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'Trust fund' nothing but fantasy



Published: Wed, June 15, 2005 @ 12:00 a.m.



By LAWRENCE S. PRATT

KNIGHT RIDDER/TRIBUNE

As Washington debates Social Security reform, remember one thing: The Social Security Trust Fund is more trust than fund.

To most, the words "trust fund" produce images of rich kids like Paris Hilton who, rather than having to work, can live off wealth created by their families.

For the relatively few who are beneficiaries of such arrangements, the words have a more comforting meaning, indicating that somebody cared enough about them to set aside money "in trust" for their benefit.

Either way, our perception of what a trust fund is probably explains the strong attachment we have to the notion of a Social Security Trust Fund. At least in our retirement, somebody -- in this case Uncle Sam -- will be watching out for us. Or so we've been led to believe.

Unfortunately, no Social Security Trust Fund exists.

No pot of money in Washington or elsewhere has been set aside to pay future Social Security benefits.

Instead, the "trust fund" is merely an accounting balance equal to the total amount of Social Security taxes paid since the program was started, plus interest credited to the account, minus total benefits paid during the life of the program. In the federal budget, the interest credited to the trust fund is counted as both an expense and an "offsetting receipt" -- the equivalent of taking money from one pocket and putting it in another.

Social Security was designed to have "pay-as-you-go" financing. And for most of the program's history this has been true: the annual benefits paid out have been roughly equal to the taxes received. When it appeared that benefits would exceed receipts, Congress simply raised the tax rate.

'Stagflation' era

This happened increasingly during the "stagflation" era of the 1970s and early 1980s. Despite increases in the combined employer/employee tax rate, by 1984 the "trust fund ratio" -- that is, the amount reported in the trust fund at the beginning of the year as a percent of the benefits expected to be paid during the year -- decreased to just 14 percent. In 1970, by contrast, the comparable figure was 101 percent.

President Reagan inherited Social Security's problems.

After Congress rejected his proposal to trim benefits, he appointed a commission headed by Alan Greenspan to find a permanent solution.

The Greenspan Commission recommended three steps: Increasing the combined employee/employer tax rate from 10.8 percent in 1982 to 12.4 percent in 1990, where it remains; gradually increasing the amount of income subject to the tax (to the current $90,000) and increasing the full retirement age to 67 by the year 2027.

Because the commissioners overestimated price inflation and underestimated economic growth after 1984, Social Security tax receipts have far exceeded the benefits paid. That's what produced the ledger-book fiction of a trust fund surplus.

A few years from now, after the first of the baby boomers retire, the balance will start shifting again, and benefits will soon exceed receipts. The shortfall will widen in future decades. Those who think Washington can continue to pay benefits at promised levels simply by "cashing in" the reputed trust fund balances don't understand that this money exists only on the books. In reality, the government will have to use general tax revenues or borrow from the public.

For generations, politicians have been cultivating the public's confusion about the Social Security Trust Fund. Indeed, the entire Social Security vocabulary is deceptive, designed to mislead the public into equating Social Security with a retirement savings program, such as an insurance annuity, and Social Security taxes with "contributions" or premiums. But Social Security is not a savings program and the taxes are not contributions.

In truth, Social Security is a welfare program without a means test. Like the rest of us, most politicians have lost sight of the program's original goal. But President Franklin D. Roosevelt was clear when he signed the legislation in 1935. The purpose is to provide "some measure of protection to the average citizen and his family against the loss of a job and a poverty-ridden old age."

X Lawrence S. Pratt is a senior fellow at the American Institute for Economic Research. Distributed by Knight Ridder/Tribune Information Services.




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