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Don’t Trust the Social Security Trust Fund

Whenever we hear talk of the solvency of the “Social Security trust fund,” we’re not sure if we should laugh or cry.  Consider today’s New York Times headline: “Recession Drains Social Security and Medicare.”

The Times writes, “the Medicare fund that pays hospital bills for older Americans is expected to run out of money in 2017, two years sooner than projected last year.  The Social Security trust fund will be exhausted in 2037, four years earlier than predicted…”

Run out of money?  That implies that Social Security and Medicare have money.  Alas, they do not. 

Currently, the two programs take in more money through taxes than they pay out in benefits.  But those surpluses do not go into a giant national piggy bank.  No, a more apt metaphor would be that of a pig trough, with Congress as the pigs.  The surpluses are “borrowed” by the government and replaced with Treasury bonds.   This means that the government is borrowing from itself.  More accurately, it is borrowing from its future retirees.

This means that the entire concept of the trust fund is an accounting fiction at best and outright fraud at worst.   Recent estimates had the Social Security surpluses turning to deficits by around 2014, and perhaps sooner due to the effects of this recession.  This means that in less than 5 years, the Social Security Administration will be “calling in” its government IOUs.  Unable borrow from itself (and now actually having to pay itself back), the government will have to turn increasingly to the public markets…and to higher taxes.   And with a flood of new public debt, do you really think interest rates on government bonds can remain at their current low levels?  More debt at higher rates will be an unmitigated disaster.

Bottom line:  if you think the Federal deficits are bad now, just wait until the illusion of the trust fund disappears. It’s going to get a LOT worse.