February 25, 2005
The ‘Trust Fund’ Explained
Okay, so here’s the deal. My wife and I both work. Right now, she’s running a surplus. The amount of money she earns exceeds her necessary expenditures. So she’s passing that money to me. Of course, in our future, the demographics are going to change, and when we have kids, she is not going to be working. Thus, at that time, I can pay back the “trust fund” that she’s building up, right? Of course, during this time, that “trust fund” has been used to pay rent, bills, and other things. So when the day comes, for me to “pay back” the fund, it will require me to either make more money or reduce other expenditures. Since our actual income and expenses are aggregate, losing one income hurts both.
There’s a little accounting trick going on here. Of course, it’s the same accounting trick our government is using. Who is it tricking? Us.
That’s where our government is. Everyone keeps talking about the social security “trust fund”. The trust fund is not money that the SSA has saved. It’s a drawer full of IOUs from our government. One pocket has spent the money it should be holding for the other.
For this reason, we really need to figure out how to fix this issue. They say that in 2018, Social Security will have to draw from the “trust fund”. Right now, the payroll tax is providing money not into savings that will be drawn later, but is paying for general expenditures of the government. As that trust fund transfer decreases and then reverses, the rest of the government will either have to increase taxes or reduce spending to cover the difference. This is a problem next year, a bigger problem the year after that, and only grows and grows. The references to the “trust fund” only confuse the issue.
Once you remove the references to the “trust fund”, you realize a simple fact: to cover social security and maintain constant spending in other areas, total government spending will increase, and tax receipts need to increase with it.
The problem isn’t waiting for 2018 or 2042. The problem is now. We must immediately reduce spending. Whether we do this by reforming Social Security or by cutting back the rest of the government doesn’t really matter. But unless we start cutting spending now, we’re in for some trouble. Raising payroll taxes now may help the immediate situation, but it doesn’t help retirees down the road, unless the “trust fund” is actually saved. Suffice to say, running a deficit right now only makes it worse.
As they say in A Few Good Men, “These are the facts. And they are undisputed.”
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Mrs. TF here. What would happen if they stopped taking money from the “trust fund” and actually leave it there for Social Security? (I don’t see that happening any time soon.) That is why the Democrats and fighting mad about “private” accounts. They can’t get their hands on it.
If they did make it a *real* trust fund, and didn’t touch it, it would make the whole debate accurate. I doubt that will happen anytime soon either.