The $900 Billion Dollar Question

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The $900 Billion Dollar Question

Was either presidential candidate asked about his `Save Social Security First` plans? What was proposed about paying back the $900 billion taken from Social Security over the last 30 years?
-F.D., Penn Valley, CA

From the Editor:

Although both Gore and Bush put forward plans to `save Social Security` during the campaign, neither plan adequately outlined how the more than $1 trillion (as of December 31, 2000) used from Social Security will be repaid.

Benefits to current retirees are paid out of current payroll taxes. Because the workforce is larger than the number of retirees, the excess taxes go into the Social Security Trust Fund. Government trust funds, however, are not what their name implies. Rather than accumulating cash, the Social Security Trust Fund contains bonds issued by the federal government. The bonds represent a promise to pay the money back to the Trust Fund when it is needed. They are essentially IOUs.

In the meantime, the Social Security surplus goes to other purposes. For years the government simply spent it. More recently Congress and the Clinton administration used some of the excess to reduce the national debt held by the public.

The looming problem still remains. Under Social Security`s trustees` projections, payroll taxes will no longer cover benefits starting around 2015, when the system will begin relying on those IOUs. At that time the government will be forced to cut benefits, increase taxes, increase the rate of return on the money coming into the system, and/or borrow.

The Gore plan proposed devoting the entire Social Security surplus and some of the general revenue surplus to the elimination of the $3.5 trillion in national debt held by the public. Eliminating the debt would leave the government better able to borrow later on, if necessary. Starting in 2011, Gore`s plan proposed to funnel into Social Security an amount of money equal to the annual interest savings from the debt reduction-$100 billion a year at first, growing to more than $200 billion a year by 2015.

Transferring the interest savings would still leave the taxpayers on the hook to pay for the shortfall in funds, because those transfers would be in the form of more government IOUs. There is also no guarantee of surpluses in the first place. At the rate Congress is pork barrel spending, this is a real threat.

The Bush plan was even more problematic. That plan sharpened the problem by pledging not to add any new taxes for Social Security. The Bush plan also precluded the possibility of repayment of debt to the Social Security Trust Fund by spending the non-Social Security surplus on large tax cuts.

In addition, Bush`s proposal would divert money out of the Social Security Trust Fund with individual retirement accounts. For the average worker who opts for such accounts, the guaranteed benefit would be cut. Bush and those who support individual accounts say the difference will be made up from higher returns by investing in stocks and bonds. What Bush did not say is how benefits for current retirees would be paid if money were diverted from the system.

The key question as to how the Social Security Trust Fund will be repaid remains unanswered.

This article first appeared in Volume 6, Issue 3 of "The Social Security and Medicare Advisor" newsletter (February/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here.