Imagine a parent who, faced with the duty to build a college fund for his child, writes himself IOUs instead of putting real money aside for the future.
That's what Social Security has done, except that it calls its stash a "trust fund."
Many people believe the trust fund contains securities that have real economic value. So, a few days ago, I wrote an editorial titled "The myth of the trust fund." It wasn't long before the piece drew an objection.
David Ekerdt, of Kansas City, Mo., director of the gerontology center and a sociology professor at the University of Kansas, asserted that I was badly mistaken, and he wrote a response. I had an amicable e-mail exchange with Professor Ekerdt prior to the publication of his article, but we weren't able to resolve our differences. I should add that he is hardly alone in his views. Many subscribe to the trust fund myth.
AARP, to cite a better-known example, has actively spread the notion that Social Security's financial footing is quite strong, perfectly healthy -- nothing we need worry about right now -- because the trust fund contains trillions in government bonds.
This belief is one of the reasons entitlement reform has been so difficult. Those who subscribe to the myth accuse reformers of seeking to destroy one of America's most cherished programs.
But reformers are correct in arguing that if Social Security isn't fixed, and soon, it will be difficult to shore up without threatening the benefits of people already retired.
In most years, the payroll tax dedicated to Social Security produces more money than the government needs to pay benefits. When that happens, the revenue is spent by Congress and the Social Security trust fund is credited with "special issue," non-marketable, U.S. government bonds.
Many people point out, correctly, that the trust fund bonds, like publicly tradable bonds, are backed by the full faith and credit of the government. They conclude from this that Social Security is on a solid financial footing.
But like the foolish parent who builds a college fund of IOUs written to himself, not even the government can spend the money, write an IOU to itself and then on some future date expect to use those IOUs to fund benefit checks.
To turn trust fund bonds into real money, the government must do what it would have to do if the trust fund did not exist: borrow, cut spending somewhere else or raise taxes. The trust fund bonds may be assets from the point of view of Social Security, but they're a liability for the government as a whole, and for us as taxpayers.
Professor Ekerdt says it is "outrageous" to suggest that the government would not redeem these bonds, which represent "the debt to American workers" who have paid the payroll tax. Here, the professor is correct: The trust fund is full of debts.
Social Security is not a pension program as we commonly understand it. It is a pay-as-you-go program.
Current recipients must be paid with current tax revenue. Future recipients must be paid with future tax revenue.
This year, the Social Security trustees said revenue from the payroll tax would fall short of what's needed by $41 billion. That cash deficit is expected to shrink in 2011 as the economy strengthens. It will vanish for a couple of years, then reappear with a vengeance in 2015, when Social Security begins running permanent cash deficits. By 2020, the annual shortfall will balloon to more than $78 billion. A decade later it will top $267 billion.
Anyone can find reports from this or that agency or think tank arguing that the trust fund securities are adequate to fund benefits for many years to come. Again, from the point of view of the trust fund, the special-issue bonds are assets. But as the Social Security trustees noted in 2009, "Neither the redemption of trust fund bonds, nor interest on those bonds, provides any new net income to the Treasury ... ."
In its 2000 budget, the Clinton administration was even more explicit: A large trust fund balance "does not, by itself, have any impact on the Government's ability to pay benefits." I don't know what could be more clear.
Social Security reform should be phased in gradually so that benefits for retirees and those nearing retirement aren't cut. But if we wait too long -- if we listen to those who subscribe to the trust fund myth -- the borrowing needed to finance benefit checks will rapidly push us closer to the growth-killing tax increases and benefit cuts that no one wants.