Everyone’s Favorite Subject: The Trust Fund

EVERYONE’S FAVORITE SUBJECT: THE TRUST FUND….President Bush made some weirdly contradictory statements about the financial solvency of Social Security today, but that’s hardly surprising and hardly worthy of comment any longer. However, he also made the following plain statement about the Social Security 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 government programs. There is no trust.

This is a fool’s errand, I suppose, but I’d like to clear up the nature of the trust fund once and for all ? on a variety of different levels. Here goes.

The trust fund consists of U.S. treasury bonds. These bonds have been purchased with excess payroll taxes collected since 1983.

Fine. But what is a treasury bond? Easy: it’s a call on the future general fund revenue of the United States. People who buy bonds are receiving a promise that they will be repaid (with interest) by U.S. taxpayers in the future.

Who then are the purchasers of the bonds in the trust fund? Answer: the people who paid payroll taxes between 1983-2018.

And who is required to pay them back? Answer: the bonds will be redeemed by the general fund between 2019-2042 (on current estimates, anyway). Since the general fund is financed mostly by personal and corporate income taxes, that means that the people required to pay back the bonds are income tax payers between 2019-2042.

So: are these bonds merely IOUs from one branch of the government to another? Not really. They are IOUs between one set of citizens (payroll tax payers between 1983-2018) and another set of citizens (income tax payers between 2019-2042).

What this means is that the United States really does have a moral obligation to pay back those bonds. Bonds are always paid back by future taxpayers, not all of whom had any say in selling the bonds in the first place. The fact that it’s a burden on these future taxpayers is not reason enough to pretend the bonds don’t need to be repaid ? or don’t exist at all.

And make no mistake: redeeming the trust fund will be a burden on future taxpayers ? in the same way that paying excess payroll taxes is a burden on current workers. There’s no free lunch. The only way to pay back the bonds is either to increase the federal deficit or to increase taxes. My approximate guess is that it will require a phased increase in income taxes totaling about one-fifth. In other words, beginning in 2019, someone paying a 15% tax rate will see their rate slowly increased to 18%.

The bottom line is this: the trust fund is not an accounting trick. It’s a genuine obligation, both morally and legally. At the same time, it’s not a stack of gold bars, either. Redeeming it will require some kind of tax increase. (It doesn’t have to be an increase in personal income taxes of course. It could be anything: corporate taxes, inheritance taxes, carbon taxes, whatever.) There’s no point in pretending this tax increase won’t be a burden, but equally, there’s no point in pretending that our obligation to devote tax revenues to paying back the trust fund bonds is just a fiction.

The president of the United States, of all people, ought to understand that.