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The Social Security Trust Fund is the United States federal government's means of accounting for taxpayers' contributions in excess of those necessary to pay current obligations. The Social Security system is a pay-as-you-go system, meaning that monthly payments to current retirees come directly from current payroll tax payments flowing into the system. Because of the policy choice made in 1983, the tax has been greater than necessary to pay for current obligations. The surplus is accounted for in the Social Security trust fund, currently near $1.2 trillion.
In reality, the Social Security Trust Fund does not hold any marketable assets to secure taxpayers' contributions. The Social Security Trust Fund "invests" surplus tax revenue in non-negotiable United States Treasury bonds and U.S. securities backed "by the full faith and credit of the government." In the case that these securities must be redeemed because future tax receipts are insufficient to meet Social Security obligations, the federal government will have to use other funds, such as those from tax receipts, additional debt, and/or from reducing other government expenditures.
During the administration of William J. Clinton, the administration's Office of Management and Budget in 1999 reported:
These [Trust Fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist 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.
Thus the existence of the Trust Fund does not actually provide any funding to cover the foreseen shortfall. This in itself is a very confusing issue and one that has been exacerbated by a long history of misleading government statements. It might be said that the Trust Fund exists only to justify and document the collection of excess payroll taxes, and nothing more.
It can be said with certainty that the possible future sale of government bonds to support Social Security (at the time of a revenue shortfall) will in no way be aided by the existence of the Social Security Trust Fund.
The administration of George W. Bush has proposed reforming the program, in particular to permit individuals to have some direction over the investment of their tax payments. This is a very controversial proposal, particularily for those who regard Social Security as a cornerstone of modern society and one of the greatest lasting legacies of Franklin Delano Roosevelt, generally regarded as one of the greatest Democratic presidents.
However partisan the arguments, undisputable, however, is the issue an aging population presents. A program originally designed to fund old age insurance and once favored by demographics will soon become stressed by the growing number of retirees who claim benefits for many years, due to extended average lifespans, while the number of working taxpayers supporting the system grows more slowly.
If nothing is changed, it is projected that the Social Security program will require additional funding around the year 2018. The fallacy is that the redemption of trust fund bonds will provide the extra revenue needed to support Social Security outlays at that time -- however this redemption will have to be funded by increased tax receipts, additional debt, or by reducing other government expenditures. It is also often reported that the trust fund will be "exhausted" by the year 2042 -- but again this is mere bookkeeping. Beginning around 2018, the funding issue will have to be addressed and additional revenue provided from that time forward. The existence of the Social Security Trust Fund will at no point actually aid in the funding.
The difficulties regarding privatization proposals is that these depend on reducing the tax revenues supporting the current system, which would then suffer an even greater funding shortage. Privatization is a popular concept, offering a possible improved rate-of-return, but not without increased risk and increased complexity. Indeed privatization has been attempted in a number of foreign countries with mixed success.
The crucial time will arrive when the current payroll tax revenues are insufficient to support the Social Security obligations. At that time the real nature of the Social Security Trust Fund will certainly be more widely discussed as a matter of political controversy.
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