The Infamous Trust Fund

THE INFAMOUS TRUST FUND….Andrew Olmsted writes today that he often disagrees with me (sometimes harshly!) and that he has no doubt that I would disagree with him too if I had more time. Well, there’s no time like the present!

As it happens, Andrew has a post today on a subject I get a steady stream of email about: the infamous Social Security trust fund. Basically, he takes issue with Edith Fierst’s contention that Social Security is solvent until about 2042, correctly pointing out that payouts start to exceed taxes in about 2017. The only way Social Security stays solvent between 2017-2042 is by cashing in the treasury bonds it’s been piling up in the trust fund since 1983.

The problem, of course, is that these bonds are redeemed by the U.S. treasury, which means they’re basically an IOU from one branch of the government to another. What kind of a shell game is this?

Not a very good one, I agree. The trust fund was Alan Greenspan’s idea in 1983, and it’s a bit of sleight of hand that allows payroll taxes to stay low after 2017, but only at the cost of raising incomes taxes. Basically, the Social Security trustees redeem bonds every year after 2017, the feds cover the redemptions by increasing the income tax rate, and the additional income tax revenue is handed over to the Social Security trustees for disbursement to retirees. All we’re doing is trading one tax for another.

But here’s the thing: it doesn’t matter. Maybe the trust fund was a good idea, maybe it wasn’t. The fact is that it exists, and the federal government is not going to default on treasury bonds. Those bonds are going to be redeemed, they are going to be used to fund Social Security payments, and the money to redeem these bonds is going to come from the general fund ? i.e., income taxes. That decision was made two decades ago and there’s no way to undo it now.

So that’s why Fierst is correct to use the 2042 date. She’s assuming that the treasury won’t default on the trust fund bonds, and in that she’s quite correct.

But Andrew is also quite correct to say that we’re going to have to increase income taxes (or run a bigger deficit) in order to redeem those bonds. There’s no way around that.

Really, though, there’s no way around any of this. Over the long term the only way to keep Social Security solvent is to (modestly) raise taxes or (modestly) reduce benefits. All the fancy arithmetic and doubletalk in the world can’t change that, no matter how desperately people want to believe it. We could make progress on this issue an awful lot faster if there weren’t so many ideologues in Washington pretending otherwise.