The trust funds

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Fifteen years ago, Sen. Daniel Patrick Moynihan became upset because Congress and the White House were using Social Security surpluses to finance other federal programs. The New York Democrat offered legislation that would have reduced the payroll tax in order to drastically reduce the Social Security surpluses. Congress rejected the bill.

Until Social Security nearly went bankrupt in the early 1980s, the retirement program was essentially financed as a pay-as-you-go operation. In the late 1970s and early 1980s, benefit payments actually exceeded payroll-tax receipts. In fact, Social Security, whose relatively meager trust-fund assets were hurtling toward zero, would have gone broke in 1983 were it not for a multi-billion-dollar loan. That year, to address the crisis, Congress passed legislation substantially increasing payroll taxes, which soon exceeded annual benefit payments, creating the Social Security surpluses that would eventually upset Mr. Moynihan.

Each year over the last two decades, Congress has borrowed the surplus payroll-tax money. In exchange, the Social Security trust funds received Treasury securities as IOUs. These securities earned interest income.

During the mid-1980s, the cash-flow surpluses and interest payments were small. In 1987, for example, trust-fund income (excluding interest) exceeded benefit payments and other costs by $14 billion; and trust-fund interest income totaled $5 billion. As more Treasury securities were issued each year to cover ever greater cash-flow surpluses and as more and more interest accrued, the assets in the trust funds soared. In 2005, trust-fund income (excluding interest) will exceed costs by $70 billion, while interest income will total $94 billion.

As a result of increasing cash-flow surpluses and rising interest income, over the past two decades the year-end net assets in the trust funds have increased from less than $20 billion in 1984 to nearly $1.7 trillion in 2004. When the trustees issued their annual report last month, they revealed a present-value unfunded obligation of $4 trillion. That is how much money that would have to be made available today (and earning interest) in order for Social Security to finance its commitments.

The little secret is that the calculation generating the $4 trillion unfunded liability assumed that the trust funds already included $1.7 trillion in assets. (Technically, they do.) However, as the trustees have repeatedly made clear, there are only three options available to redeem the Treasury securities in the trust funds: raise taxes; borrow the money and increase the budget deficit; or reduce spending on other government programs.

This year there is bipartisan agreement in Congress to spend Social Security's $70 billion cash-flow surplus. There is also bipartisan agreement to make an intragovernmental interest payment of $94 billion to Social Security's trust funds to service the debt incurred from having spent Social Security's surpluses over the previous 20 years. In other words, when the White House and Congress project a 2005 budget deficit of $425 billion, the truth of the matter is that the fiscal imbalance this year would be much closer to $600 billion if it weren't for the $164 billion Social Security surplus. In retrospect, Mr. Moynihan's 1990 proposal would have stopped the thievery dead in its tracks.