This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Social Insecurity: Inside the 'Trust Fund' Illusion

In other words, Social Security's nonmarketable bonds are merely markers for actual Treasury bonds, which must be sold, and for which interest must be paid. Thus, Social Security is entirely dependent on the Treasury's sale of new bonds for its future solvency. If interest rates spike or global buyers become wary of buying trillions of dollars in U.S. T-bills, costs for that borrowing will skyrocket, crowding out all other federal spending.

As a result, U.S. taxpayers are now paying twice for their Social Security benefits: Once through payroll taxes, and again when the Treasury uses their taxes to pay interest on the bonds it sold to fund Social Security.

This is not some far-in-the-future issue: The Treasury reported in October that it had to sell new bonds to fund Social Security shortfalls in 15 of the previous 25 months.

A Budgetary Illusion

Another way of understanding the hollowness of Social Security's nonmarketable securities is to ask: What difference would it make if we erased the Trust Fund from the ledger?

The answer: none whatsoever. In the "Trust Fund" we now have, when Social Security's outlays exceed its payroll-tax income, then the Treasury sells freshly minted bonds and transfers the cash to Social Security. If we eliminated the so-called Trust Fund, the exact same thing would occur: When Social Security's outlays exceed its payroll-tax income, the Treasury would sell bonds and transfer the cash to Social Security.

This thought experiment reveals that the Trust Fund is illusory, but the reality is that the U.S. Treasury will have to borrow $2.6 trillion on the global bond market to redeem Social Security's nonmarketable securities. That means the Social Security system is totally dependent on the Treasury's ability to sell trillions of dollars of bonds at interest rates that won't cripple the federal government.

The Treasury borrowed $1.3 trillion in 2010 just to fund the federal deficit. As baby boomers retire and payroll taxes remain stagnant, the Treasury will have to borrow substantially more to fund shortfalls in Social Security. If the global bond market hesitates to buy more Treasury debt at low interest rates, then all federal programs will feel the impact -- including Social Security.

-- Charles Hugh Smith writes for AOL's DailyFinance.

3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $129.99 -0.33%
FB $79.86 -0.68%
GOOG $559.88 0.79%
TSLA $204.80 -1.20%
YHOO $44.49 0.09%

Markets

DOW 18,184.59 -29.83 -0.16%
S&P 500 2,109.12 -1.62 -0.08%
NASDAQ 4,982.2590 -5.6310 -0.11%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs