Podcast: Understanding the Social Security Trust Funds

October 5, 2010

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Download the mp3 of this podcast (4:40)

In this podcast, we’ll discuss some basic information about the Social Security trust funds. I’m Michelle Bazie and I’m joined by Paul Van de Water, Senior Fellow here at the Center.

1. Paul, few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. How do the trust funds work?

Social Security’s financial operations are handled through two federal trust funds — the old-age and survivors insurance trust fund and the disability insurance trust fund. Although they’re two different funds, they are often referred to collectively as “the Social Security trust fund.” Payroll tax contributions and other earmarked income are deposited into the funds, and all of Social Security’s benefits and administrative expenses are paid out of the trust funds. 

2. What is the trust funds’ financial status? Do the funds have enough money?

The latest data show that Social Security can pay full benefits through 2037 without any changes, and relatively modest changes would put the program on a sound financial footing for 75 years and beyond. I mention 75 years, because that’s the period that the program’s actuaries use in evaluating the program’s long-term financial status.

3. You mention that modest changes would be needed around 2037 to put the program back on solid financial footing. How so?

You see, under current projections, the combined Social Security trust funds will continue to run annual surpluses through 2025. The interest income that the trust funds earn on their bonds, as well as the proceeds the trust funds will receive when the bonds are redeemed, will enable Social Security to keep paying full benefits until 2037.

2037 is the year that the trust funds are projected to run out of Treasury bonds to cash in.

4. What happens then?

At that point, if nothing else is done, Social Security could still pay more than three-quarters of its scheduled benefits using its annual tax income. Contrary to a common misunderstanding, benefits would not stop.

5. But is three quarters enough?

Certainly not. Congress should take action well before 2037 – sooner, rather than later – to restore long-term solvency to this vital program. A mix of tax increases and modest benefit reductions — carefully crafted to shield the neediest recipients and give ample notice to all participants — could put the program on a sound financial footing indefinitely.

6. Why do some say that the trust funds have been raided or are mere IOUs?

Alarmists who claim that Social Security won’t be around when today’s young workers retire either misunderstand or misrepresent the projections.

Those critics are attempting to undermine confidence in the program with wild and blatantly false accusations. All of these claims are nonsense.

7. How so?

The Social Security trust funds are invested in Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard these securities as being among the world’s very safest investments. As I explain in a new paper we posted to centeronbudget.org, investing the trust funds in Treasury securities is perfectly appropriate. Money that the federal government borrows from the public or from Social Security is used to finance its ongoing operations in the same way that money deposited into a bank is used to finance spending by consumers and businesses. In neither case does this represent a “raid” or misuse of the funds. The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.

8. What’s the bottom line? 

Social Security marked its 75th birthday earlier this year. At this milestone, policymakers have an opportunity to reassure future generations that they, too, can count on this sound, successful program.

Thanks for joining me, Paul.

 

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