Thursday, December 23, 2010

No trust for Social Security

Fortune Magazine’s senior editor-at-large, Allan Sloan writes that the Social Security trust fund is a trap and a fantasy, and in no way a solid basis for the Social Security program.


    The trust fund is nothing more than a trap and a fantasy for those who think it's a solid foundation for Social Security.

    I used to joke about the government "solving" Social Security's long-term problems by creating Treasury IOUs out of thin air and sticking them in the program's trust fund. My point, of course, was to show that no matter how many Treasury securities there are in the trust fund -- currently, around $2.6 trillion -- the fund is merely an accounting fiction that has no economic value when it comes to protecting Social Security beneficiaries.

    Now, with last week's passage of the much-ballyhooed tax deal between President Obama and Republican lawmakers, my sarcastic joke has become public policy. It all has to do with the provision cutting payroll taxes in 2011.

    Let me show you how this works. Next year, as you probably know, workers subject to Social Security taxes will pay only 4.2% of their "covered wages" -- wages up to $106,800 -- rather than the normal 6.2%. This will reduce Social Security's cash proceeds by $112 billion, according to Congress' Joint Committee on Taxation.

    What impact will this cash shortfall have on the Social Security trust fund? None. Zero. Zip.

    How can a $112 billion cut in Social Security revenues not affect the trust fund? Because the Treasury will give the trust fund the same amount of bonds it would have gotten if the two-percentage-point tax holiday didn't exist.

    In other words, the Treasury isn't selling bonds to Social Security, it's creating bonds out of thin air and putting them into the trust fund. The missing cash? Uncle Sam will just borrow $112 billion from somewhere.

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