The Trust Funds

Payroll taxes collected are placed in the Social Security Trust Funds—the Old Aged and Survivors Insurance (OASI) and the Disabled Insurance (DI) fund. After benefits are paid, surplus monies are used to purchase government bonds. These bonds are loans to our government that are used to pay to run our government. They are fully guaranteed by the United States government. The United States government must repay these loans with interest.

These bonds held by the Trust Funds are real. Just as real as those held by banks, individuals or corporations. Some are saying that these are just worthless pieces of paper. This far from the truth. The bonds are just as valuable as the savings bonds you buy or any other government backed security. The United States government has never defaulted on its bonds.

“The portion of the OASI Trust Fund that is not needed to meet day-to-day expenditures is used to purchase financial securities, generally special public-debt obligations of the U.S. Government. The cash used to make these purchases flows to the General Fund of the Treasury and is used to meet various Federal outlays or to reduce the amount of publicly-held Federal debt. Interest on these securities is paid to the trust fund and, when the securities mature or are redeemed prior to maturity, general fund revenues flow to the trust fund. Thus, the investment operations of the trust fund result in various cash flows between the trust fund and the General Fund of the Treasury.” (Social Security Trustees Report, March 23, 2005).

The Board of Trustees was established under the Social Security Act to oversee the financial operations of the OASI and DI Trust Funds. The Board is composed of six members. Four members serve by virtue of their positions in the Federal Government: the Secretary of the Treasury, who is the Managing Trustee; the Secretary of Labor; the Secretary of Health and Human Services; and the Commissioner of Social Security. The other two members are appointed by the President and confirmed by the Senate to serve as public representatives: John L. Palmer and Thomas R. Saving, the current public Trustees, began serving their 4-year terms on October 28, 2000.

Every year the government-appointed Board of Trustees releases a report on the financial outlook for the Social Security and Medicare Trust Funds. The 2005 Trustees Report was released on March 23, 2005.

According to the 2005 Trustees Report:

“The OASI and DI Trust Funds, individually and combined, are adequately financed over the next 10 years under the intermediate assumptions. The combined assets of the OASI and DI Trust Funds are projected to increase from $1,687 billion at the beginning of 2005, or 320 percent of annual expenditures, to $3,697 billion at the beginning of 2014, or 417 percent of annual expenditures in that year. Combined assets were projected in last year’s report to rise to 325 percent of annual expenditures at the beginning of 2005, and 446 percent at the beginning of 2014.” (emphasis added)

Trustees’ Projections

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the financial and actuarial status of the OASI and DI Trust Funds. These projections are for the coming 75 years! Can you imagine how hard that is?

You can read the 225-page trustee report by going to www.socialsecurity.gov/OACT/TR.

The Trustees estimate that beginning in 2018 the cost of current benefits will exceed payroll tax collections. This means, Social Security will turn to its accumulated surplus and interest payments to supplement benefit payments. In 2041, current income will be able to pay 73 percent of benefit obligations.

In order to make the estimates, the trustees used a very slow economic growth expectancy. As you will read in the article on why private accounts aren’t all they are being touted to be, you can’t have it both ways. You can’t argue that the trustee projections are correct (slow economic growth) and that private accounts will be hugely successful because of strong economic growth. Adjustments are needed to ensure Social Security continues to be able to serve the needs of all Americans, but drastic changes like some being proposed make the problem worse.