Social Security Mythology

Social Security generates more unintended confusion and deliberate misinformation than any other issue.  Political candidates of both parties accuse their opponents of “raiding” the trust.  Some writers disparage the trust funds as “funny money,” “IOUs,” or a “fiction.”  All these claims are nonsense.  The Trust fund reserves stand at $2.73 trillion.  The reserves are expected to grow each year until 2020 according to actuaries.

 

Social Security’s financial operations are handled through two federal trust funds — the Old-Age and Survivors Insurance (OASI)(monthly income for seniors) trust fund and the Disability Insurance (DI) trust fund.  They are legally distinct, although commonly referred to collectively as Social Security.  All of Social Security’s payroll taxes and other earmarked income are deposited in the trust funds, and all of Social Security’s benefits and administrative expenses are paid from the trust funds.

 

In years when Social Security collects more in payroll taxes and other income than it pays in benefits and other expenses — as it has each year since 1984 — the Treasury invests the surplus in interest-bearing Treasury bonds and other Treasury securities.  Social Security can redeem these bonds whenever needed to pay benefits.  The balances in the trust funds thus provide legal authority to pay Social Security benefits when the Social Security program’s current income is insufficient by itself.

 

Social Security has run a surplus in every year since 1984, as was anticipated when Congress enacted and President Reagan signed new legislation based on the recommendations of the Greenspan Commission in 1983.

 

Under current projections, the combined Social Security trust funds will continue to run annual surpluses until 2020.   Actually, the DI trust fund faces exhaustion in 2016, and the much larger OASI fund is projected to last until 2034.  Congress must therefore take action before late 2016 to replenish the DI trust fund.  Increasing the share of the payroll tax that is allocated to DI (and reducing the OASI share) would assure that both the OASI and DI programs pay full benefits through 2033.  Congress has reallocated payroll tax revenues many times in the past, and doing so has not been controversial.

 

At that point, if nothing else is done, Social Security could still pay more than three-quarters of its scheduled benefits using its annual Social Security tax income.  Contrary to a common misunderstanding, benefits would not stop.  Of course, paying three quarters of promised benefits is not an acceptable way to run the program, and Congress should take action well before 2033 to restore long-term solvency to this vital program.

Source:  Annual Report of Board of Trustees of Social Security to Congress           Michael Smith

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