Academic journal article Journal of Economic Issues

Financial Aspects of the Social Security "Problem"

Academic journal article Journal of Economic Issues

Financial Aspects of the Social Security "Problem"

Article excerpt

There is a widespread belief that the Social Security Trust Fund is going bankrupt. Thus, while Old-Age and Survivors Insurance and Disability Insurance (OASDI) is currently accumulating large financial surpluses, the fear is that Social Security faces a financial crisis because post-2020 program expenditures are expected to exceed revenues. [1] The solution, many argue, is to "use" (current and future) budget surpluses to "save" Social Security from financial collapse. [2] The idea, according to these "saviors," is that by "depositing" the surpluses into a trust fund, the Treasury can be prevented from "spending" them. Many of these "saviors" also insist that the rest of the government's budget must remain balanced, for otherwise the Treasury would be forced to dip into Social Security reserves. We examine these points by first providing an analogy.

Can a trust fund help to provide for future retirees? Suppose the New York Transit Authority (NYTA) offered subway tokens as part of the retirement package provided to employees--say, 50 free tokens per month (for life) upon retirement. Does this mean that New York should attempt to run an annual "surplus" of tokens (on average collecting more tokens per month than are paid out) in order to accumulate a trust fund to provide for future NYTA retirees? Of course not. When tokens are needed to pay future retirees, New York will simply issue more tokens at that time. Not only is it unnecessary for New York to accumulate a hoard of tokens, but it will not in any way ease the burden of providing subway rides to future retirees.

Whether New York can meet its real obligation (to convert tokens into rides) will depend solely on the future carrying capabilities of the transit system. Its financial commitment, in contrast, can always be met merely by issuing tokens to future retirees as benefits come due.

Just as an accumulation of subway tokens cannot help to provide subway rides for future retirees, neither can the Social Security Trust Fund help to provide for the (real) consumption needs of baby-boomer retirees. Whether their future consumption needs are realized will depend solely on society's ability to produce real goods and services (including subway rides) at the time that they will be needed. Thus, an accumulation of credits to a Social Security Trust Fund is neither necessary nor efficacious. Moreover, it does no good to run a budget surplus, which simply reduces the demand for currently produced goods. While the analogy with a subway token retirement system is not a perfect one, it does make the important point that the issuer of the token (or dollar) never needs to collect tokens (dollars) before making payments.

How Well Do the "Saviors" Understand the Fundamentals?

The above is intended to clarify two points, which, if misunderstood, preclude any sensible discussion of Social Security. The first point concerns the building up of financial resources as a means of providing for the needs of future retirees. This, as we argued, is both unnecessary and ineffectual since the availability of financial resources by no means guarantees the availability of sufficient real resources. [3] Second, it makes no sense to support balanced budgets (much less surpluses) as a means of "protecting" the trust fund since this, also, does nothing to augment real resources. That this is not understood, even by those who ought to have a better grasp of the fundamentals, is evidenced in an excerpt from a document issued by the U.S. House of Representatives Budget Committee, which states that:

Every penny that is taken out of America's paychecks for Social Security should be locked in a safe-deposit box so it can only be used to pay for Social Security benefits [Penner et al. 1999, 1; emphasis added].

Three fundamental misconceptions, each indicated in italics, exist in the above.

If the safe-deposit box is meant to represent the Social Security Trust Fund (and we believe it is), then the first misconception is revealed. …

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