Gary M. Galles - Contributor
Galles is a professor of economics at Pepperdine University.
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[Gary M. Galles] 12/17/04
Bush administration apparently serious about touching the third
rail of American politics, opponents are ramping
up campaigns to undermine the effort by discrediting the idea
that Social Security faces a crisis. And one of their most
frequent devices is pointing to the apparent reassurance offered
by the Social Security Trust Fund.
For instance, the
annual report on the status of Social Security released earlier
this year concluded that the Social Security
Trust Fund would not be gone until 2042. That distant date seems
to overwhelm any real sense of urgency and rebut the claim that
something must be done now. Unfortunately, however, the Social
Security Trust Fund sets aside no resources for future beneficiaries.
As a result, it provides no assurance about the program’s
How can a trust fund
with over a trillion dollars “in” it
not really exist? When it consists solely of IOUs from the federal
government to itself. The federal government borrows any current
trust fund surpluses in exchange for special U.S. Treasury Bonds.
The dollars are then spent by the government on current programs,
leaving a “fund” of Treasury IOUs. But those are
not real assets. The result is no different than if you “saved” up
to buy something by writing an IOU to yourself and depositing
it in a cookie jar each week.
Since the trust fund consists of federal IOUs whose proceeds
have already been spent, how will the U.S. Treasury come up with
the funds to redeem them when they come due? It will require
new taxes, added borrowing (deferred taxes) or reduced spending
on other federal programs, because that is the only way the federal
government can acquire the necessary resources to live up to
its trust fund commitments. As a result, the trust fund essentially
amounts to nothing but a commitment to massive future tax increases,
but with all the details of who will pay and how much it will
cost them conveniently unexplained.
The absence of a real
trust fund also means that taxpayer bailouts will be needed
far sooner than the fund’s insolvency date,
when its balance reaches zero (with assumptions that may well
turn out to be over-optimistic). Ironically for those relying
on trust funds for financial assurance, that bailout will begin
just after the trust fund hits its forecast peak. The trust fund
must then start paying out, and the Treasury will have to start
making good on its IOUs at that date, not a generation later.
This year’s Social Security trustees’ report
estimated that date to be in 2018, 24 years before the forecast
the exhaustion of its trust fund. That is clearly not too far
off to begin dealing with its multi-trillion dollar unfunded
That report also showed
that Medicare’s finances were
in even worse shape, with its trust fund already forecast to
begin shrinking this year, and only worsening after that. By
2078, benefits from these two programs were anticipated to take
20.6% of GDP, nearly triple the 7% they absorb today. The magnitude
of that expansion also shows that only major changes, not minor
tinkering around the edges, can address those problems.
Backed by trust funds that do not really exist and therefore
do nothing to delay the real day of fiscal reckoning, Social
Security and Medicare are not nearly as sustainable as reform
opponents claim. The status quo is therefore not an option, making
the real question that of which alternatives to pursue. And failing
to address those questions now is irresponsible.
All of the real options will be painful, because both programs
have under-funded promised benefits by trillions and trillions
of dollars-. However, before we can really begin an informed
discussion of those alternatives, we need some idea of the serious
and growing magnitude of what we face. Deluding ourselves with
imaginary trust fund security blankets can only prevent that
discussion, and guarantee that it will be far more painful when
it unavoidably takes place. tOR
2004 Gary M. Galles