Getting It Wrong (Again) on Social Security

Yesterday, the Social Security Trustees released their annual report on the programs finances and much of the national news media thought they saw good news. “Extra Year Expected for Retirement Funds,” was a typical headline, with nearly all the media reports focusing on the Trustees’ projection that the Social Security Trust Fund would be exhausted in 2041, a year later than was projected last year.

But, of course, that date is meaningless. The Trust Fund is not a pile of money that can be used to pay Social Security benefits. It is simply an accounting measure of how much money the system owes, a collection of IOUs. No one explained it better than the Clinton administration in its 2000 budget message.

These Trust Fund balances are available to finance future benefit payments…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.

The important date in the Trustees’ Report is 2017, just 10 years from now. That is when Social Security will begin running a deficit. At that point, Social Security will have to begin redeeming the special issue bonds held by the Trust Fund. Since the federal government has no extra money with which to redeem these bonds (note our ongoing budget deficit), it will have to raise taxes, borrow more, or cut other government spending.

Moreover, the failure to reform Social Security has allowed the program’s financial problems to get worse. The system’s total unfunded liabilities are now $15.6 trillion (in discounted present value terms). That’s $100 billion worse than last year, despite $600 billion in savings from changes in technical assumptions.  And, of course, workers still have no legal, contractual, or property rights to their benefits.

That doesn’t sound much like good news to me.