Why "Looting" the Social Security Trust Funds is Both Legal AND Fair

Having hopefully gotten some attention with THAT post title, let me start dispelling some misconceptions and myths about the Social Security Trust Funds, some innocent and some disseminated with malice aforethought. A common narrative among the left is that the Social Security Trust Funds were established after the Greenspan Commission in 1983 to one) pre-fund Boomer retirement and/or two) provide cover for Reagan to loot worker paychecks to pay for tax cuts for the wealthy and buy ships, planes, and missiles. Well every single element of that ranges between totally effing wrong and not quite right. I.e. wrong or wrong. In reality the Social Security Trust Funds were created pursuant to the Social Security Amendments of 1939 effective Jan 1, 1940. Explaining why the First Report of the Trustees of Social Security was released in 1941, it wasn’t until then either the Trust Fund or the Trustees had a full year of existence under those names. The first Report is not long, but goes a long way towards demythologizing the Trust Funds.

¬†First and foremost the Trust Funds are an operational fund. All receipts and reimbursements are credited to the fund at regular intervals and all benefits and administrative expenses are debited with all this being reported at monthly and annual intervals. At the end of each year the Trustees make a determination of financial adequacy of the Trust Funds where the metric is the NEXT YEAR of expenses for each year of the projection period, whether than be annual, five-year, ten-year, 25 year, 75 year or Infinite Future, all of which have been used at times since the first Report. If the Trust Fund balance for each projected year equals one year of next year cost as expressed as a ratio where 100 = 1 year, the Trust Fund is ‘financially adequate’ and in ‘actuarial balance’. In the words of that first Report:

The old-age and survivors insurance trust fund provides a financial margin of safety for the system against the first impacts of unforeseen changes in the upward trend of disbursements as well as against these short-term fluctuations and contingencies.

That is in addition to its role as a operational fund, the original TF was designed to be a reserve fund, and this is crucially important, one that would be required to grow year over year to maintain financial adequacy and actuarial balance. Which gets to the post title. In order to achieve actuarial balance the Trust Fund principal needs to grow on net over the projection period. Which means equally that once again on net Trust Fund principal is NEVER redeemed entirely, just rolled over and AUGMENTED by retained income from interest and taxes. And in turn this augmented Fund is BY LAW invested in Treasuries, in this case a category called Special Treasuries. And like all Treasuries this means that actual cash collections in excess of benefit and admin costs are spent on other functions of government. Moreover the requirement for an ever increasing reserve means the following counter-intuitive combination of facts: Trust Fund assets are as real as real, honest to God Treasury obligations backed by Full Faith and Credit of the United States. That never have to be paid back if Social Security is maintained in normal operation. That is the Trust Fund just grows and grows to meet continued growth in anticipated cost. All you need to do is to secure it an adequate income stream via taxes to pay for whatever benefits are not covered by interest. Which under a condition of what is called ‘Sustainable Solvency’ means that something over 95% of cost has to come from current tax. Because the Trust Fund just isn’t an investment fund. It is an operational and reserve fund that facilitates a Pay as You Go system. And any “looting” is just an unfair way of presenting the legal requirement to invest those reserves in Treasuries. (You buy a bond and the government spends the money on something. How is that looting?). Over to you all.

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