Sense and nonsense about Social Security

Now that the basic medical legislation has passed, it sounds like new efforts will be made to fix Social Security.

Thanks to the recent meltdown in stocks, it is unlikely that quack panaceas like “privatization” will have much support this time except among diehard conservative fanatics. But reasonable Social Security reforms will be very difficult politically as long as public understanding of the situation is as muddled as is presently the case.

The principal misunderstanding concerns the Social Security Trust Fund, which currently amounts to about 2.5 trillion dollars. The Fund was built up during the last several dozen years because Social Security taxes collected greatly exceeded payments to Social Security beneficiaries.

The stated purpose for building up the Fund was to provide the money needed when Baby Boomers started retiring in larger numbers and the number of taxpaying workers per retiree begins decreasing. This time is now coming.

Many people, however, believe that “there is no money in the Fund” because the U.S. government has borrowed all the money and spent it. This belief reflects basic misunderstandings of how money and banking work.

It is true that the government has borrowed and spent all the money in the Fund, but in return it has placed government bonds for the 2.5 trillion dollars in the Fund, and it pays interest on these bonds. In 2009 it paid the Fund approximately $120 billion dollars in interest, an average rate of 4.86%. The government owes the money it has borrowed from the Fund just as much as it owes money to private individuals and banks that have bought government bonds.

Recent scare articles have claimed that the Trust Fund is already starting to decrease because Social Security payments this year will exceed by $29 billion the amount brought in by Social Security taxes. This is untrue, because the $120 billion in interest coming in will more than take care of the $29 billion shortfall.

However soon enough the time will come when the Fund really begins to be reduced. But why have the Fund at all if this was not going to happen? This will be politically awkward, though, because the government will have to stop financing current operations with the regressive Social Security tax and rely more on the progressive income tax.

Or it can sell more bonds privately to make up the difference, which will not increase the total national debt but simply change its structure----less owed to the Trust Fund, equal amount more owed to other bondholders.

It is true that in several dozen years the Trust Fund will be exhausted, since people are living longer and hence are retired for more years than was assumed when the system was designed. But relatively small increases in the Social Security tax can take care of this problem, and the sooner it is done the smaller those increases will need to be.

[To access some interesting Q & A on the Social Security Trust Fund, click here.]

[This article has run in the Adrian Daily Telegram in Michigan]