The Social Security trust fund is often misunderstood. Many believe it to be a genuine financial asset ensuring future benefits. This paper challenges that misconception, showing that the trust fund is more of a political construct than a true repository of savings or investments. The trust fund essentially consists of IOUs or promissory notes that represent claims on future tax revenues. Regardless of the trust fund balance, when Social Security's annual expenses exceed its annual income, the government must either raise taxes, increase borrowing, or cut spending to fund promised benefits. This fiscal reality can be illustrated with several analogies to convey the complexities of Social Security's financing in simple and accessible terms. The key takeaway is that legislators should focus on closing the gap between annually scheduled benefits and annually projected revenues by addressing the structural imbalances that threaten to drive Social Security's spending to exceed revenues in perpetuity. Instead of setting out to achieve superficial 75-year solvency by proposing to raise revenues in the short term without addressing long-term deficits (which is what raising or eliminating the payroll tax cap would do), policymakers should focus on reducing the Social Security program's burden on taxpayers. Effective reforms should address cost-growth factors such as increasing life expectancy (especially among higher-income earners), the dwindling worker-to-retiree ratio, and the automatic real growth of benefits (exceeding inflation). This paper argues for a more honest discussion about the program's future that considers difficult choices, such as reducing benefits for higher-income earners, slowing the growth in future benefits, and raising the retirement age.
Authors
- Pages
- 12
- Published in
- United States of America
Table of Contents
- E X E C U T I V E S U M M A R Y 1
- I N T R O D U C T I O N 2
- S O C I A L S E C U R I T Y S F I N A N C E S 2
- The Social Security trust fund is a figurative piggy bank that holds only IOUs issued by the Treasury to the Social Security Administration not actual money. 2
- A Recurring Misunderstanding The Trust Fund Balance Is Not a Source of Income 3
- Writing an IOU to Yourself Does Not Generate Real Wealth 3
- S O C I A L S E C U R I T Y S O F F I C I A L 3
- I N C O M E S T R E A M S 3
- T H E T R U S T F U N D I L L U S I O N 5
- A Pay-as-You-Go Program After All 6
- 75- Y E A R S O LV E N C Y S H O U L D 7
- N OT B E T H E S TA N DA R D O F 7
- S U C C E S S F U L R E F O R M 7
- R E D U C I N G S O C I A L S E C U R I T Y S 7
- B E N E F I T B U R D E N S H O U L D B E T H E 7
- S TA N DA R D O F S U C C E S S F U L R E F O R M 7
- Indexing initial benefits to prices instead of wages. 8
- Transitioning to a flat benefit to prevent senior 8
- Discontinuing cost-of-living adjustments for 8
- Adopting a more accurate inflation index for cost- 9
- Capping survivor and dependent benefits. 9
- Raising eligibility ages to account for longer 9
- C O N C L U S I O N 9
- N OT E S 9
- C I TAT I O N 12
