Social Security: Here's the Real Question

Will Uncle Sam have the money to pay promised benefits to tomorrow's retirees? Want the answer to that one?

By Howard Gleckman

After all these years, people are still arguing over whether there is a trust fund for the Social Security federal pension system, what's in it, and whether it was raided by President Bush's tax cut.

Now the whole flap is back in the news. First, a new Congressional Budget Office forecast says Washington is again using payroll taxes for Social Security to keep the government in the black. Without these dedicated tax receipts, the government surplus of roughly $150 billion would disappear. Second, Bush's Social Security Commission will soon recommend a plan for creating private retirement accounts within the federal pension system. The panel, if it is to be credible at all, will have to also explain how to pay for them.

Predictably, Democrats protest that Bush is raiding the Social Security Trust Fund. And, like clockwork, the GOP responds that there is no raid. There is no trust fund. And even if there were a raid and a trust fund, it makes no difference.


  This whole debate is phony. Both arguments play to a fundamental misunderstanding that has been nurtured by politicians for generations, namely, that the fate of Social Security benefits is tied to the amount of money held by the program. Such rhetoric lets the pols argue about whether the trust fund is solvent. And it allows them to duck the real question, which is: How on earth will the government pay the benefits it has promised?

Let me say this as simply as I can. Neither the size of the Social Security Trust Fund nor the nature of its contents has anything to do with whether the government will pay those benefits. Whether the fund has no money, as Treasury Secretary Paul O'Neill has been saying lately, or whether the program is sitting on a pot of top-quality government bonds, as its defenders claim, isn't the point. Rather, the government has promised to provide benefits, but will it have enough money to do that when the promises come due? The answer is no.

Here are the facts. Every time you get a paycheck, you and your employer fork over a payroll tax that's transferred to Social Security's account. This is the infamous "trust fund." About 80% of that money is actually used to pay for benefits of current retirees. If the government is in overall deficit, as it was until a couple of years ago, the rest is used to pay for other government programs. If Washington is running a surplus, the excess is used to buy back some of the $3.4 trillion in publicly held federal debt.


  To complete the transaction, the government places an IOU in the Social Security account. Is this piece of paper the same as a government bond? Sort of. Like a negotiable Treasury bond, it's a claim on the government. Unlike a marketable bond, it can't be sold. Is it real? It doesn't really matter.

All this back and forth is merely bookkeeping. The government is substituting one form of future obligation -- Social Security IOUs -- for another -- the public debt. The exercise does serve an important political purpose. It keeps all us so confused that we can't keep track of where our tax money really is going. But in an economic sense, whether it's an IOU or a public debt matters little.

Now, here's what does matter. The government has made a promise to pay trillions of dollars in future Social Security benefits for baby boomers. The oldest boomers will start collecting that money as soon as seven years from now. By 2018, according to the latest estimates, the government will be paying out more in benefits each year than it takes in from payroll taxes. By 2036, Social Security will be paying out $1 billion a year more in benefits than it will be collecting in payroll taxes. That's not accounting. It's real cash money. And it will have to come from somewhere.

The government will either have to borrow the money, raise taxes to get it, or reduce the benefits it has promised. And that's true whether you believe in a Social Security Trust Fund or not. Sometime over the next decade or two, Congress and the White House will have to stop the silly argument over whether there is a trust fund -- and really figure out a way to pay Social Security benefits for boomers.

Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online

Edited by Douglas Harbrecht