Despite the frequent attention Social Security gets from the US press and the hundreds of politicians in Washington, the ugly fact about the Social Security Trust Fund (SSTF) is that it contains no cash, stocks, or other assets that have any economic value.  

If you set up a trust fund for any reason, you will put cash, stocks, bonds, and other tangible assets in the fund that you expect to grow in value, but the SSTF doesn’t work that way. Instead, when the Social Security taxes collected are greater than the benefits to be paid, the surplus goes into the US Treasury General Fund to be spent on other government programs.

In exchange for Social Security’s surplus taxes, the SSTF receives special government bonds that can only be redeemed by the US Treasury to cover Social Security revenue deficits. The interest rate on these bonds is much lower than what the surplus taxes would earn if they were invested in real financial instruments.

For example, the average inflation-adjusted annual return of the S&P 500 companies from 2003 through 2022 was 10%. For the SSTF, the average return was 4%. And the meager interest earned isn’t paid with cash, it’s just another accounting entry.

So what the Trust Fund holds is IOUs our government might not be able to pay off when Social Security needs cash in the future. Despite government claims that the SSTF was worth $2,880 billion at the end of 2022, the “dollars” are just accounting entries.

The SSTF is not a financial asset. It is an unfunded liability future taxpayers will have to pay whenever Social Security has a tax revenue deficit. “Unfunded” means no plans exist for the US Treasury to acquire the $2,880 billion (plus more deficits and interest) it will need to pay Social Security benefits in future years. It’s like knowing you will need a new car next year, but you have no idea where you will get the money to pay for it.

There are only two ways to make Social Security financially secure: reduce benefits and increase revenue. Options for accomplishing this are:

• Increasing the retirement age to compensate for people living longer.
• Increasing Social Security tax rates.
• Increasing the upper limit on income subject to Social Security taxes.
• Reducing government spending on other programs to fund Social Security benefits.

Borrowing or printing money won’t solve the problem. More government debt will increase inflation and reduce the standard of living for most Americans.

Senator Bill Cassidy (R-Louisiana) has proposed creating a trust fund outside of Social Security by borrowing money to invest in diversified financial assets. He claims this will pay off 75% of Social Security’s shortfall in 70 years. The other 25% must come from unspecified sources.

Unfortunately, Mr. Cassidy’s proposal has some problems:
• It doesn’t provide the economic assumptions and figures underlying his proposal so independent analysts can assess the feasibility of his plan.

• Borrowing money to bet on what will happen to an investment over the next 70 years is risky. The return on the investments may not exceed the interest on the debt, which must be paid.

• His proposal is drastically different from what he says are similar successful programs that are much smaller than Social Security, such as the National Railroad Retirement Investment Trust. Like Social Security, this program gets its funds from levies on employees and employers. However, any revenue surpluses go directly into the trust instead of the US Treasury. The trust’s assets are then actively managed by financial professionals overseen by a board of three directors representing railroad employers, railroad labor organizations, and the public interest.

I saw Mr. Cassidy on CNN when he said Social Security would be broke in nine years, without admitting it is already broke and dependent on the US Treasury for covering future Social Security tax revenue deficits.

Mr. Cassidy also played the usual “Blame the Other Party” game by blaming the Biden administration for not doing anything to save Social Security. While his argument has some merit, Mr. Cassidy should also blame Trump, Obama, W. Bush, Clinton, H. W. Bush, and other politicians of both parties for doing almost nothing to solve Social Security’s long-term revenue problem when it was readily apparent in the early 1980s.

Mr. Cassidy did say his plan needed more work, and he was betting on the future strength of our economy. However, he failed to mention our economy is buried in government and private debt because we have been living beyond our means for over forty years.

The painful truths about the Social Security Trust Fund and Social Security are:

• The Social Security Trust Fund holds nothing that has financial value.
• The Social Security funding system lets our government use surplus Social Security taxes as general tax revenue while not paying the artificially low interest with cash.
• The Trust Fund is not an asset; it is an unfunded liability.
• All future Social Security revenue shortfalls must be paid by taxpayers, paid with borrowed money, “paid” by reducing benefits , or paid with printed money that will increase inflation.
• Social Security taxes have been, and still are, a regressive tax because low-income people pay a larger percentage of their wages on Social Security taxes than high-income people.
• Congress can change what it will spend on Social Security (and similar programs) whenever it wants to.

The politicians of both parties have been lying about the value of the Social Security Trust Fund and similar trust funds for decades. It is the biggest lie ever told about the financial future of average Americans.

Before our fiscally irresponsible politicians started running up large budget deficits in the early 1980s, it seemed the Treasury could pay off its IOUs in the distant future when Social Security would need the money.

However, forty-plus years later, with our government and private sectors buried in debt, being able to cover Social Security’s future revenue deficits without increasing taxes or borrowing more dollars looks doubtful.

The limiting factor on the taxes our government can collect and how much it can borrow is the monetary wealth our economy can earn by producing goods and services. Given the current shaky state of our economy, the future doesn’t look promising.

Unless we significantly improve our economy and our government’s financial capability in the near future, Social Security will have to reduce benefits sooner and probably more than if the Trust Fund contained real dollars instead of US Treasury IOUs.

Rebuilding our economy will not be easy, but we can certainly do it if our government leaders do what’s best for our country instead of “what’s best for me and my political party.”

Unfortunately, the odds of this happening are between slim and none unless powerful spirits from a distant galaxy change how our government leaders think and act.