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The Social Security Trust Fund Is Just a Stack of IOUs in a West Virginia Filing Cabinet

This is a syndicated repost published with the permission of Money Morning - We Make Investing Profitable. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The Social Security Trust Fund every retiree is relying on is not what most Americans believe it is.

The brutal truth is this $2.85 trillion fund, which is supposed to keep the Social Security program solvent until the year 2033, has no money in it whatsoever.

The entirety of the Social Security Trust Fund is held in “special obligation bonds,” a type of government bond issued for a single purpose (in this case, the funding of Social Security benefits).

In other words, this “fund” is actually debt.

And unlike marketable Treasury bonds, these special obligation bonds can’t be sold. They only have value if the U.S. government buys them back.

They also differ from marketable Treasuries in that they exist in paper form. All of them are stored in two loose-leaf binders in a filing cabinet at the “Bureau of Public Debt” in Parkersburg, W.Va.

But what many people fail to realize is that what the paper bonds represent isn’t money that can be sent to Social Security beneficiaries, but debt owed by the U.S. government.

President George W. Bush made that clear on a little-remembered visit to Parkersburg in April of 2005:

“A lot of people in America think there’s a trust, in this sense — that we take your money through payroll taxes and then we hold it for you, and then when you retire, we give it back to you. But that’s not the way it works.

There is no ‘trust fund,’ just IOUs that I saw firsthand, that future generations will pay — will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.

The office here in Parkersburg stores those IOUs. They’re stacked in a filing cabinet. Imagine — the retirement security for future generations is sitting in a filing cabinet.”

While the public is generally unaware of this, those in the government have always known.

That’s right. The government spends all the excess Social Security tax money in the year they receive it, replacing it with the paper IOUs that now sit in the filing cabinet in Parkersburg.

President Bill Clinton’s 2000 budget proposal included a description of the Social Security Trust Fund similar to that of President Bush:

“The Social Security Trust Fund does not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”

But if the Social Security Trust Fund is just a pile of debt, where did the money go?

You’re not going to like this answer, either…

All of the Social Security Trust Fund Money Was Spent

Most people know that Social Security is funded primarily by payroll taxes levied on all U.S. workers. The money is spent as it comes in, sent out to beneficiaries.

But in most years there’s a surplus, which the government is supposed to set aside for when the payroll tax receipts can’t cover the cost of the benefits.

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Investing that money in those special obligation bonds allowed the government instead to add the surplus to the general budget – where it was promptly spent on everything from defense to welfare to foreign aid.

That’s right. The government spends all the excess Social Security tax money in the year they receive it, replacing it with the paper IOUs that now sit in the filing cabinet in Parkersburg.

Over the years, different presidents have been accused of “raiding” the Social Security Trust Fund to finance this or that program, but that’s understating what’s actually happened.

The truth is, every president since Franklin Delano Roosevelt has overseen this “borrowing” from the Social Security Trust Fund. And as long as the program’s receipts exceeded its expenditures, it didn’t matter all that much.

But that’s about to change…

In 2020, Social Security Reaches a Tipping Point

In 2010, the amount the Social Security program paid in benefits exceeded what it took in payroll taxes, a gap that now grows larger every year.

Still, Social Security was able to more than make up the shortfall with interest payments it receives on the special obligation bonds. Last year, for instance, Social Security received $93.3 billion in interest payments from the U.S. Treasury.

But this grace period will be short-lived. The Social Security trustees estimate that in 2020 the interest payments will no longer be able to cover the shortfall. At that point, the program will need to start redeeming its special obligation bonds.

Since that’s debt owed by the Treasury, every bond redeemed will add to the federal budget deficit. It will be like paying off one credit card with another.

The alternative, as President Bush noted, is reducing Social Security benefits, raising taxes, or chopping other budget items. All politically toxic.

Of course, accelerating the growth of the national debt – already at $20 trillion – could affect the ability of the government to continue buying back the special obligation bonds.

As the baby boomers retire, the ratio of workers supporting retirees will continue to shrink. That means a gap in Social Security’s finances that will widen with each passing year.

But the real crisis hits in 2034…

America’s Choice: Slashed Social Security Benefits or Crippling Debt

In just 17 years the trustees estimate the Social Security Trust Fund will run dry (taking the interest payments with it).

By law, the system can only pay out money it controls. The depletion of the Social Security Trust Fund in 2034 means that in that year – benefits will shrink to 77% of what is owed. So a retiree who gets a monthly check for $1,000 would see it fall to $770.

The political outcry would probably force Congress to supplement Social Security from the general budget to prevent such painful cuts in benefits.

But that solution will quickly balloon budget deficits and the national debt.

According to Social Security trustee projections, the annual supplement needed to make the program whole will reach $1 trillion by 2038 and $2 trillion by 2042. The 2017 federal budget is about $4 trillion.

Any way you look at it, the Social Security program – and the millions of Americans who rely upon it — have some rough years ahead of it.

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