What the Trust Fund Isn’t
By Marco Zappacosta
It only took the first paragraph of Adam Sacarny’s recent Spectator op-ed, “Trusting the Trust Fund,” to wash away my hopes of having someone genuinely spell out how the Social Security Trust Fund actually works. In his first sentence, he boasts that the fund “has effectively become one of the world’s richest bank accounts,” but later he states that Bush is somewhat right when he says that “the government will somehow have to come up with an extra $200 billion to keep the system afloat.” So what’s the deal? Is there money in the Trust Fund or not?
The answer is plainly no. The Social Security Trust Fund contains nothing more than $1.6 trillion worth of IOU’s. Don’t believe me? How about the Clinton administration’s fiscal year 2000 budget:
These [Trust Fund] balances are available to finance future payments and other Trust Fund expenditures – but only in the bookkeeping sense. These funds are not set up to be pension funds like the funds of private pensions plans. They do not insist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not by itself have any impact on government’s ability to pay benefits. (Executive Office of the President of the United State, Budget of the United States Government, Fiscal Year 2000, Analytic Perspectives, p. 337. Emphasis Added)This point becomes quite clear when you realize what the government is doing. As Adam correctly points out, the Trust Fund buys treasury bills, which are nothing more than government debt. And this is where everyone should pause and say to themselves, “Wait, so the government is first spending this money to finance its own debt and then claiming that its saving it in a lockbox, what?” You can spend or save, not both. Adding insult to injury, the government also claims that these ‘assets’ are earning interest, increasing the unfunded liabilities that our generation is going to have to deal with.
I can just hear people now, “But that is my money, they can’t just spend it!” Unfortunately, the Supreme Court of the United States doesn’t agree. In 1954, after having his old-age benefits revoke after his deportation back to Belarus (due to his involvement with U.S. Communist Party), Ephram Nestor sued the government under the takings clause of the Fifth Amendment. He understandably assumed that since he had paid into the system, he was entitled to his benefits. The Court disagreed and Justice Harlan wrote, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands”.
So where does that leave us? Unlike Adam, I think it is extremely unlikely that the government will flat out default on the treasury bill holdings in the Trust Fund. There is a reason why treasury bills are considered the safest investment in the world; the U.S. government does not default on its debt.
But this implicit debt, and the unfunded liabilities that Social Security faces on a whole, will have to be addressed – the only question is how. Be it through the transition costs in Bush’s private account system, lowering benefits, raising taxes, or issuing more debt, these are all manifestations of the reality that we have promised a lot more money than we have.
So remember, regardless of political hue; don’t let anyone convince you that there actually exist any tangible assets in the Trust Fund or that you have any property rights over them. This is an important debate; let’s at least get the facts right.