Our view: Payroll taxes raid Social Security

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For almost three decades, Social Security was the only major government benefit program that generated more money than it cost, thanks to hefty payroll tax revenue that exceeded benefit payments to seniors. This surplus was so tempting to spendthrift lawmakers that, in the 2000 presidential race, Al Gore famously proposed protecting it in a "lockbox."

These days, not only has the lockbox been raided, but money is being diverted before it even gets there. As a result, Social Security is increasingly dependent on the destructive borrowing that's pushing the national debt to dangerous levels.

OPPOSING VIEW: Payroll tax cuts ease jobs crisis

This year and next, Social Security will pay out $187 billion more than it takes in, according to figures from the Congressional Budget Office. The gap is being made up by transferring money from the rest of the government, which is borrowing $4 for every $10 it spends. And budget negotiators in Washington might be about to make the problem even worse.

It was bad enough last December when President Obama and Republican congressional leaders agreed to cut 2 percentage points from the 6.2% payroll tax on employees to stimulate the economy, promising that it was for just one year.

These days, of course, tax cuts that are supposed to phase out somehow never do, largely because it has become GOP dogma that there is never an appropriate time to raise any tax. Witness this week's battle over getting rid of the indefensible subsidy for corn-based ethanol: Hard-liners portrayed even that as a tax increase, and the GOP senators who voted to end the subsidy were accused of violating their pledge never to raise taxes.

So once the payroll tax got cut, the chances of restoring it were always going to be dicey, particularly ahead of an election year. And, sure enough, that's how things are playing out.

USA TODAY OPINION

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Larry Summers, former chief economic adviser to the Obama administration and now a Harvard professor, argued in a widely published opinion piece on Sunday that the payroll tax cut should not just be extended next year; it should be raised to 3 percentage points from 2 and extended to employers as well as employees. That would take away about half the revenue dedicated to paying Social Security benefits (6 percentage points of the combined 12.4% payroll tax paid by workers and their employers).

Summers' $200 billion proposal was followed by reports that the Obama administration has been floating the idea of extending, and perhaps even expanding, the payroll tax cut as part of the budget talks aimed at finding a way to raise the debt limit.

The argument for cutting the payroll tax in the first place — and Summers' argument now — is that the fragile economy still needs stimulus, and boosting take-home pay for virtually all working Americans is an effective way to do it.

Don't be fooled. What is billed as a stimulative cut in payroll taxes is really budgetary malpractice on the order of diverting money that's supposed to go into your 401(k) account, or your kid's 529 college savings plan, to pay for current expenses.

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What are the Social Security Trust Funds? The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.
Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund. Benefits to disabled workers and their families are paid from the DI Trust Fund. More than 98 percent of total disbursements in 2010 were for benefit payments.

A Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial status of the trust funds.


How are the trust funds invested? By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.
In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

Data on trust fund investments provide a breakdown by interest rate and trust fund for any month after 1989.


What interest rate do the trust funds' assets earn? The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2010 was 2.760 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.642 percent in 2010. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.


What happens to the taxes that go into the trust funds? Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.


If all the income is invested, how do benefits get paid each month? Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When "special-issue" securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.


What were the amounts of securities bought and sold during recent years? The amount bought in 2010 was $1,020 billion, while the amount sold was $929 billion. See investment transactions for more detail and earlier years.

Why do some people describe the "special issue" securities held by the trust funds as worthless IOUs? What is SSA's reaction to this criticism? As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.
Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 20 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds' securities will need to be redeemed on a large scale prior to maturity.


Can the Social Security Trust Funds remain solvent without making changes to the program? In the annual Trustees Report, projections are made under three alternative sets of economic and demographic assumptions. Under one of these sets (labeled "Low Cost") the trust funds remain solvent for the next 75 years. Under the other two sets (the "Intermediate" and "High Cost"), the trust funds become depleted within the next 25 years. The intermediate assumptions reflect the Trustees' best estimate of future experience.
Some benefits could be paid even if the trust funds are depleted. For example, under the intermediate assumptions, annual income to the trust funds is projected to equal about three-quarters of program cost once the trust funds become depleted. If no legislation has been enacted to restore long-term solvency by that time, about three-quarters of scheduled benefits could be paid in each year.

The Trustees believe that extensive public discussion and analysis of the long-range financing problems of the Social Security program are essential in developing broad support for changes to restore the long-range balance of the program.


Were the assets of the Social Security Trust Funds depleted in the past? The assets of the larger trust fund (OASI), from which retirement benefits are paid, were nearly depleted in 1982. No beneficiary was shortchanged because the Congress enacted temporary emergency legislation that permitted borrowing from other Federal trust funds and then later enacted legislation to strengthen OASI Trust Fund financing. The borrowed amounts were repaid with interest within 4 years.

Trust Fund FAQs