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Dean Baker's commentary on economic reporting


Fiction on the Social Security Trust Fund

Nothing like some comments on the trust fund to get the blogging juices flowing. It is amazing how metaphysical these discussions on the trust fund get. I don’t really see anything very complicated here. I am simply referring to the law as it stands.

Under the law, Social Security can only pay benefits out of the money that it has in its trust fund. Yes, that means it has a separate account from the rest of the budget. If the budget has an enormous surplus, but the trust fund is empty, then no benefits get paid, that’s the law. On the other side, if the government has an enormous deficit, but the trust fund still holds bonds, then Social Security benefits still get paid, that’s the law. I have not commented on whether I like the law or not, I am simply describing the law. (By the way, Medicare is currently being financed in part by the bonds held in its trust fund, and I have not heard a single politician make an issue of this.)

Under the law, there is absolutely nothing that would suggest the bonds held by the trust fund are fictional. They are legal obligations, just like the bonds held by banks and private individuals. As President Bush rightly pointed out last year, they are “sheets of paper.” That is true of other bonds, stock certificates and most other claims to wealth in a modern economy. Maybe there are a lot of folks out there who carry around gold, but for my part, I don’t know of any.

Could Congress change the law? Of course, Congress passed the law and it has the legal authority to change it. My guess is that any Congress that voted to default on the bonds held by the trust fund would be massacred at the polls, but that is just speculation. I will say that I do not know of a single member of Congress who has publicly called for defaulting on the debt.

In any case, if people are trying to understand Social Security’s finances, they should understand what those finances are under the current law, not the law that some oped writer or Washington Post editor would like to exist.


  • At 1:55 PM, Anonymous Erik L. said…


    You have a funny way of changing the point of the discussion as it progresses. There is nothing complicated here. The "trust fund" is an accounting fiction as demonstrated in my second post.

    This fact has nothing to do with whether or not the bonds in the trust fund are legal obligations. Of course they are. So what (unless you are returning to your earlier article about whether or not we should default on them).

  • At 2:22 PM, Anonymous dale said…

    It has everything to do with it erik. What is the point of your assertion that the trust fund (in scare quotes no less) is fiction- other than to suggest that payment of the bonds is optional or somehow not required?

  • At 3:35 PM, Anonymous Anonymous said…

    Congress wouldn't default on the debt. They'd change the payment schedule by reducing benefits in some manner. Many Congressmen have called for that through changing benefit formulas or retirement age.

    I do agree that calling anything a fiction in this context is ridiculous. Even if you think that bonds held by government agencies are not the same as those held by private parties, Social Security is no more or less a fiction than our plans to fund procurement of F-22's.

  • At 3:48 PM, Anonymous John said…

    erik I. said that the Trust Fund is an accounting fiction.

    More nonsense that I get so tired of hearing.

    Yes, it is an accounting fiction. The dollar bills in my wallet are accounting fictions. My checks are accounting fictions. My paycheck is an accounting fiction, not even dollars doled out to me, just blips from the company's bank to my bank.

    Every instrument of finance, private or public, is an accounting fiction.

    So zippedy-doo what?

  • At 3:50 PM, Anonymous Mcwop said…

    The trust fund is real, and not a fiction. It is an asset of the Social Security division of government, but is liability of the overall government entity.

  • At 4:21 PM, Anonymous S Brennan said…

    Well if SSI is fiction then legal tender is

    What's the point of keeping the constitution preserved in Washington when folk at WAPO are too lazy to go over and read it?


    Passed by Congress June 13, 1866. Ratified July 9, 1868.
    Section 4.
    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned...

  • At 4:40 PM, Anonymous Erik L. said…

    Dale- I am not saying it because I think we should default. I say it because it produces two excuses for raising taxes instead of one. You raise taxes in the 1980s and lend it to the general fund. This allows government spending (which never ever goes down) to rise. Then in mid 21st century when the bills come due and the baby boom retires they have to raise taxes again to pay them.

    If they did not create this accounting fiction (which, BTW John is no way analogous to the other things you mention) then instead of raising taxes (and spending) in the 1980s, they would just have had to raise taxes in the mid 20th century by enough to pay the boomers.

    SO you can see, if you care to pay attention, that this fiction allowed congress to get away with raising the same sum twice and to spend it on other things the first time. This is my problem with it. It has nothing to do with an excuse for default.

    If you want to rebut this post please explain to me in detail why the above is wrong instead of ignoring it agasin.

  • At 4:41 PM, Anonymous Erik L. said…

    Also, in my experience it isn't nonsense that people tire of hearing. It is things they are afraid are true.

  • At 4:46 PM, Anonymous Brian said…

    The trust fund is an IOU from one branch of the government to another. The bonds it contains could be incinerated tomorrow and it would in no way affect the government's ability to make Social Security payments.

  • At 4:46 PM, Anonymous howardl said…

    If economists are this confused about SS, no wonder journalists and the laity can figure it out.

    1. If you want to understand SS financing, think of SS as a private company that provides annuities. People buy the annuity by paying money to the company during their working years; the annuity pays money back to people during their retirement years. During any given year, the company may find inflows exceed outflows; this excess is invested. During any given year, the company may find that outflows (obligations) exceed inflows; this excess is financed by liquidating investments. Three differences between SS and a private company:

    A. The private company would establish the rules of the annuity (how much paid out and how paid in by an individual in any year) to be actuarially sound (based on life expectancy and investment returns, the company will be able to meet its obligations).
    B. If the private company or SS cannot meet its obligations, the government can (if it passes the appropriate legislation) bail it out; almost everybody believes that the government is more likely to bail out SS than a private annuity company.
    C. SS can only invest in government bonds. A private company could also invest in real estate, or the stock market, for example. It really stretches the meaning of the term "accounting fiction" to say that a private company that purchases government bonds has acquired "meaningless pieces of paper".

    2. Macroeconomists, when trying to get a measure of the total fiscal stimulus of government combines the surplus from the SS with the deficit from the rest of the budget. This is perfectly appropriate if you want to evaluate the fiscal stimulus; but it is at the root of why people are confused about whether SS is separate from the government or not.

  • At 4:47 PM, Blogger PGL said…

    erik - suppose you have placed savings into some private trust fund, which decided to purchase government bonds. You are relying upon their good faith and their accounting. Or maybe your employer is running a defined benefits program, which they placed into corporate bonds with the corporation being your employer. If either decides to take what they promised you in terms of retirement benefits and give them to someone else - you'd likely sue. And I bet you'd win.

  • At 5:18 PM, Anonymous Half Sigma said…

    The term "trust fund" creates the illusion that your Social Security retirement money is invested somewhere waiting for your retirement.

    But in the case of Social Security, the money is lent to other parts of the federal government and the other parts will supposedly pay the money back in the future. So this "trust fund" is not like a private trust fund. How would you like it if you found out that you purchased an annuity from a private company, and that the private company had "invested" all of your money into another part of the company, and the company as a whole was deeply in debt?

    Not that I'm requesting that Social Security actually invest money, this is impossible given the vast amounts of money involved. The government can't just go to Fidelity and open an investment account.

    Inevitably, the ability of the government to pay benefits in the future is based on the ability to tax future generations, which is actually pretty safe unless our country doesn't exist in the future.

    In any event, it isn't helpful for people to try to understand Social Security based on a "trust fund" concept, whatever the law (easily changed by Congress whenever it feels like) happens to call it. From a holistic perspective, it's a transfer payment scheme where people who work are taxed and the taxes are given to people old enough to collect.

  • At 5:35 PM, Anonymous John said…

    Outstanding point, s brennan, that I never encountered before! Article XIV of the Constitution. You know, I never thought of that.

    "Section 4.
    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned..."

    Thanks very much brennan.

  • At 5:46 PM, Anonymous howardl said…

    Again, I just don't understand the logic of half sigma. Suppose I buy a private annuity and the company I buy it from invests my payment in government bonds.

    1. Am I suffering from an "illusion" that my money is invested somewhere, or is a government bond a legitimate investment?

    2. If it's not a legitimate investment, is it because you believe that government bonds are inherently less secure than privately issued bonds? Or do you regard bonds in general as illegitimate assets?

    3. Or is a government bond a legitimate asset when purchased by a private individual or company, but not a legitimate asset when purchased by social security? How could the government selectively default on bonds held by social security? If they tried this, the social security administration would sell the bonds on a secondary market and a non-social security owner would cash them in for full value.

    4. Or is it that you do not believe that the social security administration purchases and holds government bonds? This is where Dean started the whole discussion and I thought his explanation was crystal clear.

  • At 6:29 PM, Blogger PGL said…

    half sigma - well, the SSTF does earn the same interest rate on its bonds that private trust funds earn when they invest part of your retirement funds into government bonds. If you wish to earn a higher expected return and take the stock market ris with the private portion of your retirement funds - nothing is stopping you.

  • At 6:45 PM, Anonymous sts said…

    I think the point that Half Sigma is making is that when one thinks of saving money one is usually not referring to "lending it to oneself."

    Also, the securities held in the social security trust fund are non-mareketable and can only be held by the trust fund. So in that sense they are not like other govt bonds. I am not suggesting a defualt on the special securities, they almost certainly will not be defaulted on. However I do believe that the 1983 law which began the overfunding of SS was a massive fraud perpetrated on the public. Putatively it was meant to have the baby boomers fund their own retirement. In fact it funded tax cuts for the wealthy (or in essence a wealth transfer with little to do with pension funding). The Baby Boomer retirement will be funded by the Gen Xers and Yers. This is fine, but there was no need to create extra payroll taxes to offset tax breaks for the wealthy.

  • At 2:10 AM, Blogger Hans Gruber said…

    I think what Dean Baker is trying to say is that with respect to social security (and ONLY social security) the assets are real. I think he's right there. It's probably better just to look at the trust fund as a government commitment, commitments which must be financed by issuing more debt or raising taxes when the time comes.

    Of course what is an asset to SS is a liability to the general government, so the government as a whole is no better off. The money isn't really saved, which is why the language of a "trust fund" is so deceptive. The situation we have today is no different than if the government committed to pay for future benefits through issuing debt and increasing taxes. Yet that does not mean these commitments are fiction, they are real, but instead of money sitting in a bank the commitment is the promise of more debt and higher taxes.

  • At 3:17 AM, Anonymous dale said…

    Erik, seems to me that your use of "fiction" is obfuscating your better point that the surplus social security taxes could have been used for better purposes- to make the economy stronger- more sustainable.

    As opposed to being used to finance tax cuts for the wealthy and a tragic occupation of Iraq.

    We might have been better off sticking to a strict pay as you go. but the powers that be devised this system of surplus with holding taxation to build up this trust fund to get us through the boomer buldge. Surplus funds can't be put in a vault or under the mattress. They have to be converted to Treasury bonds and sold to investors. Although, I suppose they could have gone directly into paying down the national debt- making it easier to raise taxes when the need arose to continue with pay as you go.

  • At 8:31 AM, Anonymous howardl said…

    sts provides information that is helpful to me in understanding the "trust fund is an accounting fiction" point of view. Namely: SS acquires special issue bonds that can be sold to and redeemed by the SS only. Therefore, there is a way to execute a selective default on SS-held bonds. Not arguing about politics or legalities, but only that administratively it could be done. And this makes the 14th Amendment stuff more interesting (to me) since it raises the possibility that congress would pass a law saying default on SS bonds, and the supreme court would say, "That law is unconstitutional."

  • At 10:29 AM, Anonymous John said…

    Amendment XIV, Section 4.

    Hmm, well I read it. In context, it affirms the validity of Union debt and disavows Confederate debt.

    It can probably be extended to other debt, but it is not a blanket assertion of the validity of all debt not connected with the late rebellion.

    I don't see its applicability to the Trust Fund.

    At least, not as I read it. Perhaps a lawyer can do better than me.

  • At 12:08 PM, Blogger Saam said…


    The thread underscores the danger of making references to gold in the way that you did. What you say is precisely accurate; money (broadly defined) is a claim to wealth. Gold can be money, or it can be fashioned into jewelry or filings. Paper can be money, or it can be fashioned into books or toys.

    But as gold is more scarce than paper, people associate it with innate value beyond its exchange value as money. Ie, gold is 'real money', whereas paper is 'fake money'. Which of course is absurd, as is the idea that an account that represents a legal claim to trillions of dollars of wealth is an 'accounting fiction'.

    So while you may not know anyone that carries gold around, you must know many, many people that carry gold around in their minds as an object of great monetary power.

  • At 5:11 PM, Anonymous RK said…

    the reason any honest economist will point out that there is no "trust fund" is because the government will, in the future, have to borrow money from the private sector (via foreign or domestic buyers of its bonds) to pay out "promised" social security benefits.

    the government uses today's FICA tax revenues to finance all current government expenditures and payments on existing debt.

    Dean is correct in saying the issue should be simple...but he still doesn't seem to get it...more than likely he is being dishonest.

  • At 9:11 PM, Anonymous mjs said…

    First, as a legal issue it seems clear that the Trust Fund exists. Congress has the power to pass laws, and they used this power to create the Trust Fund.

    Second, fiscally it seems possible to discuss Social Security consistently either as a separate fund or as part of the overall government budget, as long as you include both assets and debits/obligations. (It seems confusing and misleading to deliberately ignore the law, but not inconsistent.) What is dishonest are positions that claim the assets are part of the overall bugdet but the debits are not.

  • At 2:00 AM, Blogger Dr. Tax in Sacramento said…

    The Social Security Trust "Fund" is a fiction. The securities that back it are not based on anything more than the good faith of the people and the promises that can be revoked or changed at any time. Alternative retirement vehicles have constituted requirements for probity. But no similar situation exists in Social Security. Social Security would work well in Alice's Wonderland. The definitions that millions of Americans have counted on - can be redefined in the same way the Cheshire Cat redefined terms and issues.

    Were this a company, it would be in bankruptcy - there are no hard assets to back the promises. The rules in FASB do not carry over to this scheme. As the number of annuitants increases (and we know they will) and the number of taxpayers who are making the current payments becomes smaller a couple of choices present themselves the system becomes unbalanced. That leaves only a couple of options. First, the promised annunity could be be diminished - thus making the promise a fiction. But in the political world that defines this program - that is unlikely to happen. Second, taxes could be increased significantly on the current payers to pay for the current annuitants. Again, that is not likely to happen.

    The first participants in this ponzi scheme got huge rewards - the Return on Payment (it is not an investment as clearly stated in the statute) has continued to decline over the last several decades. The current generation of payors - when they try to collect will get an ROP that would embarrass a short term money market manager.

    So how else would you define this but as a fiction. Alice and the Cheshire Cat would love this. But Wonderland, like Social Security is a fiction.

  • At 5:21 AM, Blogger Dean Baker said…

    A few quick comments before I leave this one.

    First, none of the "fiction" advocates here has explained how the bonds held by the trust fund are different from any other government bonds in that they are only backed by claims on future tax revenues. If this somehow makes them a "fiction," then all government bonds are a fiction.

    I love the assertions that one part of government can't have a debt to another part of government. Really? Is thisa principle of nature?

    In the law, one part of government (if it makes anyone feel good to describe SS that way) absolutely does have a claim against another part of government. Again, that's the law. Those folks who don't like that can go to Congress and advocate that it default on this debt and eliminate the claim. It may prove difficult as the number of people who are relying on income drawn from these bonds will be rising rapidly in the next few years.

    Finally, the whole Social Security "crisis" depends entirely in the idea that there are distinct funds within the government accounts. The "fiction" advocates who want to say that this is impossible, must then also believe that the Social Security tax revenue can in no way be distinguished from other government taxes. This would mean that it makes no more sense to say that Social Security will run out of money that the Defense Department or State Department will run out of money.

    In other words, if they are consistent, the people who believe that the Social Security trust fund is a fiction must also believe that the Social Security crisis is a fiction, since the program can only run out of money if the government as a whole runs out of money.

  • At 3:43 PM, Anonymous Anonymous said…

    rk wrote, the reason any honest economist will point out that there is no "trust fund" is because the government will, in the future, have to borrow money from the private sector (via foreign or domestic buyers of its bonds) to pay out "promised" social security benefits.

    And how is that different from government debt owed to private parties?

  • At 4:30 PM, Anonymous Half Sigma said…

    Everyone else, including foreign governments, can invest in U.S. government debt instruments. But Social Security can't because that's just the way it is.

    The dollar has become bigger than just being the medium of exchange in the U.S. It has become the medium of exchange for the world.

    The U.S. government doesn't have any money saved up, it's a debtor government, and really it's impossible for it to be any other way, U.S. government debt is necessary for the world economy to work.

    Talk of a "trust fund" creates the illusion that your social security payments are put way somewhere safe to be withdrawn later, and that's not true at all. The government will have to tax future generations to pay future beneficiaries. This would not be the least problem if the ratio of workers to SS beneficiaries were going to remain constant. But it's a huge problem that SS beneficiaries will make up a significantly increasing percentage of the population. How will they be paid?

    There's no magical solution to this problem like "investing" SS money in the stock market. The ability of SS to pay benefits is based on the future economy of the U.S., and future corporate incomes are based on the same thing, so it's an illusion that the stock market can perpetually outperform the U.S. tax base, it can't.

    The U.S. needs to make tough choices regarding solving the SS problem by planning for future reductions in benefits, but no one wants to do anything tough.

  • At 1:40 PM, Anonymous S Brennan said…

    Half sigma said:

    "The U.S. needs to make tough choices regarding solving the SS problem by planning for future reductions in benefits, but no one wants to do anything tough."

    Oh...sigma, the right thing to do...the tough love thing to do...the conservitive thing to do.

    Wait for it...

    Stop transfering tax burdens from the wealthiest 3% to working people.

    Of course nobody has the courage to do that do they? Far easier to do as you suggest and cut the pensions of those who paid the excess taxes that allowed the rich to cut their tax.

    Were you looking in the mirror when you said:

    "...but no one wants to do anything tough.

  • At 9:04 AM, Anonymous Anonymous said…

    The Supreme Court ruled in 1937 in Helvering v. Davis and stated the following:

    "The proceeds of both taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way."

    In the 1960 case of Flemming v. Nestor the court asserted that individuals paying the tax have no right to Social Security or "accrued property." The details can be read at the SS site (

    What is above is the law.

  • At 4:18 PM, Blogger Dean Baker said…

    Since I have heard it so many times,I have to give a quick comment on anonymous' Supreme Court case saying that people do not have a right to their Social Security.

    The use of this case has been incredibly misleading. The Court said that people do not have a constitutional right to their Social Security. That means that if Congress changes the law, then they may not get the benefits to which they are currently entitled under the law.

    This has absolutely nothing to do with the issue being discussed. Under current law, it is illegal to discriminate based on age (for certain ages). This is not a constitutional right. Congress could change the law tomorrow, which would mean that any employer can then tell a worker that he or she is being fired because they are over age 50.

    But, until Congress changes the law, it is in fact illegal to fire a worker simply because he or she is over the age of 50. Similarly, with the trust fund -- UNLESS Congress changes the law, the government bonds held by the trust fund are legal assets of the Social Security system, every bit as much as the designated tax revenue that gets paid in each year.

    The people who say the bonds are a fiction are either trying to deceive the public or have no idea what they are talking about.

  • At 8:40 AM, Anonymous Anonymous said…

    To add to what Dean just said, note that (IIRC) the technical term for having a constitutional right to your SS benefits is that you have a "property interest" in them.

    This comes up because of the Constitutional protection against being deprived of property without due process of law, etc.

    As Dean says, just because you don't have a property interest in your SS benefits doesn't mean that the government can formally default on the SS trust fund obligations.

  • At 1:43 PM, Anonymous Half Sigma said…

    Laws can easily be changed by the whim of a majority of Congress, and laws are flip-flopped all the time.

    Constitutional rules are much harder to change, although they do too slowly change, usually via new appointments to the Supreme Court rather than by Constitutional amendment.

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