Tuesday, March 08, 2005
A great article in the New York Times that explains the trust fund. Some of the articles on the social security debate in the MSM clearly do not understand the trust fund.

As I have mentioned before, the trust fund does not have any money - there is no gold in Ft. Knox that represents the "trust fund." The trust fund is not non-existent though. And it is not quite as meaningless as a bookkeeping entry somewhere in our budget. What the trust fund is, is a bond holder. The trust fund buys treasury bonds from the U.S. government every year (or actually I think more often than that, but it isn't really relevant). And what, might you ask, does Congress do with the money they get from the trust fund? Well they spend it of course - all of it - we are running a deficit after all.

Thus, when the trust fund becomes necessary in order to pay benefits, the U.S. government has to pay money it doesn't have. It has to either go further into deficit, cut spending in other programs, raise taxes (which nets out as a benefit cut - well it wouldn't actually net out, but it would have the effect of cutting benefits in some proportion). So the trust fund isn't truly non-existent in the sense when social security goes to collect it will be gone. But it will have a negative effect on our economy when that happens. And it is going to happen soon - 2018 by the latest projections. That is a mere (and I am not being sarcastic) 13 years away.

If we are in a recession at that time, it could get really ugly. That is why Bush is doing this - he is thinking ahead like all politicians should, but almost none do. Regardless of what you think of his policies, this alone makes Bush a great president in my book. He isn't only concerned with his short-term political career or even his legacy (cough, Clinton, cough). He is focused on doing the right thing, no matter how unpopular, for the good of the long term.

This is also why he is pushing privatization. Privatization is largely a red herring for the imminent issue - it doesn't really help the "solvency" problem (actually it sort of does - in the long run - but I am not going to argue this now). But what privatization really does is ensure this doesn't happen again. It would allow those who turn 18 under this system to be guaranteed to get out of the system what they paid in (assuming it requires very conservative investing - which I am sure it will - no one is going to actually "lose," they just might not get the greatest return on investment).

privatization the system will prevent the situation facing us now from happening every other generation (or ever three generations, or whatever it would end up being) when the demographics get messy like they are now. It is a long term solution to fix social security. But I digress.

Back to the trust fund. Contrary to what many on the left say, the situation social security now faces shows that its critics were essentially correct back during FDR's administration:
Alfred M. Landon, Roosevelt's Republican opponent in the 1936 presidential election, called the new program "a cruel hoax," no different from a parent who took money from his children to invest for retirement but instead spent the money and left the children with i.o.u.'s.
That is essentially what has happened now. If we do nothing, benefits will go down 30% (probably more - but we won't know till 2042 or thereabouts) when the trust fund runs out. And on top of that, for the 24 years before that our economy will be getting pressured from having to pay back the trust fund bonds. So in real dollars, that 30% could be 50%, 60% maybe even worse.

That is the problem with the trust fund.
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I am an attorney in Chicago. Politically speaking, I am an indepedent that tends to lean conservative on fiscal issues and progressive on social issues. I try to remain as unbiased and open-minded as possible. Please email or post any comments, and especially criticisms. If something I say is wrong, or you disagree - let me know about it!



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