Are the Social Security trust funds a sham?

Illustration by Slug Signorino

Cecil replies:

Is it a sham? This is such a negative way of looking at things, Daniel. Better we should ask ourselves: what is reality?

Social Security, in theory, is a break-even proposition. Payments to retirees are supposed to be balanced by taxes collected from the poor stiffs who are still working (and their employers). Long ago some genius realized that once baby boomers got to retirement age, there was going to be a lot more cash going out than coming in. So Social Security taxes were hiked to build a surplus that we could draw down later. This surplus, in theory (again), goes into a trust fund.

So far so good. The problem is that the trust fund is not some gigantic sack of cash somewhere, or even a bank account. It’s just a bunch of entries in the government’s account books. All Social Security assets are automatically invested in special U.S. bonds, the proceeds from which pay off current government debts. In short, skeptics says, the trust funds are a scam: we’re using the money we’re supposed to be saving for tomorrow to help us scrape through today.

At this point the debate gets pretty woolly. Some in the don’t-worry-be-happy school excuse the government’s semi-fishy invest-in-ourselves approach by saying governments can’t save the way people can. Nonsense. There is nothing to prevent the government from taking all the Social Security taxes it collects, burying the dough in a big can in the back yard, and disbursing the worm-eaten remains thirty years hence. Or more plausibly, investing in Japanese savings bonds or GM notes or any other investment vehicle.

Would those investments be more “real” than investing in U.S. bonds? Depends how you mean. All unsecured financial obligations are built on air. If you walk into the Japanese savings bond agency or the GM treasurer’s office and ask to see the assets underlying their financial instruments, what they will have to show you? Nothing; the money went to pay off current debts. Presumably, however, the venture as a whole prospers, and it is in the belief that it will continue to do so that one reposes one’s hope for future repayment.

The question then becomes: who’s the best bet to pay off 30 years from now on an obligation issued today? The U.S. government, of course. Naturally there is the possibility that we will run up such staggering deficits that interest payments will consume the entire federal budget or cause the government to default, in which case not only do pensioners get stiffed, so does everyone else. But that problem is independent of concerns about Social Security per se.

Not so fast, say the skeptics. When you strip away the fancy bookkeeping, the fact remains that the government is using the Social Security surplus not to build productive assets but to buy paperclips, million-dollar outhouses, and all manner of other foolishness. When the time comes to fund the baby boomers’ pensions, Uncle Sam will have to raise the money like it always does, through taxes or borrowing, regardless of whether there’s a paper surplus in some trust fund. Senator Daniel Moynihan thinks we should quit kidding and operate Social Security on a “pay as you go” basis — just collect enough this year in taxes to pay this year’s pensions.

But Moynihan doesn’t get it either. The Social Security surplus has the practical effect of reducing the real federal deficit, no small achievement. And while a pay-as-you-go policy would mean lower payroll taxes now, taxes would rise steeply when the baby boomers began shoving off for Sun City. If I were a Generation Xer faced with the prospect of paying crushing taxes to finance the golden years of my obnoxious elders, I think I’d just as soon leave things as they were.

Cecil Adams

Send questions to Cecil via cecil@straightdope.com.