Why pick on Social Security? Since Social Security will be solvent until 2037, why must it be part of any fiscal overhaul now?
Rep. Xavier Becerra, D-Calif., a member of the Bowles-Simpson has accused Republicans of wanting “to raid Social Security to pay for their past failures to balance the books.” He said Social Security has “$2.6 trillion in reserves dedicated to paying the retirement, disability and survivor benefits that American taxpayers have earned” and that $2.6 trillion “doesn’t add to our deficit.”
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What's in the trust fund?
“What people sometimes forget is that when somebody my age goes to collect on their Social Security I want money, cash,” Bowles, who is 65, replied. “And I go to present that obligation to the Social Security trust fund and it doesn't have cash. What it has is the government IOUs there which are as good as gold. But the government has to go out into the marketplace and borrow the money. And so it increases the national debt.”
The gross national debt is now equal to about 100 percent of gross domestic product, the highest level since right after World War II, and it will grow as more Americans retire and collect Social Security and Medicare benefits.
The controversy hinges on the nature of the Social Security trust funds. They aren’t trust funds like wealthy investors leave for their grandchildren. So what are they?
Some people, such as Bowles, refer to one fund but there are in fact two of them: the Disability Insurance fund and the Old-Age and Survivors Insurance fund.
Most analysts look at the system’s finances as a whole and aggregate the two funds. The Social Security Administration displays all
the trust fund data on its site.
Where does the excess money go?
For most of the past 30 years, since the reforms designed by the 1982 Greenspan Commission to extend Social Security’s solvency, the system has collected more in revenue from Social Security taxes on workers than it has paid out in benefits to retirees, widows, orphans, and the disabled.
The excess revenues did not go into “an ironclad lockbox where the politicians can't touch them,” as Al Gore proposed as a presidential candidate back in 2000.
As a Congressional Research Service (CRS) report explained in 2000, “Contrary to popular belief, Social Security taxes are not deposited into the Social Security trust funds ... Along with many other forms of revenues, these Social Security taxes become part of the government’s operating cash pool, or what is more commonly referred to as the U.S. treasury. In effect, once these taxes are received, they become indistinguishable from other monies the government takes in.”
But the Social Security revenues are “accounted for separately through the issuance of federal securities to the Social Security trust funds … but the trust funds themselves do not receive or hold money. They are simply accounts.”
By the end of last year, those securities, or bonds, amounted to $2.6 trillion, the number Becerra used.
The bonds earn interest. That interest — essentially paid by the federal government to itself and amounting to $117 billion last year — helps pay for the benefits.
Last year — partly due to high unemployment and the aging of the population — Social Security taxes collected (nearly $640 billion) were less than the benefits paid out (more than $701 billion). The system had a “negative net cash flow.”
Cashing in the bonds
That reversal points to the future of Social Security when the $2.6 trillion in bonds will need to be cashed in to pay the benefits promised to future retirees.
According to the latest Social Security trustees report, about 14 years from now, the interest earned on the bonds won't be sufficient to cover the annual difference between benefits and tax revenues.
At that point, the trust funds will be drawn down — the bonds will be cashed in — until the bonds are gone in 2037. If Congress does nothing before 2037, benefits would need to be cut by 22 percent to keep the system in balance.
“What often confuses people is that they see these securities as
assets for the government,” the CRS report said. They aren’t really assets, but liabilities.
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Social Security and it's Surplus. Over 2 Trillion
