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Social Insecurity: Inside the 'Trust Fund' Illusion

Social Security has over 53 million beneficiaries -- 17% of the U.S. population of 312 million, or about 1 in 6 Americans. As a comparison, that's substantially more than the entire population of Spain (46.5 million). Its outlays in fiscal year 2010 totaled $707 billion, about one-fifth of the $3.45 trillion federal budget. And its payouts will inexorably rise in coming decades, thanks to the 76 million-strong baby boom generation. The first boomers qualified for Social Security in 2008, and over 3 million more enter the system every year.

Social Security is a "pay as you go" retirement system, intended to run with a surplus designed to fund future shortfalls. Payroll taxes paid by current workers and employers fund today's retiree benefits, and the difference between tax receipts and outlays -- a surplus, until recently -- is transferred to the U.S. Treasury.

In exchange for this excess cash, the Treasury issued the Social Security Trust Fund special nonmarketable securities. The Trust Fund now holds about $2.6 trillion in these securities. (Technically, there are two trust funds, one for the main Social Security program and one for Disability Insurance, but the SSA usually combines the two.)

If You Can't Sell a Bond, Is It Worthless?

Though the SSA doesn't state it directly, what this means is that the Treasury took $2.6 trillion in Social Security cash surpluses and transferred it to the federal government to spend on other government programs. (For context, the total net wealth of U.S. households is $54.9 trillion, according to Federal Reserve data.)

The fact that the Treasury bonds the Trust Fund received in return for that $2.6 trillion are nonmarketable -- that is, they aren't bonds that can be sold on the global bond market -- has led some observers to characterize them as worthless.

The Social Security Administration defends the worthiness of its special bonds in its FAQ page:

  • "The surplus money flowing into the trust funds is invested in U.S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.
  • Far from being 'worthless IOUs,' the investments held by the trust funds are backed by the full faith and credit of the U.S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government."

This debt to Social Security is called "intragovernmental holdings," and it is included in the total national debt, along with other special Treasury securities held by other agencies.

The "Trust Fund" Is Not a "Lockbox"

What the Social Security website fails to explain is where the Treasury gets the money to redeem those bonds. The answer: It borrows the money on the global bond market by selling freshly issued real Treasury bonds.

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