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Tuesday, November 08, 2005

Unraveling Social Security

The essentials of Social Security financing are much less mysterious than most people realize. The government levies a tax on the wages of active employees to provide the money for paying pensions to retired and disabled workers and their survivors. At present, this tax produces more revenue than is paid out in benefits. The government spends this surplus for other purposes. With the Treasury operating at a deficit, excess Social Security taxes are used to pay the government's bills.
The Treasury accounts for Social Security taxes used for non-Social Security purposes by issuing IOU's to the Social Security trust fund. As many observers have pointed out, the trust fund is insubstantial, since its only assets are claims against the grantor of the trust. Whether the trust is real or illusory, it is of little practical importance. Benefits under the present system are unrelated to any accumulation of assets, and, as we shall see, their economic cost unavoidably falls upon the current generation of active workers, no matter what intermediary mechanisms are used to disguise that reality.
Due to the age distribution of the American work force, the ratio of active workers to Social Security recipients is declining. Consequently, benefits are catching up with taxes and will overtake them. From that point forward (until some distant day when demographic waves generate a surplus again), the government will use other tax revenues to supplement Social Security taxes and keep benefit payments flowing. To account for this Social Security use of non-Social Security funds, it will cancel IOU's in the trust fund.
Sometime in the early 2030's, there will be no IOU's left. Social Security will then be bankrupt and a great crisis will follow. The truth is slightly different. Instead of subsidizing Social Security with general revenues, the government will then have to - subsidize Social Security with general revenues. The deceptive nature of the trust fund works both ways: Just as its assets do no good, its lack of assets does no harm.

Comments:
You suggest that "its lack of assets does no harm." Perhaps. Yet, as I discussed in class, one of the problems I see in our current government program is the dishonesty. The Trust Fund is an integral part of the dishonesty. So, I suggest there is harm done by the Trust Fund fiction. Without the Trust Fund fiction, without the lies about the very nature of government's program, I think it would have been much more difficult to approve the program originally, and it would have been much or difficult to sustain the program for so long, and without the lies today it would be far more easy to reform the program to have the character of an insurance program.
 
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