Social Security is largely a pay-as-you-go program. That is, most of the payroll taxes collected from today’s workers are used to pay benefits to today’s recipients. In 2006, the two, so-called, trust funds that comprise the Social Security program (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) collected $744.9 billion in revenues. Of that amount, 84% was derived from payroll taxes and 2% from income taxes on Social Security benefits. Interest earned on the government bonds held by the trust funds provided the remaining 14% of income. As the chart indicates, assets in these trust funds increased in 2006 because income exceeded expenditures for benefit payments and administrative expenses.

The preceding paragraph (paraphrased from the government explanation of the charts) uses two terms, trust fund and assets, in a manner that is inconsistent with the way most individuals understand them. Trust fund suggests a large accumulation of cash waiting for the day when those who made payments into the trust fund during their working years will call upon the fund during their retirement years. In fact, the only substantial assets in these trust funds are IOUs from the U.S. government, which has borrowed the excess Social Security receipts and used them to finance other government programs. The trust funds are treated as having loaned the excess receipts to the federal government, which then pays interest to the trust funds for the use of the money. However, the payments merely consist of increasing the amount the federal government already owes to the trust funds, so the trust fund appears to grow in size (see the 25% slice of the right hand pie chart).

To our way of thinking, it is this notion of the apparent existence of a trust fund endowed with trillions of dollars that gives the American public a false sense of security about the ability of the federal government to meet its future obligations without heavier taxation, heavier borrowing or both.