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Some Thoughts About Social Security Trust Fund Balances
Paul Chadwick
March 11, 2009
Every year the President's budget for the next fiscal year includes a set of Historical Tables that contain a wealth of information regarding current and past federal revenues and expenses. The finances of Social Security and Medicare are summarized in Section 13 of the historical tables for the FY 2009 budget. (As of this writing – March 11, 2009 – the Obama administration has yet to publish the revised Historical Tables for the FY 2010 budget.) The actual figures for FY 2007 in the FY 2009 historical tables show that the 12.4% OASDI component of the payroll tax, together with interest from the US Treasury, generated income for the Social Security Trust Funds of approximately $773 billion, while outlays for the year for benefits were only $586 billion. Thus, there was an excess of $187 billion for FY 2007 that increased the balance in the Trust Funds. That $187 billion excess represents approximately 24% of the amount of payroll taxes collected. With the current combined employee/employer rate of 12.4% on the first $106,800 of each wage earner's earned income, that excess represents about a flat 3% tax on wages up to $106,800!
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It has been suggested by some that Social Security funds could be invested in the bond market as a more trustworthy guarantee of future gains than perhaps stocks or other private-sector investments.
In fact, Social Security funds are already in the bond market, albeit internal government obligations that cannot be sold to the public. Every extra dollar from payroll taxes that is not used to pay current benefits is required by law to be used to buy these bonds from the US Treasury, and the Treasury deposits interest in the Trust Fund in the form of additional bonds. The fact that these bonds cannot be publicly traded makes little difference because, if and when outlays for benefits begin to exceed its income, the Trust Fund will go to the US Treasury to redeem some of the bonds for cash, and the Treasury will obtain the necessary cash by either selling bonds to the public or increasing taxes.
Now, consider for a moment: suppose the US Treasury was simply removed from these transactions with the Trust Fund. In that case every extra dollar in the Trust Fund could be used to buy bonds from the public. Interest from the bonds would deposit in the Trust Fund and be used to buy more bonds from the public. If and when outlays for benefits exceed its income, the Trust Fund would have a choice: sell some of its bonds back to the public, or get Congress to increase taxes to cover the shortfall. What would be the difference? In both cases the ability of the Trust Fund to meet future obligations depends either on the ability to sell government bonds to the public or to collect taxes. From the standpoint of meeting future Social Security obligations: same deal, either way.
There would, however, be one effect on government finance that might be significant: that is, the excess money collected from payroll taxes each year would be going back to the public rather than to the US Treasury. It would not be a hidden source of cash to finance federal government operations. Consequently, the government might exercise a little more fiscal responsibility in view of the fact that if it insisted on spending at the same level it would have to either increase taxes or increase its external debt.
A final consideration, however: what if the payroll tax were simply adjusted now so that income does not exceed outlays for benefits in any given year and no balance accumulates in the Trust Fund? This would be like giving the extra money back to the public, same as buying bonds from the public, except: 50% would go to workers and 50% would go to their employers instead of 100% going to investors. Then, if and when expenses for benefits exceed income from payroll taxes, the government would have two choices: either increase taxes or borrow by selling bonds to the public. Does this sound familiar?
So, why do we need a balance in the Social Security Trust Fund? The answer is: we don't. And what does current practice – building a balance in the Social Security Trust Fund – accomplish? The answer: it requires collection of an extra tax of approximately 3% of wage-earners income, currently a regressive tax because it only applies up to $106,800. If, as currently required, the Trust Fund gives that money to the US Treasury, it is essentially an extra income tax used to finance federal operations. If the Trust Fund were permitted to buy bonds from the public instead, it would be a forced transfer of 3% of wages from workers and employers to bond investors. Choose your poison.
Or perhaps the government could continue to collect the extra 3%, but give it back to the wage earner to save or invest it as they wish. But shouldn't that be a matter of individual choice?
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