The Real Social Security Problem

Conventional wisdom says that the Social Security problem starts happening in either 2017 when the "trust fund" starts running deficits or in 2042 when it is technically bankrupt. As Rossputin points out, however, conventional wisdom is wrong. The real problem begins in just 2008, when the Social Security surplus begins to decline. Even though it might still run a surplus from 2008 through 2017, the value of the "trust fund" is not really increasing.

The Social Security surplus is treated as general revenue and spent by the Congress, with an IOU for the surplus amount entered into the Trust Fund. The Trust Fund is not invested in anything. It is full of arguably worthless IOUs. Since the Trust Fund does not hold real assets, when repaying the IOUs to fund retirees’ benefits the government must act in precisely the same way it would if there were no Trust Fund: by increasing borrowing or raising taxes.

The Social Security surplus in fiscal 2004 was $164 billion. The government used it to offset part of the total spending deficit to reach a net reported deficit of $412 billion. In other words, the reported deficit would have been about $576 billion without spending the surplus. The surplus camouflages a budget process which is more out of control than even most critics realize.