The Trust-Fund Sham

Volume VI, Number 4 April 3, 2000

For the third year in a row, Social Security's projected bankruptcy date has receded-from 2029 in the Trustees' 1997 annual report to 2037 in the 2000 report released last week. Many are taking this to mean that the long-term outlook for Social Security has improved. Not so. Trust-fund solvency says nothing meaningful about Social Security's fiscal and economic sustainability. What matters is the program's annual cost and annual operating balance-that is, the difference between earmarked taxes and outlays. And here, the long-term projections have not improved at all.

A Stack of IOUs

Three years ago, the Trustees projected that, by 2040, Social Security would cost 17.8 percent of payroll, would be running an operating deficit of 4.6 percent of payroll, and would be able to pay just 74 cents of every dollar of promised benefits. Today, they project that, by 2040, Social Security will cost 17.9 percent of payroll, will be running an operating deficit of 4.7 percent of payroll, and will be able to pay-you guessed it-just 74 cents of every dollar of promised benefits. The unchanged outlook is not surprising, since there have been no major revisions in the demographic and economic assumptions that determine Social Security's long-term cost. Yes, the Trustees have nudged up their "ultimate" fertility and real-wage growth rates. But they have also nudged up their assumption about future longevity. Taken together, the changes are a wash. What then accounts for the trust funds' eight-year reprieve? The answer lies almost entirely in the near-term economy. Low unemployment and strong wage growth keep boosting workers' taxable payroll, and along with it Social Security's temporary operating surpluses. Over the next fifteen years, the Trustees now project that surplus Social Security tax revenue will total $1.2 trillion, nearly four times what they were projecting three years ago. The extra cash, along with higher real interest rates, is swelling Social Security's trust-fund coffers-and pushing out its bankruptcy date.

The problem is that the trust funds consist of a stack of IOUs. They constitute claims against Treasury, but not economic assets that can defray future costs. As soon as Social Security's operating surpluses turn into deficits-in 2015, according to the latest Trustees' report-Congress will have to raise taxes, cut other spending, or borrow from the public to pay current-law benefits. Ironically, the more IOUs the trust funds possess, the larger the burden on the budget and economy.

The Real Significance

It's time to face the truth: Congress could keep Social Security solvent indefinitely with the simple stroke of a pen by issuing sufficient debt to its trust funds. But that wouldn't make Social Security more affordable. Nor, of course, would it address the system's other underlying problems, from the dismal deal it offers younger workers to its built-in bias against thrift. This brings us to the real significance of the new Trustees' report. Social Security's growing near-term surpluses could make genuine reform easier-for instance, by underwriting the transition cost to a new system based in part on funded personal savings. Unfortunately, by papering over the current system's long-term deficits, they also make reform seem less urgent. Let's hope leaders see through the trust-fund  sham.

Social Security Operating Balance

as a Percent of Taxable Payroll


1997 Report

2000 Report


2000 0.91 2.31 +1.40
2010 0.26 1.18 +0.92
2020 -2.22 -1.75 +0.47
2030 -4.38 -4.26 +0.12
2040 -4.61 -4.71 -0.10
2050 -4.76 -4.76 0.00
2070 -5.86 -5.92 -0.06