- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

Can You Call it 'Social Security' if it's Built on Nothing but Monopoly Money?

Posted By Kathryn Nix On August 11, 2010 @ 1:00 pm In Economics | Comments Disabled

[1]

Social Security faces the serious danger of failing to live up to its name due to its unfunded obligations. Last week, the Social Security and Medicare trustees issued their report on the fiscal outlook for the program. We reported that [2]:

Social Security has a $7.9 trillion shortfall (up $0.1 trillion from last year), which means the program would require $7.9 trillion in cash—today!—to afford its promises. Alternatively, closing that gap would require payroll taxes to rise immediately and permanently from 12.4 percent of earnings to 14.24 percent. For a worker earning $50,000, that’s a $920 tax increase.

This year, Social Security ran its first deficits since 1983. Though the program will rebound back into the black for the next few years (assuming the Administration’s projections for economic recovery are correct), the program will dive into the red permanently in 2015. By 2037, the trust fund will run dry. That means that while there is enough money to pay current retirees full benefits, younger workers face an uncertain future.

But Heritage expert David John explains that [3] by 2015, “Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special issue bonds in the trust fund, the money to repay those bonds will come from other tax collections or borrowing.”

Writing for The Washington Post [4], Allan Sloan refers to the trust fund as “one of the world’s biggest piles of funny money.” Writes Sloan:

Let’s say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenue is below its expenses, Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow money to pay me, regardless of how big the trust fund is.

Instead of holding onto seniors’ savings to pay for later benefits, the trust fund consists of little more than IOUs. Last year, the trustees included [4] this in their report:

Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

Sloan puts this in layman’s terms: “The trust fund is of no economic value.”

There’s no time to kill to solve Social Security’s impending shortfall. For younger workers, the program must be fixed now in order to put the “security” back in Social Security.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/08/11/can-you-call-it-social-security-if-its-built-on-nothing-but-monopoly-money/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/Monopoly.jpg

[2] We reported that: http://www.foundry.org/2010/08/05/trustees-report-social-security-and-medicare-are-unsustainable

[3] But Heritage expert David John explains that: http://www.heritage.org/Research/Reports/2010/08/2010-Social-Security-Trustees-Report-Continues-to-Show-the-Urgency-of-Reform

[4] Writing for The Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2010/08/09/AR2010080905559.html?wpisrc=nl_wonk

Copyright © 2011 The Heritage Foundation. All rights reserved.