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Adding more

rowing from the public, or reducing ben-

Social Security paying out more in benefits

efits or other expenditures. The existence

than it brings in through taxes. The surplus

money to the

of large trust fund balances, therefore,

is used to purchase special issue Treasury

Trust Fund now

does not by itself have any impact on the

bonds. When the bonds are purchased, the

would simply

government's ability to pay benefits.20

Social Security surplus becomes general rev-

enue and is spent on the government's annu-

increase the num-

al general operating expenses. What remains

Adding more money to the Trust Fund

ber of bonds. It is

behind in the Trust Fund are the bonds, plus

now would simply increase the number of

an endless cycle

an interest payment attributed to the bonds

bonds. The money from purchase of those

(also paid in bonds, rather than cash).

bonds would revert to general revenue and be

that does nothing

Government bonds are, in essence, a form of

spent. It is an endless cycle that does nothing

to change Social

IOU. They are a promise against future tax

to change Social Security's actual solvency.

revenue. When the bonds become due, the

A far better measure of Social Security's

Security's actual

government will have to repay them out of

finances and the impact of changes such as

solvency.

the general revenue.

raising the tax cap is the annual cash-flow sur-

Perhaps the clearest explanation appeared in

plus or deficit, that is, the yearly gap between

the Clinton administration's FY 2000 budget:

Social Security's revenue and expenditures.

This is a measure of the amount of additional

These [Trust Fund] balances are available

revenue Congress will have to find--through

to finance future benefit payments . . .

taxes, borrowing, or reductions in other

but only in a bookkeeping sense. . . . They

spending--if benefits are to be paid.

do not consist of real economic assets

Figure 3 shows the current financial condi-

that can be drawn down in the future to

tion of Social Security. The program is run-

fund benefits. Instead, they are claims on

ning a surplus today, but by 2017 it will begin

to run a deficit.21 Those deficits continue to

the Treasury that, when redeemed, will

have to be financed by raising taxes, bor-

increase, reaching 5.75 percent of payroll at

Figure 3

Social Security Tax Payroll Surplus or Deficit

3

2

1

0

-1

-2

-3

-4

-5

-6

-7

Source: The 2005 Annual Report of the Board of Trustees of the Federal Old-Age Survivors Insurance and Disability

Trust Funds.

6