What is in the Social Security trust fund? Nothing. Nothing that can be bought or sold, that is. Technically, the fund holds “bonds.” But these are not bonds like the bonds that you and I can purchase in the marketplace. They are literally IOUs the government writes to itself. For Social Security, they are created on a typewriter. For Medicare, they are created electronically.
In both cases, there is no difference between the government writing an IOU to itself and calling it an asset than Bernie Madoff writing IOUs to himself and calling those pieces of paper “assets.”
Like most government-sponsored retirement programs in the world today, our Social Security system is pay-as-you-go. All payroll tax revenues are spent — the very minute, the very hour, the very day they are received by the U.S. Treasury. Most of these revenues are spent on benefits for current retirees. Any additional amount is spent in other ways. But there is no funding of future benefits. No money is being stashed away in bank vaults. No investments are made in real assets.
Most pay-as-you-go systems do not have trust funds, since there are no investments for the trust funds to make. In the U.S., we have trust funds — but they serve an accounting function, not a financial function. For example, the trust funds do not collect taxes. Nor do they disburse benefits. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury.
Technically, the trust fund bonds represent the cumulative surplus (payroll tax collections minus benefit payments). But these bonds are only important for accounting purposes. They are like bookkeeping entries. The annual reports of the Social Security trustees list the yields and maturity dates of these bonds. But the special-issue bonds are not the same as the bonds held by the public. They are not part of the official outstanding debt of the U.S. government. They cannot be sold on Wall Street or to any foreign investors. Nor can they be used to pay benefits.
Even more important, every “asset” of the trust fund is a liability of the US Treasury. Summing over both agencies of government, assets minus liabilities always equal zero.
The technical issuer of the bonds (the U.S. Treasury) and the holder of the bonds (the Social Security trust fund) are both agencies of the U.S. government. Moreover every asset of the trust fund is a liability of the Treasury. Summing over both government agencies, the balance is zero. [See the diagram.]
For Social Security, the trust fund’s special issue bonds are paper certificates held in government filing cabinets in Parkersburg, W.Va. If a fire were to burn down the building tomorrow, or if thieves were to take the filing cabinets away, there would be no harmful consequences for retirees. Similarly, if the trust funds themselves were simply abolished, real economic activity would be unaffected. The government would not be relieved of any of its existing obligations or commitments. Alternatively — as the late economist Robert Eisner suggested — with the stroke of a pen, we could double or even triple the number of IOUs the trust fund holds. But creating more pieces of paper will not help the government pay any more bills.
When Social Security runs a cash flow deficit, as it is doing today, it is paying out more in benefits than it is in collecting taxes. In the face of this deficit, the government only has three options: Raise taxes, cut benefits or borrow. These are the same choices the government would face if there were no trust fund at all.