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Abolish the 'Trust Fund' That Isn't

Social Security: We pay for today's retirees. Tomorrow's workers will pay for us.

January 26, 1998|PAUL S. HEWITT | Paul S. Hewitt, a research fellow at the Center for Strategic and International Studies in Washington, is writing a book on Social Security reform

After months of White House waffling, President Clinton has pledged to use the remainder of his term to press for action to save Social Security and Medicare. Now comes the hard part: telling the American people that the Social Security trust fund offers no security, no trust and no funds.

Over the years, politicians have fed the public so many white lies about Social Security and Medicare that what most Americans think they know about these programs is wrong. The president can eliminate a major source of this confusion by calling on Congress to abolish the Social Security and Medicare trust funds.

Rhetoric about trust funds often dominates the debate about the financial health of our public retirement systems. Yet these artifacts of federal bookkeeping exist solely to keep track of unspent budget authority. They hold no money for future retirees. Nor do their asset balances accurately reflect whether Congress will continue funding benefits in the future.

In a recent Congressional Research Service report, David Koitz, the senior Social Security specialist at the Library of Congress, explains that "the promise of future benefits rests primarily on government's ability to levy taxes in the future, not on the balances of the trust funds."

In its common usage, the term "trust fund" refers to a cash management or savings account. This case of mistaken identity occasionally prompts program supporters to portray Social Security as a big savings plan for our golden years. The notion that the money in the trust funds is "ours" reinforces our sense of entitlement and makes it harder for politicians to cut benefits. Using the same specious logic, some reformers argue that young people could get a better deal by investing their payroll taxes elsewhere. Listening to their rhetoric, one might conclude that the Social Security reform debate is about the right to choose among competing investment vehicles.

But Social Security and Medicare are social welfare programs in which all of the taxes collected in a year are spent in that year. When we retire, none of the benefits we receive will be funded with the money we paid. The "deal" we get from paying into the system consists mainly of the comfort derived from providing today's retirees with health and income security. Succeeding generations may make far greater sacrifices for us. But that part of the deal is intangible at best.

Threatening to swamp this system are the twin tidal waves of demography and health care inflation. Over the next 30 years, the beneficiary population is projected to grow five times faster than the taxpaying population, and price increases in the health sector are expected to far exceed inflation in the rest of the economy. The Congressional Budget Office projects that Social Security, Medicare and Medicaid will cost an additional 8% to 13% of gross domestic product by 2030. By way of comparison, at the current rate of 15.3% of payroll, Social Security and Medicare taxes are expected to bring in only 6.4% of GDP.

These shortfalls are only partly reflected in the Social Security and Medicare trust fund reports. For example, the Social Security Administration projects that the trust fund surplus will last through 2028. Yet in that final year of solvency, we will be drawing down the surplus to the tune of $197 billion in today's dollars. Where Congress will find the money to cover this drawdown is anyone's guess. Meanwhile, the Medicare Hospital Insurance trust fund is projected to have a shortfall of $295 billion in 2028. But this calculation leaves out the comparably sized Supplementary Medical Insurance portion of Medicare, because like Medicaid, SMI is funded out of general revenues and by definition can't "go broke." With the SMI and Medicaid programs, the total budget shortfall in 2028 zooms to nearly $1 trillion in today's dollars.

Certainly it is important for us to project the fiscal impacts of our retirement programs far into the future. But the partial and often distorted view we get from the trust funds no longer serves this purpose. By calling on Congress to abolish these misleading accounting systems, the president can focus public attention where it belongs, on the enormous economic challenge posed by the aging of America.

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