begin cashing the bonds. The nominal value of
not only those retired or working but also those
the bonds, or alternatively their tax liability, was
too young to work and even those not yet born.
$589 billion at year-end 1997.12
Even a person born 50 years from now would be
How these bonds should be thought of is a
included because that person will be 25 years
matter of some debate. One perspective is that
old at the end of the 75-year horizon and will
Social Security's financial condition should
have worked and paid taxes for about five years.
include the bonds but not the cost of redeeming
A girl born today would also be included,
them. After all, they are backed by the full faith
because over the next 75 years she would pay
The cost of
and credit of the United States government,
taxes for a full working career and receive ben-
the present
default is highly unlikely, and portfolios around
efits for about 8 to 10 years. There is no politi-
the world hold government bonds and consider
system is the
cal calculation made as to whether those not yet
them assets. The OASI Trust Fund, in essence a
born would be willing to pay OASI taxes. The
forgone
portfolio, is no different and should be treated
assumption is that they would.
consumption,
like all portfolios.
The closed-group model differs in that
Others counter that considering the bonds
either by
the group is "closed" to those currently 15
wealth by not recognizing the offsetting tax lia-
years of age and older. The estimated taxes
individuals
bility is nonsensical.13 This reasoning is analo-
received from a 14-year-old over the next 75
or the
gous to suggesting that if the government were
years as well as the benefits paid are not part of
to issue each American a $1,000 bond financed
government,
the calculation.
by a $1,000 per capita tax, then each citizen
In both models the annual difference between
necessary to
would be $1,000 wealthier. If this were so, then
taxes received and benefits paid is adjusted for
pay future
the state could create individual wealth simply
inflation and the time value of money. The pre-
by issuing bonds to its citizens. And by the same
promised
sent value of the 75 annual differences, either
logic the state could create Social Security
positive or negative, or stated differently, is the
benefits.
wealth simply by issuing bonds to the Trust
funded surplus or unfunded liability of the sys-
Fund. From this perspective, concerns about
tem. When calculated by using either model, the
Social Security's finances would be over: The
system is unfunded. The unfunded liability is
Trust Fund would be issued enough bonds to
the amount of additional capital the Social
meet all future obligations or, alternatively, the
Security system needs immediately, not during
bonds' credited interest rate would be increased
the next 75 years, over and above the projected
by the same equivalent. The futility of this argu-
payroll taxes for all of the next 75 years to pay
ment is that it rests on the neglected reality that
benefits already promised. Exclusive of the
taxes ultimately must finance the principal and
initial Trust Fund balance, the unfunded liabili-
interest when due on the Trust Fund bonds. For
ties of the OASI open- and closed-group models
society as a whole, the bonds are not wealth;
are about $3 trillion and $8 trillion, respectively,
they are both an asset and a tax liability of equal
or $29,700 and $79,200 for every American
magnitude.
household.15 And even if the capital could be
In reality, and intergenerational issues aside,
raised immediately, it would be exhausted by
whether or not the bonds held by the OASI Trust
the end of the 75th year, after which negative
Fund are included as an asset is irrelevant, as
cash flows would recommence and, in today's
long as the offsetting tax liability is recognized
dollars, equal about $440 billion16 in the 76th
if they are.
year alone.
The Future: Funded or Unfunded? The
The Cash Flow View: Social Security's un-
Trust Fund is a retrospective view; it looks at
funded liability is sometimes characterized as
past taxes and benefits and how they were
merely a cash flow problem: too many benefits,
accounted for. Social Security's financial
not enough taxes. Indeed, the "Report of the
future is analyzed differently. Actuaries esti-
19941996 Advisory Council on Social Secu-
mate prospective taxes and benefits and
rity" included some recommendations that
employ two models to compare them.14 One
seemed to agree with this view.17 For example,
model is called the "open group"; the other is
some Council members supported increasing to
called the "closed group."
38 from 35 years the period over which the aver-
For the open-group model, actuaries estimate
age indexed wage is computed. The effect of
annual benefits paid and taxes received for the
this increase would be to reduce benefits to all
next 75 years from a population that includes
4