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The nature and significance of Social Security trust funds is sometimes misrepresented to the public. This appears to be the case in Social Security Brief #30 issued on May 12, 2009 by the National Academy of Social Insurance. The section of this brief entitled “Where does the Social Security surplus go?” states essentially the following:

“Some people worry when they hear that Social Security annual cash surpluses are loaned to the U.S. Treasury and the government spends the cash on other activities.” Don’t worry, be happy, because when a Social Security surplus is loaned to the government it reduces the debt owed to the public by the amount of the surplus and thereby makes it “easier to afford Social Security and other activities of the government in the future.” (Emphasis added)

I believe that this conclusion is incorrect and that it is an inappropriate way to characterize the nature and value of the trust funds.

Those who believe the brief’s conclusion is correct appear to rely on the assumption that “intragovernmental debt” is different from “public debt.” Perhaps it is, but no matter how the debt is labeled:

• the U.S. government’s responsibility to pay interest and eventually repay the loans is no different.
• the amount of future taxes required to pay interest and eventually repay the loans is no different.

Collecting surplus Social Security taxes and loaning the funds to the government and calling it “intragovernmental debt” does not “make it easier to afford Social Security and other activities of the government in the future” than if the government borrowed that same amount from someone else and called it “public debt.”

There are, however, other consequences to collecting surplus Social Security taxes and loaning them to the government:

• The government uses Social Security taxpayer money to finance other government programs during the years that surplus Social Security taxes are added to the “trust fund,” and thereafter uses general revenue to finance Social Security benefits. This results in a subtle cost-shifting between one generation of the Social Security taxpaying population and a later generation of the general taxpaying population.
• By the time the trust fund is nearly exhausted, say in 2037, Social Security benefits and administrative expenses will be financed 76% by payroll taxes and 24% by general revenue (to redeem Treasury securities). Therefore, this financing procedure is, in effect, an ingenious method of gradual transition from payroll tax financing to significant general revenue financing.
• After 2037 when the trust fund has no more Treasury securities to be redeemed, the government could--with a change in the law--finance the deficit between payroll taxes and benefits by simply continuing to use general revenue or by borrowing, just as it will have been doing since 2016 to pay interest on or redeem Treasury securities. The result would be a seamless shift to still more general revenue financing after 2037.
• Labeling some of the government’s debt as intragovernmental debt (the part borrowed from the trust funds), and thus reducing the acknowledged public debt, may lead some people to believe the government’s fiscal condition is stronger than it really is. Accordingly, the government may be able to offer lower interest rates than otherwise required to induce the general public to buy Treasury securities. However, this will work only so long as the voluntary purchasers of Treasury securities fail to recognize the true government debt. (It may be relevant to note that at the beginning of 2009, 24 percent of the total national debt was owed to the Social Security trust funds; and another 19 percent was owed to other federal trust funds or accounts.)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities (using the ruse of building up a “trust fund” to finance Social Security benefits), the government may be able to pay a lower interest rate on such securities than if it had to sell them on the open market. (An effective subsidization of government operations—and general taxpayers-- by Social Security taxpayers?)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities, the government takes funds from the hands of such taxpayers that are thus not available for alternative uses. Such taxpayers might well have made more productive use of these funds if they’d had a choice.
• For the unsophisticated, all the rhetoric frequently used to describe the “trust funds” tends to bestow on the trust funds an undeserved significance; to obscure the fact that funds purportedly collected to pay Social Security benefits are diverted to other government programs; and to suggest that Social Security is more financially viable, during the period the “trust funds” exist, than it really is.

Acknowledgment of the true nature and significance of the Social Security trust funds will be important as the nation considers alternative ways to make the program viable. It will be of particular significance when considering proposals to increase payroll taxes at a time they are not needed to pay current benefits. Such tax increases might put the system’s income and outgo into “arithmetic balance,” but they would result in a trust fund buildup of questionable value.