Ask The Advisor: November 2010

Ask The Advisor: November 2010

Q:  Since Social Security is a trust fund, is it legal for the government to use money from Social Security for every-day operations?  When the money is taken, does the government replace it with treasury bonds?

A:  Not only is it legal for the government to use Social Security taxes for every-day operations, it’s the law!  Calling them “Trust Funds” is a misnomer, because the government does not use the sort of accounting rules for Social Security and Medicare Trust Fund, that it requires for private trust funds.  And while the government by law is required to use excess Social Security taxes, unfortunately for us, there’s no law that guarantees the funding for the repayment of borrowed revenues when Social Security runs low on cash, as it is doing today.  In fact the Supreme Court has ruled in the past that Congress at any time can make changes that could cut benefits and raise taxes.

Revenues from payroll taxes and taxes on Social Security benefits are the two primary sources of program funding.  Those taxes are credited to two Social Security Trust Funds, one that pays retirement and survivors benefits, the other for disability.  When the cash generated by taxes exceeds the funds that are needed to pay benefits, then the U.S. Treasury uses the cash and credits the program with special Treasury bonds that earn “interest”.

Those bonds and the interest they earn don’t represent real cash, but I.O.U’s from the Treasury to the Trust Funds.  When the Trust Funds cash receipts are less than outlays, as they are today, the Treasury securities are redeemed for cash.  When that situation occurs, the Treasury must either obtain that cash from taxes, more borrowing or cutting spending, including spending on benefits.

The Social Security Disability Trust Fund is facing the greatest risk of insolvency today.  According to the Social Security Trustees, the disability program will be completely exhausted as early as 2015.  According to the Congressional Research Service, when Trust Fund tax income and accumulated assets (represented by the IOUs) are not sufficient to pay benefits, the law prohibits full Social Security benefits from being paid on time.  Experts say that Congress must resolve the solvency issues or full benefit checks would either be paid on a delayed schedule or benefits would be automatically cut to balance revenues received to enable payment on time.

Sources:  2010 Social Security Trustees Report, August 5, 2010.  “Social Security:  What Would Happen If The Trust Funds Ran Out?” Christine Scott, Congressional Research Service, August 20, 2009, RL333514.