In reality, SSA and Congress had no choice but to use the money this way. Ideally, in a retirement system, contributions are used to buy assets that are then available to pay future benefits. This government-run pension system, however, couldn't buy actual assets in private companies, but could only collect IOUs from itself. Essentially this was the government loaning money from one pocket to the other. It never made sense outside of the accounting office and had no real effect other than to give Social Security a first claim on future taxpayer dollars.
The real limitations of the Trust Fund became clear this year when Social Security's balance sheet turned negative. Instead of running a surplus, Social Security actuaries predict that payroll tax revenue won't be enough to cover benefits in 2010. Social Security will have to use its famed Trust Fund assets to cover the shortfall. Taxpayers are now learning once and for all that those assets are of no comfort: Congress will have a new line item in its budget, and will have to either issue new debt, raise taxes, or cut other spending to pay SSA back. That's exactly what would have happened absent the Trust Fund, unless politicians wanted to do the unthinkable and cut current Social Security benefits.
Social Security's finances are only going to get worse, given the pending retirement of millions of baby boomers. But this time, there’s no disguising the problem.
When Congress begins debating Social Security reform, Americans will know that what's being discussed is a mix of benefit cuts for future retirees and higher taxes for current workers. Undoubtedly, Congress will try to make the math tricky. Tax increases will tilt toward those with high incomes, so politicians can claim to protect average Americans, ignoring how the effects of those higher taxes will trickle through the economy. Benefit cuts will also be progressive. Yet the vectors will be obvious: the American people will be paying more and getting less.
The silver lining is that perhaps Americans will take a fresh look at the Social Security system. Does it really make sense for the federal government to run what is essentially the world's largest Ponzi scheme, in which the ability to pay benefits rests entirely on the ability to raise enough revenue from current workers? Increasingly risk-averse Americans have come to appreciate sound financing: They know it's best to have money in the bank to cover future liabilities. Instead of just tinkering around the edges of Social Security, policymakers should act more boldly. True, sustainable Social Security reform would embrace the principles of sound financing and private property, by creating a system of personal retirement accounts.