On the January 12 edition of CNN's Lou Dobbs Tonight, Concord Coalition president and Council on Foreign Relations board chairman Peter G. Peterson falsely claimed that the Social Security trust fund is “not funded” and that the U.S. government will have to borrow money, increase taxes, or cut benefits in order to finance Social Security benefits between 2018 and 2042. Peterson also misstated the current payroll tax rate used to fund the Social Security system, claiming it is 11 percent when it is 12.4 percent, split evenly between employer and employee.
The Social Security trust fund is what I call a fiscal oxymoron. It shouldn't be trusted and it's not funded. And whether you have one or not, you still have to go out and do the same thing -- three things. You either have to try to borrow the money, or you're going to increase taxes, or you are going to cut the benefits. Now, how much would you have to borrow? Preparing for this occasion, I asked the Concord [Coalition] people. In 2018, the system starts moving cash-flowed deficit. Between 2018 and 2042, we would have to borrow $5.4 trillion, in current dollars, to finance those deficits. Or if you want to increase taxes to pay for the benefits, taxes would have to go up from 11 percent of payroll to 18 [percent].
According to the Social Security Administration and as established by federal law:
Social Security taxes and other income are deposited in these accounts, and Social Security benefits are paid from them. The only purposes for which these trust funds can be used are to pay benefits and program administrative costs.
The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.
After 2018, the Social Security Trustees project that promised benefits will begin to exceed projected payroll tax revenues. But this shortfall will be made up by assets accumulated, as federal law stipulates, in the trust fund -- established in 1939 -- which Peterson claimed does not exist.
In addition, Peterson was incorrect to assert that it would be necessary to raise taxes or borrow money in order to finance promised benefits beginning in 2018. Because the trust fund's assets are invested in government bonds -- a legal requirement -- it is a U.S. government lender, just like any other entity or individual investing in Treasury bonds. As with all government bonds purchased by private or public entities, the government uses this money to partially finance its deficit spending. But Peterson is treating the trust fund's U.S. government bonds -- its assets, on which the U.S. owes payment -- as nonexistent, arguing that the trust fund must reimburse itself for the money it has invested in those bonds. Using Peterson's logic, if you lend your brother $1,000, he doesn't have any obligation to pay you back. You're out $1,000 and must recoup that money some other way.