The Trust Fund, the Surplus, and the
Real Social Security Problem
Yes, there are real problems with the Social Security system. No, the problem is not that we may raid the trust fund next year or that we have failed to provide a “lock box” to save the surplus. The real problem is very different. Social Security is essentially funded on a pay-as-you-go basis, meaning that the benefits of current retirees are paid by the taxes of current workers. As a result, the system is a potential “victim of demography.” 1 Indeed, demography will turn against the system in the not-too-distant future when the baby boomers start to collect benefits. It will be tough to pay the bills because we have promised large and growing benefits but have not created any viable mechanism for prefunding those benefits.
Worrying about the size of the trust fund is misguided. It is a fund in name only; it holds no real assets. Consequently, it does not generate funds to pay future benefits. And there are other problems. Social Security discourages saving and distorts work incentives, negatively affecting income in old age and national income in general. Despite its huge expenditures, it has not eliminated poverty among the elderly.
The pundits tell us that Social Security is the third rail of politics. But it is difficult even to hold a dialogue on the subject because the operations of the program are so cloaked in complexity that the public is confused about the true nature of the program.
The phrase “Social Security Trust Fund” creates the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future recipients. But in
Originally published as Cato Institute Social Security Paper no. 26, April 9, 2002, and updated to reflect current information.