Nothing to Trust

The Social Security trust fund is a foolish piece of accounting nonsense—and the blathering about how the trust fund is running out of money is just a gigantic distraction from the Social Security system’s fundamental problem. To understand why, ask yourself two questions.

First, when the trust fund cashes in some of the special Treasury bonds it holds, where does the Treasury Department get the money to buy back those bonds? The same place that money comes from to fund all government operations: by levying taxes and by issuing more debt.

In other words, the Social Security trust fund isn’t comparable to a mutual fund that you or I might hold in our brokerage account. There’s no money saved up from years ago that’s now slowly getting spent. Instead, those special Treasury bonds are just an accounting mechanism to cover up the transfer of money to and from the rest of the federal government. Got a $5 bill in your left pocket that you then move to your right pocket? That’s what Uncle Sam is doing.

That brings me to the second question: What would happen if Congress voted to add billions to the trust fund, so all retirees could receive $100,000 a year in benefits? Those retirees would merrily spend their fat checks—but the economy would struggle to provide the goods and services that folks want to purchase, likely resulting in soaring inflation.

Now imagine that, instead of a massive boost in monthly Social Security benefits, all retirees were given private Social Security accounts holding $1 million in stocks. What would happen when these seniors sell their stocks and go to spend the proceeds? It would have the same result. Remember, in the end, both cash and stocks are just mediums of exchange. If folks try to exchange these financial instruments for goods and services, and those goods and services aren’t readily available, we’ll see inflation spike.

The bottom line: The fundamental problem with Social Security doesn’t have anything to do with the trust fund. Instead, it’s a basic demographic and economic problem, the result of too few workers and too many folks dependent on their labor.

Want to “fix” Social Security? What we need to do is persuade folks to stay in the workforce for longer, so they produce the goods and services that the U.S. population wants to buy. If Congress wants to “shore up” Social Security, it should be crafting tax and other incentives so folks want to work past age 65 and employers want to retain these older workers.

One indication that we’ve achieved a better balance between those who work and those who don’t: The federal budget deficit would shrink because the government would be collecting more in taxes from those in the workforce—even if the tax code was tweaked so older workers were taxed less heavily. Indeed, like inflation, the federal budget deficit isn’t the problem per se, but rather a symptom of our fundamental economic problem—too few workers producing the goods and services we’re all demanding.

Want to put Social Security on a sound financial footing? Come up with a plan that’ll encourage older folks to keep working. Anything else is like the Social Security trust fund—a financial fig leaf that hides the real problem.