For all the talk about Social Security solvency, what we discover when we take a closer look at Social Security “trust funds” is that they are, in fact, “trust funds” in name only, which in turn suggests an easy fix . It was not until 1939, five years after the passage of the Social Security Act, that the Old Age and Survivors Insurance Trust Fund was established in the US Treasury Department.
The adoption of the “trust fund” label for what was effectively a treasury bill was intended to capitalize on the public’s understanding of this term that assets are absolutely safe, invested on someone’s behalf and held for future use, and to reassure the public that social security was sound and reliable.
According to Charles Rounds, a professor at Suffolk University Law School, the Social Security system contains nothing remotely like the common law trust. There is no segregation of assets, no equitable property rights, no private right of enforcement. It is merely a system of taxation and appropriation sprinkled with terms of trust to hide its true nature.”
Social Security income goes to the Treasury’s General Fund and is automatically credited to the Trust Fund in the form of Treasury Bonds. The Treasury, through its agent, the Federal Reserve Bank, pays Social Security benefits and administrative expenses out of general revenue and debits the “trust fund” an equivalent value of bonds. Any remaining Social Security revenues fund the government’s operations, leaving an equivalent value of bonds in the “trust fund” as the Social Security surplus to cover any future revenue shortfalls. This is how a treasury account, not a trust fund, works.
After 2035, when the “trust fund” is reduced to zero, Social Security will, by law, be able to pay only 80 percent of planned benefits using existing tax revenues. The trustees of the Social Security Administration (SSA) have been saying something similar for years because they are required by law to report annually on the current and projected financial status of old-age and survivors’ insurance and disability insurance trust funds.
Democrats believe that raising the income ceiling on Social Security taxes will allow “trust funds” to remain solvent for the distant future. Republicans oppose raising Social Security taxes because, in their view, taxing all income, combined with our current cap on Social Security benefits, makes Social Security a very poor investment for higher-income families.
What both political camps forget is that Social Security is not an investment vehicle. Rather, it is a social insurance. That it might not pay out what we put into it misses the point. We buy homeowners insurance, auto insurance, and health insurance, and if we’re lucky enough to never make a claim on our insurance policies, we never claim they were bad investments. Social Security is a form of social security, insurance against the possibility that life will deal us a bad hand if our private pension and savings are not realized due to unforeseen economic circumstances.
Republicans want to raise the retirement age to 70 as a way to make the “trust funds” solvent in the distant future. But raising the retirement age to 70 will completely strip some minority groups of their right to vote. Indigenous peoples (both men and women) have a life expectancy of less than 70, as do black men, who have a life expectancy of 68.
For all the fear we’ve inflicted on ourselves regarding solving Social Security, the solution to the “trust fund” problem is found in the Medicare Part B enabling legislation.
The “trust fund” for Medicare Part B comes from the federal government’s general fund, with about 25 percent coming from Medicare Part B premiums, and while Medicare Part B has no financial problems, the enabling legislation gave fund managers the legal authority to pay full benefits if the trust fund is ever exhausted. While this authority does not extend to the Social Security “trust fund” or Medicare Part A, it does prove that a “trust fund” is not necessary to make Medicare Part B payments.
If we can separate the “trust fund” for Medicare Part B from its spending commitments, Congress could do the same for Social Security. Remember that it is the Fed that finances all federal spending at the request of the Treasury, the SSA simply provides the accounting information necessary to make the proper payments. It’s time to end the “trust fund” fiction and associated restrictions on benefits, and fund Social Security the way we fund, say, the Department of Defense or the Department of Agriculture. We should make it a liability funded from the general treasury.
