VOL. 24, NO. 2
SUMMER 2011
BENEFITS LAW
JOURNAL
From the Editor
Social Security Is in the Red
$5.4 Trillion Trust Fund Surplus
Has Been Spent
S
ocial Security isn’t a ticking time bomb—it exploded last year. That
was when the System spent more than it took in for the first time
since it was “fixed” in 1983. For nearly 30 years accounting gimmicks
have hidden, in plain view, the fact that Uncle Sam has long since
spent the so-called Social Security “surplus.” To provide a needed
dose of reality and urgency to the ongoing debate over entitlement
reform and craft a workable and fair solution, we must begin with
a clear-eyed view of the real financial state of the Social Security
System.
Despite providing $800 billion in annual benefits, Social Security is
not complicated. On the revenue side, the System is credited with all
Social Security taxes 12.4% (split between employers and employees)
up to the first $106,800 (indexed) earned plus federal income taxes
payments on benefits received by higher income retirees. (For simplicity, I’m combining the technically separate pension “OSAI” and
disability “DI” programs that make up the Social Security System.)
That money pays for all Social Security retirement, disability, survivor,
and dependent benefits to covered workers and their families plus the
roughly 0.9 percent administrative fee assessed by the federal government. The size of the check depends largely on career average wages,
years of work, and the retirement age when payments begin.
While Social Security was established as a pay-as-you-go system,
in a given year the amount of money coming in naturally will be
somewhat more or less than the level of payouts. To keep the System
running smoothly, from its earliest days any annual surplus has
From the Editor
been held in a bookkeeping account called the Social Security Trust
Fund, which is controlled by the Secretary of the Treasury. By law,
the Trust Fund must be invested in non-tradable US Government
securities and the interest paid on those securities is added to the
Trust Fund.
The securities in the Trust Fund are not assets with real value, but
a promise by the government to repay the System (which is really just
another arm of the federal government) the funds when needed at a
later date. Essentially, the Trust Fund functioned as a means to even
out the System’s cash flow in years when its revenue was not enough
to cover costs. For years, this worked reasonably well because Social
Security operated more or less in equilibrium: cash in was not substantially different from cash going out.
That financial equilibrium was shattered in 1975 when increasing longevity, and thus a steadily proliferating population of retirees, caused the
System to begin hemorrhaging money. President Reagan and Democratic
House Speaker Tip O’Neill, acting on the advice of Alan Greenspan,
worked out a compromise to reform Social Security by raising taxes
and gradually raising the retirement age, in effect lowering benefits.
The 1983 Reformers realized that those changes meant that Social
Security would initially run at a surplus, and believed those extra
funds could be “locked-boxed” away to cover the inevitably ballooning payouts to Baby Boomers when they retired. While technically
Social Security and all other Government programs with dedicated
revenue streams (like Medicare!) are off-budget, meaning that they
aren’t supposed to figure in the Government’s day-to-day finances,
the Treasury and the GAO (General Accounting Office) lump all on
and off-budget government revenues and spending together when
they report the bottom-line deficit and budget numbers..
This was the fatal flaw in the 1983 reform: Washington could not
resist treating the extra billions taken in annually by Social Security as
a virtual ATM. And so the entire Social Security surplus—a total $5.4
trillion in 2010 dollars—has been spent.
This is how it happened. Except for a few years during the Clinton
Administration, the federal government has consistently spent more
money than it took in. Each year, the Treasury has dutifully transferred the surplus Social Security taxes from its coffers to the Trust
Fund, and reported Social Security’s annual finances as if the surplus
has been safely tucked away to pay future benefits. In fact, the Trust
Fund “buys” government bonds that are “sold” by the Treasury.
Once the proceeds from the bond sale hit the Treasury’s books, they
are considered fair game in Washington. Indeed, the surplus Social
Security taxes collected during the first 26 years (1984–2009) after the
reform helped Democrats and Republicans alike make their profligate
spending appear a little less egregious.
BENEFITS LAW JOURNAL
2
VOL. 24, NO. 2, SUMMER 2011
From the Editor
And the beat goes on. Although last year’s compromise tax reduction bill lowered employees’ share of Social Security taxes by 2
percent, the new tax law “covered” that loss by transferring the lost
revenue value to the Trust Fund in the form of meaningless Treasury
IOUs. Bernie Madoff would approve.
That means the now $2.5 trillion Trust Fund investment in Treasury
securities is an illusion. And, as the oldest of the baby Boomers hit
retirement age, the lack of a real trust fund is critical. In 2010, Social
Security had negative cash flow: the System paid some $41 billion
more in benefits than it collected in taxes. For 2011, the shortfall in
revenue is projected at a bit under $9 billion. (In 2012, cash flow is
expected to briefly turn positive with an $11 billion surplus for three
years, after which, in 2015, it will be in permanent deficit.)
Nevertheless, the Treasury cheerfully reports that there is enough
in the Trust Fund to cover the shortfall until 2037 by “selling” some
of the Trust Fund’s Treasury securities back to itself. There’s no other
way to say it: this is a bald-faced lie.
The Trust Fund illusion has convinced the public that Social Security
is in okay financial shape and enabled Congress to keep a safe distance from this political third rail. In a recent Wall Street Journal/NBC
News poll, a majority of people did not rank fixing Social Security
as a top priority and supported leaving the System pretty much as is.
Clearly, Americans are unaware of how bad things really are.
Ponzi schemes, speculative frenzies, and other financial illusions
eventually collapse of their own weight. To begin a truly meaningful
debate over how to fix Social Security, the President and Congress must
first acknowledge that the Trust Fund is empty and Social Security is in
the red. (They can blame prior Administrations.) This urgent problem
must be properly addressed, first by an honest reporting of the facts.
David E. Morse
Editor-in-Chief
K & L Gates LLP
New York, NY
Copyright © CCH incorporated. All Rights Reserved.
Reprinted from Benefits Law Journal Summer 2011, Volume 24,
Number 2, pages 1-3, with permission from Aspen Publishers,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437,
www.aspenpublishers.com
Law & Business
BENEFITS LAW JOURNAL
3
VOL. 24, NO. 2, SUMMER 2011