from other sources were it not for the Fund, lower government spending was not enabled and there was accordingly no economic contribution to government savings. Complicating an analysis is the the point of view adopted (if the fund lends to the rest of government at a below-market rate of interest, it represents a loss to future Social Security beneficiaries under a narrow view, but possibly a gain under a larger view since the government gains from the low cost funding and the fiscal health of the government stands behind the ultimate solvency of Social Security). Comparative borrowing assessments may also affected by crowding out
Crowding out (economics)
In economics, crowding out occurs when Expansionary Fiscal Policy causes interest rates to rise, thereby reducing private spending. That means increase in government spending crowds out investment spending....
effects.
Was the money added to the fund in 1980, for example, saved so that it could be spent on a retiring baby boomer in 2020 without a tax increase? If the only way for the federal government to repay the bonds held by Social Security is by raising taxes in 2020, this suggests that the excess money collected in 1980 was spent on other government activities, not saved by Social Security. However, if bonds are repaid by other borrowing, then the fund could be viewed as just one of many potential lenders to the federal government. Using this point of view, having to replace the Trust as a lender because it is recalling its loan is not evidence that the money was simply spent, but rather that lenders have shifted. If there are tax increases, those who believe the trust fund is real might also note that tax increases could have been even higher without the trust fund.
The following two scenarios help illustrate the concept. Depending on which scenario is right, Social Security is either an accounting fiction or represents real economic savings.
Scenario 1 (Trust Fund is an accounting fiction):
- 1984: $1 payroll tax collected in 1984
- 1984: $1 lent by Social Security to the federal government
- 1984: Federal government increases spending on government programs by $1
- 2020: Federal government raises taxes by $1 plus interest to repay the loan to Social Security
- 2020: $1 plus interest transferred from Federal Government to Social Security.
Scenario 2 (Trust Fund represents real economic savings):
- 1984: $1 payroll tax collected in 1984
- 1984: $1 lent by Social Security to the federal government
- 1984: Federal government borrows $1 less from other sources and increases spending on government programs by $0
- 2020: Federal government raises taxes by $0, but may borrow from other sources, to repay the loan to Social Security. Any tax increases that occur in 2020 would have happened anyway without Social Security.
- 2020: $1 plus interest transferred from Federal Government to Social Security.
It is instructive to note that the $2.5 trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees.
(1) The government may issue debt by selling treasuries. Thus $1 in debt to the Social Security Trust fund is replaced with $1 in debt to a different lender. This scenario would increase the tax burden on future generations if the interest rate is higher on the new debt. If the new debt is more expensive and government revenues do not increase sufficiently either through taxes of economic growth, the government would be forced to cut spending on other programs (such as Defense, Education, Research) or else default on all or part of the debt.
(2) The government may raise taxes. If taxes are raised across the board, ironically, by reducing take home pay for workers, the government could make it harder for the younger, working generations to invest and save for retirement. However, if taxes are raised only on those whose earlier tax cuts were partially offset by these excess FICA contributions, namely those taxpayers whose marginal rates were reduced from 74% to as little as 28% during the Reagan Administration, the younger, working generations will not lose any ability to save or invest.
(3) The government may monetize trust fund obligations by transferring the treasuries held by the Trust Fund onto the Federal Reserve balance sheet. In such a transaction, the bonds would become "assets" on the Fed's balance sheet, and the Fed would create money "out of thin air" to purchase the bonds from the government. Under such a scenario, the bonds are converted into cash, which would then be used by the government to cover social security payments. This scenario would likely lead to increased inflation, as it would inflate the money supply without directly increasing the amount of goods and services produced by the economy as a whole.
While there are many options for financing social security in the short- and long-term, there is no existing government program which can instantly change the demographic aspects that affect the sustainability of social security. The program's sustainability depends upon the payout rates and Social Security tax rates, the number of workers supporting each retiree, the rate of productivity growth among the remaining workers and the mechanics of how the excess contributions to the Trust Fund are handled (e.g. a "lock box" and for what sort of asset). In order to support the same living standard as before, as the ratio of retirees to workers temporarily increases due to the retirement of the Baby Boomers, the productivity among the working population must increase and/or Social Security Trust fund savings must be used. Productivity has consistently increased, but it is unclear if the rate of increase will be adequate going forward. This productivity growth, and/or consumption of savings, is required because there are fewer workers available to produce the same amount of goods and services. If productivity does not rise fast enough to offset the loss of productive workers, and if accumulated savings in the trust fund are not adequate to fill this gap, then per-capita benefits would decline.
Further reading
- Mamta Murthi, J. Michael Orszag, and Peter R. OrszagPeter R. OrszagPeter Richard Orszag is an American economist who is a Vice Chairman of Global Banking at Citigroup. He is also a columnist at Bloomberg View...
, "The Charge Ratio on individual accounts: Lessons from the UK Experience," Birkbeck College Working Paper 99-2. March 1999