Magazine article Strategic Finance

Social Security Surpluses

Magazine article Strategic Finance

Social Security Surpluses

Article excerpt

As a reader of Social Security Trustees Reports since the system's financial problems in the early 1980s, I have been concerned about conflicting communications through the years regarding Social Security. This article gives the information that has allowed me to reconcile reports from Washington with my background in benefits administration.

In 2004, workers paid $58 billion more into the Social Security trust than was paid out in benefits. This figure pertains to the Old-Age and Survivors Insurance (OASI) Trust Fund and equals the contributions less benefit payments as reported in Table II.B1 of The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (OASDI).

The main question is simple: Is this surplus spent to pay general obligations of the federal government, or is it held in trust by Social Security for future benefits for those workers? The answer appears to be both.

The U.S. Treasury Financial Statement includes these receipts and surpluses as part of the revenues of the U.S. government, reducing the annual deficit and the national debt. (See 40frusg.pdf, 2004 Financial Statement of the United States Government, for fiscal years ended Sept. 30, 2004, and 2003. These are a consolidation of all departments and include accrual statements of operations and net financial position, reconciliation to the cash budget, and a balance sheet.)

The Trustees Report on Social Security shows a $1.5 trillion surplus held in U.S. Treasury Bonds. These bonds can be redeemed when revenues don't meet the system's expenditures (see OASDI Table II.B1).

But are these surpluses general revenues of the U.S. government or restricted revenues that are held in trust by Social Security? They can't be both--unless we've just discovered the perpetual funding machine where revenues can be counted twice.

The actual payment mechanism is quite transparent. Social Security revenues are paid into the U.S. Treasury, which then issues restricted bonds to Social Security for surplus funds (after payments to recipients). The restricted bonds are held by Social Security as the primary asset of the system. The cash that's collected from Social Security is used by the U.S. Treasury to pay the obligations of the government, including Social Security payments. Treasury bonds are sold on the open market to fund the deficits.

The current national debt of $7.7 trillion doesn't include the $1.5 trillion in bonds that have been issued to Social Security. The official U.S. Government Financial Statement also doesn't include a liability for estimated benefits already accrued under Social Security. This information is provided as supplementary information, but it isn't considered a liability of the government (see 2004 Financial Statement, balance sheet, p. 64; stewardship information (unaudited) for Social Security, p. 68).

What supports this method of accounting for Social Security? In 1960, the Supreme Court ruled in Flemming vs. Nestor [363 U.S. 603 (1960)] that payments made to Social Security do not provide the payers with "accrued property rights. …

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