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Stop me if you&s;ve heard this one before:&a;nbsp; &q;Social Security would be doing &l;em&g;just fine&l;/em&g; if the thieving politicians hadn&s;t stolen all the money from the Trust Fund that we paid in to earn our benefit checks.&q;
Or maybe this:&a;nbsp; &q;The Trust Fund is just an accounting gimmick, nothing more, and Social Security is broke.&q;
&l;strong&g;The Trust Fund is real.&l;/strong&g;
Well, sort of.
The Social Security Administration does indeed invest its surpluses, that is, the revenues from FICA taxes, taxes on Social Security benefits, and interest credited to the fund, less benefits paid out, into government bonds.&a;nbsp; And if you or I, or, say, a pension fund, happened to exist in government bonds, we wouldn&s;t consider that investment to be &q;fake,&q; or the money to have been &q;stolen&q; from us.&a;nbsp; It&s;s real money, and we&s;d have a real right to that money.&a;nbsp; In the same fashion, the Trust Fund will redeem its bonds when it begins to run deficits.
But that&s;s not the end of the story.
Consider that the trust fund is not a matter of &q;us&q; saving for &q;our retirement.&q;&a;nbsp; There was, to be sure, a real element of building up surpluses during the early years of the program, though not to the degree that would truly make it an advance-funded program, rather than only partially-so.&a;nbsp; In any event,&a;nbsp;the Trust Fund&a;nbsp;was &l;a href=&q;https://www.ssa.gov/history/tftable.html&q; target=&q;_blank&q;&g;virtually depleted in 1983&l;/a&g;, and the system would have been unable to pay full benefits but for FICA contribution increases beginning in 1977 and accelerated in a &l;a href=&q;https://en.wikipedia.org/wiki/Social_Security_Trust_Fund&q; target=&q;_blank&q;&g;1983 bipartisan reform bill&l;/a&g;, which also raised the retirement age to 67 and otherwise stabilized the system&s;s finances.&a;nbsp; &a;nbsp;The funds which have built up since then are the moderate excess of revenues over payouts following the tax hike, not a true pre-funding as you&s;d see, for example, in a private-sector pension plan.&a;nbsp; Its function is really just, in principle, to smooth out spending over time.
The trouble is, though, that one can outline what the Trust Fund &q;is&q; in terms of accounting and financing, but people tend to look at this in a moral sense.&a;nbsp; The Trust Fund is the embodiment of American workers&s; conviction that, having paid taxes during their working lifetime, they have a moral right to their Social Security benefits, or, more generally, to a retirement free of financial worry.&a;nbsp; And this is not the case.
Consider this alternative:&a;nbsp; what if, in the 1983 Social Security reform, rather than building up surpluses, Congress had decided that any surpluses would be&a;nbsp;become general tax revenues and any deficits would be paid directly through tax revenue?&a;nbsp; Functionally, there would have been little difference, other than bookkeeping, between building up a fund, nominally, that is immediately funneled into government spending, and doing so directly, and between bonds being redeemed, in the future, requiring&a;nbsp;new borrowing to fund the redemptions (or running a budgetary surplus — in some alternate universe, anyway), or just borrowing directly.
Alternately, what if&a;nbsp;Congress had simply decided that FICA taxes would vary each year, determined by the projected Social Security payouts each year?&a;nbsp; We would not be discussing the depletion of a fund, but instead, perhaps, would be complaining at the prospect of our FICA taxes growing ever higher.
What would the economy of the United States have looked like in the past several decades had&a;nbsp;there not been FICA surpluses used to buy (or &q;buy&q; with scare-quotes if you like) government bonds?&a;nbsp; Consider that the Social Security Trust Fund (in combination with the Disability Trust Fund), &l;a href=&q;https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124&q; target=&q;_blank&q;&g;at the end of 2016&l;/a&g;, &q;owned&q; 13% of the total National Debt (the link includes a detailed breakdown of what entities own what portion of U.S. debt).&a;nbsp; Did the availability of the Trust Fund as a debt-purchaser, help hold down interest rates, keep government borrowing affordable, and keep the deficit lower than it otherwise would have been?&a;nbsp; Or did this simply enable Congress to defer dealing with deficits when they might otherwise have been motivated to make hard decisions?
Or consider our Neighbors to the North.&a;nbsp; Canada, after all, has a Trust Fund, but the nature of the fund is radically different:&a;nbsp; it is a real investment fund, holding a wide variety of assets,&a;nbsp;&l;span&g;&a;nbsp;including private equity and real estate holdings (they fully or partially own Petco, Univision, and Neiman Marcus, for instance). &a;nbsp;Their long-term planned asset mix is 55% equities, 20% fixed income securities (largely government bonds) and 25% real estate.&a;nbsp;&a;nbsp;(Readers can learn more at the &l;a href=&q;http://www.cppib.com/en/&q; target=&q;_blank&q;&g;Canada Pension Plan Investment Board website&l;/a&g;.)&a;nbsp; In addition to providing a higher rate of return over time than the interest credits of the U.S. Social Security Trust Fund, the very nature of the Canadian fund is wholly independent of the government.&a;nbsp; What&s;s more, although the Canada Pension Plan has historically been more-or-less pay-as-you-go just as in the U.S., they have actually just recently implemented a benefit increase, &l;em&g;which is being phased in slowly enough to be wholly pre-funded by a payroll tax increase&l;/em&g;.&l;/span&g;
&l;strong&g;&l;!–nextpage–&g;The surplus that generated the Trust Fund were a missed opportunity.&l;/strong&g;
To be fair, there have been worries about the prospect of the government of the United States managing a sovereign wealth-type fund&a;nbsp;of such a massive size.&a;nbsp; Could an investment board truly make decisions impartially?&a;nbsp; Would the government be too heavy-handed, attempt to micromanage the companies in which it invested — for example, by monitoring executives&s; salaries for &q;fairness&q; or requiring a sufficient number of female or ethnic-minority board members?&a;nbsp; Maybe.&a;nbsp; But there would have been an alternative — the time would have definitely been ripe for an alternate Social Security system, in which the pre-funded component from those surpluses could have been in the form of individual accounts or pooled but nongovernmental funds (hmmm . . . &l;a href=&q;https://www.forbes.com/sites/ebauer/2018/03/11/take-cover-its-another-retirement-reform-proposal/#3085a6e94244&q;&g;where have I heard that before&l;/a&g;?).&a;nbsp; Such a system would have allowed for the buildup of real advance funding for retirement, rather than leaving us worried about the future.
&l;strong&g;But the &q;Real-ness&q; of Trust Fund is a bit academic.&l;/strong&g;
The bottom line is that whether the Trust Fund is &q;real&q; or just a fiction on paper, in the end, doesn&s;t matter.&a;nbsp; Whether the Trust Fund uses its assets to pay retirees, and the federal government has to borrow, to pay back that debt, or whether the government has to pay those benefits directly, it&s;s still the case that money has to be found — and the amount of money which will have to be found, for retirement benefits, Medicare, and other expenses, is forecast to grow dramatically.&a;nbsp; A &l;a href=&q;https://www.brookings.edu/research/the-long-term-impact-of-aging-on-the-federal-budget/&q; target=&q;_blank&q;&g;January paper from the Brookings Institute&l;/a&g;&a;nbsp;provides some very sobering numbers:&a;nbsp; due to the aging of the American population, federal spending on the elderly is forecast to grow from the current (2017) level of 20.5% of GDP, up to 29.4% in 2046 — and that&s;s not 29.4% of government spending, but 29.4% of our &l;strong&g;total economic output&l;/strong&g;.&a;nbsp; And this isn&a;rsquo;t just a temporary &a;ldquo;hump&a;rdquo; due to the Baby Boom.&a;nbsp; The author states:
&l;/p&g;&l;blockquote&g;Although we often talk about aging as arising from the retirement of the baby boomers, that is somewhat misleading. The retirement of the baby boomers represents the beginning of a permanent transition to an older population, reflecting the fall in the fertility rate that occurred after the baby boom and continued increases in life expectancy. Because aging is not a temporary phenomenon, we can&a;rsquo;t simply smooth through it by borrowing. Instead, it is clear that population aging will eventually require significant adjustments in fiscal policy&a;mdash;either cuts in spending, increases in taxes, or, most likely, some combination of the two.&l;/blockquote&g;
What should the policy response be to future impact of an aging population?&a;nbsp; The paper acknowledges that such forecasting is uncertain,&a;nbsp;and offers various options but does not promise any easy solution — because there is no easy solution on offer.
&l;em&g;What do you think?&a;nbsp; Share your thoughts at &l;a href=&q;https://janetheactuary.com/2018/05/05/forbes-post-the-social-security-trust-fund-is-real-but-so-what/&q; target=&q;_blank&q;&g;janetheactuary.com&l;/a&g;!&l;/em&g;