Could someone explain to me in fairly simple terms the history of Social Security and the ‘trust fund’ from the perspective of how the government took in money and disbursed it? Basically, what I want to know is how Social Security was meant to work wrt gathering funds and dispersing funds, and if the way it works today is different to how it was originally envisioned.
Full disclosure: Got into an argument this weekend with a friend about the Social Security ‘trust fund’. I basically said that there was never a ‘trust fund’, in the sense of all the Social Security money going into some big bank account (collecting interest or whatever) and from that fund monies were disbursed to retiring people. My friend insists that there was such a fund, and that the problem with SS is that the government took the fund for it’s own use and changed the system to a pay as you go. I tried to explain my understanding of how it works (i.e. that the government doesn’t go to some bank or whatever to put it’s money into, instead it invests in, well, itself, being the most stable investment out there). I realized that there might be some holes in my own understanding, however, since I hadn’t really sat down and thought about Social Security in some years, especially historically how it worked when it was first implemented and how it works today. I would appreciate someone walking me through in simple terms, and cites are always welcome, but what I really want is a simple and concise statement of how it was meant to work, how it worked, and how it works now…assuming they are different. Also, whether there was some kind of ‘trust fund’, and how that worked.
I don’t know about it being a “trust fund” but Social Security had a surplus that was borrowed by the government for covering part of the deficits and exchanged it for Treasury bonds so that on paper the surplus still exists and is even earning a slight interest.
I cannot give a cite, but what I have read on the subject essentially says that there is a notional trust fund in the sense that every cent that comes in is posted to the fund and immediately invested in government bonds and every cent that goes out comes from selling said bonds. But somewhere there is an accountant who adds it all up and says something like, "Today we took in $300 billion and paid out $299 billion and our balance is $6.53 (understand, I am making these numbers up entirely). But in ten years, using actuarial tables (which could be totally wrong–suppose a cure for cancer were discovered in the meantime), we will be taking in only #280 billion each day and paying out $350 billion every day and on May 21, 2047 at 3:37 PM, the net balance will be 0 and SS will end.
But this is sort of fiction. In real life, every cent that comes in goes into the treasury and every cent that goes out comes from the treasury. So you are both right. It all depends on how you look at that accounting.
It’s a trust fund in the sense that the moneys are separated from the general funds and to be used for SS purposes only. They are invested in T-bills, which pay a nominal interest. Some say that is sleight-of-hand since it’s all in the Treasury, but the amount of the sequestered funds for SS purposes is increased.
It is located in a filing cabinet in a Bureau of the Public Debt office building in Parkersburg WV.
It was originally just a set of ledger books. But sometime in the 1980s (I believe – I can’t find the exact date right now), there was a public crisis of confidence in the Social Security system, so Congress, in its wisdom, decided to reassure the public by requiring actual paper bonds to be issued (at about the same time the Treasury was phasing out the use of paper for other government bonds) and stored. So there is a mid-level government bureaucrat in the BPD whose job it is to print the bonds and file them in the cabinet. The bonds are non-negotiable and payable only to the Social Security Administration, but yet they must be stored in a secure facility to prevent their loss.
Until recently, more was collected in Social Security taxes than was paid out. The excess was put into government bonds held in trust for when needed. Now, if the government had the money to pay back what it owes SS, everything would be fine for a while or at least until the trust is depleted.
With more money going out than coming in now, general revenues will have to go to paying back the bonds. Something has to go. The first plaice I would cut are the fat pensions the past congressmen earned while squandering the incoming SS taxes. Next we can sell off the assets bought with our SS payments, With the movement of space exploration to private companies, we can put Cape Kennedy up for bid. TVA? Post offices we can’t afford to keep open? Any government property that can be sold in an open market.
The current fund was created in the 80’s, when the gov’t realized that the baby-boom retirement would create a large number of retirees and put a larger tax burden on future workers. A comittee headed by a pre-Fed chairman Alan Greenspan decided the best thing to do was tax the current workers a larger amount, put the extra revenue in a fund, and then those same workers could have their benefits paid by that fund instead of by future workers.
Since simply putting the fund in a vault was obviously silly, it was decided that the trust would buy treasury bonds. This seems a little sketchy, since its essentially the gov’t borrowing from itself, but its actually a pretty good idea. The borrowing was going to happen in anycase, but by borrowing from the Fund, the gov’t gets to pay interest to itself instead of to outside investors. Thats how the gov’t makes money on the trust fund, it gets to pay interest from Treasury Bills to itself that would’ve otherwise gone elsewhere. In anycase, the gov’t didn’t “raid the fund”, as your friend suggests, it was always meant to be invested in this way.
As the bills in the fund mature, they’ve been redeemed and turned over to buy more bills. SS is predicted to pay out more then it collects in the next few years (its actually in the red now due to the Great Recession, but its projected to do better as the economy rebounds), but even after that, the interest on the bills will meet the shortfall till ~2025. After that, the fund itself will be drawn down to pay for the shortfall.
~2040 the Fund is projected to be depleted. Originally the balance between retirees and workers were supposed to have staiblized at a level that by this point that the surplus would no longer be needed at that point. However that relied on birthrates being higher then they’ve so far been, so under the SS Administrations “most likely” demographic prediction, without the fund SS will only collect 80% of what its supposed to pay out and payroll taxes will either need to be increased by 25% or benefits cut by a fifth or some combination thereof (or enough fertile Mexicans will sneak across the border in the next thirty years to change demographic trends and obviate the need for either measure).
I hope nobody has their other retirement funds in government bonds. The government bonds bought with SS funds were not spent in ways to create a stream of revenue to pay them back. They were just added to the other undisciplined spending.
Got any numbers to back this up? It seems you’re simply venting about government spending, because I’m not sure what low risk bonds have to do with whatever it is you’re going on about.
Historically, US bonds have been a safe (if unexciting) investment. The current rate on a 30 year US treasury is somewhere in the neighborhood of 4%. That doesn’t indicate heavy inflation. It also isn’t a get rich quick method, but it’s about the safest investment around.
So, it seems the SS funds were invested in a low yield (but also low risk) way. What part of this is supposed to scare low risk, low yield investors away from government bonds?
If you are referring to the solvency of the US, there’s not much of a problem there. And for Social Security itself, we implemented a fix in the early 80s (the Greenspan plan) and can put other fixes in place that keep the system solvent through the next century.
So, if you want to say the US is doing a bad fiscal job, at least back it up with firmer stuff than “Any post offices we can close?” and maybe in a different thread (by the way, you did know the USPS hasn’t been a part of the federal budget in nearly 30 years, right?). On the Social Security side, there are issues to be addressed, but there are relatively simple fixes, unlike the minefield that is health care or the general budget.
Interest rates reflect the opinion of the market on the perceived risk of an investment. The interest rates for bonds are very low, which indicates that the markets don’t perceive much risk. If you think there is a problem, you should figure out a way to short government bonds. If you are correct the prices will plummet and you’ll make a fortune. If the market is right, you’ll lose your shirt.
The interesting question is whether the initial funds from Social Security more than covered the initial payments. I’d guess they would, since there were relatively few people over 65 75 years ago. That would mean that the “trust fund” got established immediately. (I don’t have time now to search.) But it was definitely not the case that the first recipients got paid out of the trust fund.
You don’t get how government works, do you? The notion that government would be better if it was run like a business is fatuous nonsense. Government exists to do the profitless things that need doing, like defense and education and health care and million other things that private industry won’t do because they haven’t figured out how to make an obscene return on investment.
