Where do Social Security’s asset reserves really go?

In case you haven’t heard, America’s top social program isn’t on the best financial footing. According to the latest report from the Social Security Board of Trustees, Social Security is staring down a $13.9 trillion cash shortfall between 2035 and 2093, with the expectation that its $2.9 trillion in asset reserves will be completely exhausted in 15 years.

On one hand, there is solace in knowing that Social Security isn’t going bankrupt, which is a function of two of the program’s revenue sources being recurring (the payroll tax on earned income and the taxation of benefits). On the other hand, there’s no sugarcoating the worry that would follow if benefit cuts of up to 23% are passed along to then-current and future retired workers, as of 2035. Remember, more than 3 out of 5 current retirees lean on Social Security for at least half of their monthly income.

How did Social Security get into this mess, you ask? That’s a source of contentious debate, and it’s also a land mine of misinformation.

Did Congress really raid Social Security?

One of the more common theories as to why Social Security is facing a huge long-term cash shortfall is that lawmakers in Congress have pilfered cash from the program and never returned it.

This idea goes all the way back to 1968, when then-President Lyndon B. Johnson made a change to how the federal budget would be presented. Prior to 1974, before Congress had an independent budgeting process, the President’s Commission on Budget Concepts had three separate budgets, all of which had differing deficits. To simplify things, Johnson called for Social Security and its trust funds to be included in the annual federal budget.

In 1983, the Reagan administration voted to undo this change and once again remove Social Security from the federal budgeting process. This was done to ensure that changes made to the program are done solely on the merits of the program, and not to balance the federal budget.

Where the idea comes into play that Congress stole from Social Security is, during this 1968 to 1990 period (1990 is when Social Security was completely off-budget again), it’s believed that lawmakers commingled Social Security’s asset reserves (i.e., its aggregate annual net-cash surpluses built up since inception) with its General Fund to pay for wars and other line items. The belief among some folks is that Congress has stolen trillions of dollars from Social Security, and that if this money were simply returned to the program, it wouldn’t be in such dire financial shape.

But the real surprise, upon digging deeper, is that Congress hasn’t stolen a dime from Social Security.

Here’s the truth about Social Security’s Trust Funds and Congress’ “stealing”

There are two important aspects of the incorrect notion that lawmakers stole from Social Security which need to be addressed.

First of all, there’s the period between 1968 and 1990, which is believed to be when Congress pilfered America’s top social program. What needs to be understood here is that, while Social Security’s two trusts (the Old Age and Survivors Insurance Trust and Disability Insurance Trust) and its asset reserves were technically “on-budget,” funding for Social Security and payouts remained entirely separate entities from the federal government’s General Fund. In plainer English, think of money within Social Security’s sphere as being completely untouchable by other money in the federal budget. This means at no point over this 22-year period where Social Security was on-budget did a dime of Social Security income, benefits, or asset reserves get commingled with the federal government’s General Fund.

The second thing to realize here is that Social Security’s asset reserves are required by law to be invested into special-issue bonds and, to a far lesser extent, certificates of indebtedness. I’m going to repeat that, in case you were skimming. Social Security $2.9 trillion in net-cash surpluses that have been built up over time aren’t allowed to sit in a bank vault collecting dust. They’re required to be invested in bonds by law.

Are these bonds sold by the federal government? Yes. But this doesn’t equate to stealing. Rather, the federal government is borrowing capital that would otherwise be losing money to inflation and paying interest into the Social Security program on its borrowing. Yes, you read that correctly. Not only is every cent the federal government has borrowed from Social Security accounted for, but the government is paying interest into Social Security, thereby improving the health of the program. In 2018, $83 billion in interest income was collected by Social Security. If the folks who believe that Congress stole from Social Security got their way, and the federal government repaid every cent it borrowed, Social Security would have lost out on this $83 billion in interest income in 2018.

Want to blame something? Blame congressional inaction

If you yearn to point the blame for Social Security’s imminent cash shortfall on Congress, go right ahead. Just make sure you’re blaming lawmakers for the right issue.

What Congress hasn’t done is steal from Social Security. However, lawmakers have known of the program’s shortcomings since 1985, and have yet to find a middle-ground solution to fix it. If you want to point the finger at lawmakers, do so because bountiful solutions exist, but political hubris appears to be getting in the way.

As you probably know, Democrats and Republicans each have a primary fix for Social Security that works. Democrats wants to see the payroll tax earnings cap raised or eliminated, which would require the well-to-do to pay more into the program. Meanwhile, Republicans favor a gradual increase to the full retirement age, which would lead to a reduction in long-term outlays from Social Security. Although both solutions get the job done, neither has the votes to pass in the Senate.

Perhaps even more baffling, the perceived weakness of each solution is perfectly addressed by their opposition. For instance, the GOP’s plan to reduce outlays takes decades before lower expenditures are realized. This is remedied by the Democrats’ plan to immediately boost tax revenue. Comparatively, the Republicans’ plan helps to tackle lower birth rates, rising longevity, and lower net-immigration rates that the Democrats’ solution fails to account for.

If you want to blame Congress for something, let it be their lack of action to resolve the program’s imminent cash shortfall when so many solutions are on the table.

Author: Sean Williams

Source: Fool: The Surprising Amount of Money Congress Has Stolen From Social Security

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