No trust for Social Security

December 21, 2010: 5:00 AM ET

The trust fund is nothing more than a trap and a fantasy for those who think it's a solid foundation for Social Security.

I used to joke about the government "solving" Social Security's long-term problems by creating Treasury IOUs out of thin air and sticking them in the program's trust fund. My point, of course, was to show that no matter how many Treasury securities there are in the trust fund -- currently, around $2.6 trillion -- the fund is merely an accounting fiction that has no economic value when it comes to protecting Social Security beneficiaries.

Now, with last week's passage of the much-ballyhooed tax deal between President Obama and Republican lawmakers, my sarcastic joke has become public policy. It all has to do with the provision cutting payroll taxes in 2011.

Let me show you how this works. Next year, as you probably know, workers subject to Social Security taxes will pay only 4.2% of their "covered wages" -- wages up to $106,800 -- rather than the normal 6.2%. This will reduce Social Security's cash proceeds by $112 billion, according to Congress' Joint Committee on Taxation.

What impact will this cash shortfall have on the Social Security trust fund? None. Zero. Zip.
How can a $112 billion cut in Social Security revenues not affect the trust fund? Because the Treasury will give the trust fund the same amount of bonds it would have gotten if the two-percentage-point tax holiday didn't exist.

In other words, the Treasury isn't selling bonds to Social Security, it's creating bonds out of thin air and putting them into the trust fund. The missing cash? Uncle Sam will just borrow $112 billion from somewhere.

My problem with the trust fund is that it's a snare and a delusion for people who think that it makes Social Security financially sound. It doesn't do that, because having government IOUs in a government trust fund doesn't make it any easier for the government to cover Social Security's cash shortfalls than it would be if there were no trust fund.

This year, with Social Security collecting less cash than it pays out for the first time since the 1980s, the Treasury had to borrow money from investors to redeem the securities that the trust fund cashed in to meet Social Security's obligations. So what use was the trust fund, other than symbolic? None. The same thing will happen next year.

From the mid-1980s through last year, Social Security was a cash cow for the federal government thanks to tax increases and benefit cuts adopted after the Greenspan Commission's 1983 report. Social Security collected more in taxes than it paid out in benefits, turning the surplus over to the Treasury, which used the cash to meet various obligations, and gave the trust fund securities in return.

The fact that Social Security was funding the rest of the government to the tune of trillions of dollars gave beneficiaries a moral claim on the trust fund, economically useless though it is.

But now, Social Security isn't even buying the Treasury obligations that go into the trust fund. The government is merely printing IOUs and stuffing them into the trust fund in order to make the fund look healthier. It's nonsense.

The same game has been going on this year, but less noticed -- at least, less noticed by me -- with the now-expiring HIRE Act. Under that legislation, employers didn't have to pay Social Security their 6.2% share of covered wages for hires that met the act's requirements. To make up for the lost revenue, the Treasury agreed to give the trust fund IOUs equal to employers' savings.

There have been endless screeds written, blogged and babbled about the newly minted tax law, but most of that talk has overlooked how the measure reinforces the trust fund's economic futility. While I've kidded around in the past about the trust fund, Washington's latest trust fund maneuvers aren't funny. Rather, they show why "Social Security trust fund" is a contradiction in terms. It's not social, it's not secure, you can't trust it, and it has no real funds. No matter how many bonds the Treasury prints for it.

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About This Author
Allan Sloan
Allan Sloan
Senior Editor at Large, Fortune

Allan Sloan, who has been writing about business for more than 40 years, joined Fortune in July of 2007. Before that, he was the Wall Street editor for Newsweek for 12 years. His work also appears in The Washington Post. Allan is a seven-time winner of the Loeb Award, business journalism's highest honor, receiving awards in four different categories for five different employers. He is a graduate of Brooklyn College and has a master's degree in journalism from Columbia University. He and his wife live in New Jersey. They have three grown children.

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