RAO Davao City

United States Military Retiree Activities Office Davao City, Philippines

Social Security Trust Fund 5 June 2008

Posted by Service Officer on June 5th, 2008

There actually is a Social Security Trust Fund — of sorts. It lays nestled in the bottom drawer of an unremarkable filing cabinet in a government office building in West Virginia. It’s kept in a pair of loose-leaf notebooks holding plastic page covers, and each page resents a bond worth billions, according to a 2005 story from The Associated Press (AP). Today, the total “assets” in the Social Security Trust Fund are worth more than $2.2 trillion. The paper is “symbolic,” a spokesman for the U.S. Bureau of Public Debt says. According to AP, in 1994 Congress anticipated the current debate about Social Security’s solvency and whether the Trust Funds held anything more than I.O.U.s. Congress passed legislation requiring the Treasury to create a physical document “rather than an accounting entry.” Andy Jacobs, the former Indiana Congressman responsible for the law, said he wanted to rebut the “disingenuous assertions” that there was no trust fund, even though there was, in fact, no vault stuffed with cash to pay benefits. In 2008 it was projected that the Social Security Trust Fund cash surplus excluding interest will be $79 billion reflecting a growing downward trend as baby boomers enter the programs. This does not take into consideration cost associated with Congress’s recent attempts to add illegal immigrants to the program.

 

According to the Congressional Budget Office (CBO) neither the Medicare Trust Fund nor the Social Security Retirement and Disability Trust Funds operate like a “Trust Fund” as the average person would understand it. Instead of setting the money aside and protecting it in a special account, both the Medicare and Social Security Trust Funds exist only on paper as an accounting mechanism. Government accounting is hiding serious financing problems, making the trust funds appear to have more cash coming in than they actually do. The majority of Medicare Hospital Insurance (Part A) and Social Security costs are presently financed by the payroll taxes that workers pay and taxes that seniors pay on a portion of their Social Security benefits. When one of the trust funds receives more from these sources than it needs to pay benefits, the U.S. Treasury issues a government bond to the Trust fund and borrows the cash from the surplus to pay for other government expenses. The bonds earn interest, but are very different from the bonds sold to the public that can be redeemed for cash. The bonds placed in the trust funds are non-marketable, representing only an “I.O.U.” from the Treasury.

A big problem is that in recent years the so-called “interest” earned by the bonds in the government trust funds has become a growing source of funding for both programs, at least on the government’s books. But the interest funding, like the trust funds, exists only on paper and does not represent any real cash resources to pay benefits. GAO says for the trust funds to be paid, the Treasury will need to provide cash from general revenues in exchange for those trust fund securities and interest I.O.U. bonds. Such use of general revenue for Social Security would represent a major policy shift in how the government pays for expenditures. In the past Congress for the most part has rejected general revenue financing for Social Security. The GAO says payments to the trust funds in the future, should only come through “increased revenue, increased borrowing, and reduced spending (benefit cuts) or some combination.” The current state of denial is leading to a day of reckoning that could have serious long-term financial repercussions for both today’s and tomorrow’s retirees.

The Social Security Trustees further estimate that the program costs will begin to exceed cash revenues in 2017, or about nine years from now. According to the former U.S. Comptroller General, David Walker, the new president and Congress will have about 5 years to make changes, before we run out of cash revenues to pay full Social Security benefits. The Medicare Part A Hospital Insurance Trust Fund is in trouble today. The Social Security and Medicare Lock-Box Act” (H.R. 4338) that was recently introduced in the House by Representative Timothy Walberg (MI) and (S. 302) in the Senate by Senator David Vitter (LA) would establish new procedures to safeguard extra Social Security and Medicare taxes. Congress would be prevented from dipping into the Trust Fund surpluses to pay for other wasteful or pet projects. Instead the extra Social Security taxes would be “locked away” to pay future Social Security benefits [Source: TSCL, The Budget And Economic Outlook, CBO, Jan 08,. Social Security & Medicare Trustees Reports 23 Apr 07, and Social Security Reform GAO-07-213 Mar 07 ++]

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