The Corner

The Trust Fund Is an Asset to Social Security, But So What?

Last week in the Washington Post, Charles Krauthammer took on OMB director Jack Lew and his claim that Social Security won’t add to the deficit, since it’s in good shape for years thanks to the assets held in the trust funds. Krauthammer argues that the trust fund is an accounting fiction:

The OMB explained that these trust fund “balances” are nothing more than a “bookkeeping” device. “They do not consist of real economic assets that can be drawn down in the future to fund benefits.” In other words, the Social Security trust fund contains — nothing.

The problem with the argument that the assets aren’t real is that Krauthhammer allows the other side to respond that the assets are real without having to argue about the rest of his challenge. And in fact, on the OMB’s blog, Lew responded that these assets are real and backed by the full faith of the federal government . . . and then ignored the full criticism of Krauthammer’s piece.

I have said it before and I will say it again: Unfortunately, we really can’t say that the trust fund is “worthless” or not made up of real assets. That’s because when the trust fund runs out of cash (like it has before and will again very soon), Social Security will be able to take the IOUs and cash them. It has a right to that money.

As long as Congress doesn’t change the law, it is only when the IOUs are gone that the program will have to slash benefits to the level where tax collection meets benefit paid out (roughly a 22 percent cut). That, in theory, won’t happen for a while. This also means that even if the government shut down, Social Security checks will keep going out to seniors.

Now, the proper argument against Lew and people like him is a big “So what?” The fact that the assets are real isn’t changing anything for taxpayers, and it’s certainly making our deficit and our debt bigger. That’s because the only way the federal government will be able to repay the program is by borrowing more money or taxing people once again. Jason Fichtner and I explained this point in our paper “Can We Trust the Social Security Trust Funds?”:

After 2014, tax revenue alone will be insufficient to cover Social Security’s cost. The government will have to borrow money from the private sector to continue paying interest on the bonds held in the trust funds. Then, starting in 2025, Social Security will begin to redeem the trust fund bonds, at which time the government will have to borrow even more from the private markets. Though the borrowing need will increase gradually, the need to borrow an additional $2.5 trillion from the private market will be harder and harder over time.

That’s assuming that Congress doesn’t change the law, or decide to tax people instead of borrowing more from the public to repay the program. Either way it’s bad. Another way to put it is that starting in 2014 at the latest, either taxpayers will see their tax bills go up to pay for senior benefits or the deficit and our debt will increase.

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