I was going back to some of the information that I was saving to use in a blog
on the Social Security System. What got my interest was the third paragraph.
Think about it!
Recent attention to the Social Security Trust Fund
On February 2, 2005, President George W. Bush made Social Security a
prominent theme of his State of the Union Address. One consequence was
increased public attention to the nature of the Social Security Trust Fund.
Unlike a typical private pension plan, the Social Security Trust Fund does
not hold any marketable assets to secure workers' paid-in contributions.
Instead, it holds non-negotiable United States Treasury bonds and U.S.
securities backed "by the full faith and credit of the government". The
Office of Management and Budget has described the distinction as follows:
These [Trust Fund] balances are available to finance future benefit payments
and other Trust Fund expenditures – 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. (from FY 2000 Budget,
Analytical Perspectives, p. 337)
Other public officials have argued that the trust funds do have financial
and/or moral value. "If one believes that the trust fund assets are
worthless," argued former Representative Bill Archer, then similar
reasoning implies that “Americans who have bought EE savings bonds
should go home and burn them because they’re worthless because the
money has already been spent.” At a Senate hearing in July 2001,
Federal Reserve Chairman Alan Greenspan was asked whether
the trust fund investments are “real” or merely an accounting device.
He responded, “The crucial question: Are they ultimate claims on real
resources? And the answer is yes.”
From the point of view of the Social Security trust funds, the holdings of
"special" government bonds are an investment that returned 5.5% to the
trust funds in 2005. The trust funds cannot resell these "special"
government bonds on the secondary bond market, although the interest
rate is determined based on market interest rates. Instead, the "specials"
can be sold back to the government at face value, which is an advantage
when interest rates are rising.
To escape paying either principal or interest on the "special" bonds held
by the trust funds, the government would have to default on these
obligations. This cannot be done by executive order. The Congress would
have to pass legislation to repudiate these particular government bonds.
This action by Congress could involve some political risk and, because it
involves the financial security of older Americans, seems unlikely.[citation
An alternative to repudiating these bonds would be for Congress to simply
cap Social Security spending at a level below that which would require
the bonds to be redeemed. Again, this wouldbe politically risky, but would
not require a "default" on the bonds.
The week after his State of the Union speech, Bush downplayed the
importance of the Trust Fund:
Some in our country think that Social Security is a trust fund -- in other
words, there's a pile of money being accumulated. That's just simply not
true. The money -- payroll taxes going into the Social Security are spent.
They're spent on benefits and they're spent on governmentprograms.
There is no trust.
These comments were criticized as "lay[ing] the groundwork for defaulting
on almost two trillion dollars worth of US Treasury bonds".
However, even right-leaning politicians have been inconsistent with the
language they use when referencing Social Security. For example, Bush
has referred to the system going "broke" in 2042. That date arises from
the anticipated depletion of the Trust Fund, so Bush's language "seem[s]
to suggest that there's something there that goes away in 2042."
Specifically, in 2042 and for many decades thereafter, the Social Security
system can continue to pay benefits, but benefit payments will be
constrained by the revenue base from the 12.4% FICA (Social Security
payroll) tax on wages. According to the Social Security trustees, continuing
payroll tax revenues at the rate of 12.4% will enable Social Security to pay
about 74% ofpromised benefits during the 2040s, with this ratio falling to
about 70% by the end of theforecast period in 2080.