Monday, May 18, 2009

The Doomsayers and the Retirees

How can opposite sides of a debate both be right?

Doomsayers insist that Social Security has no 'trust fund' and will run out of money sooner than 2037, the new date listed in this month's official new projections.

Optimists say Social Security is well-funded and can continue with little additional money, if any.

They're both correct, at least partially so.

The doomsayers have latched on to a concept few media outlets understand: we're spending the Social Security surplus, and that means there's no 'trust fund.' Currently, Social Security takes in more money than it spends; that will change as we get more retirees per worker. Most news sources then report that the extra money Social Security has taken in - including this year and last - can then be spent to cover the gap until 2037.

But since we're spending that money now, there isn't any 'saved.' The surplus money goes into the general fund, which is spent by Congress on defense, education, and the like (see 'Where do your Taxes Go?').

It's as if you give $100 to your best friend in exchange for an I.O.U. while he or she then spends that cash. When you turn in your I.O.U., your friend needs to get that new money from someplace, since it hasn't been saved.

For Social Security, the I.O.U.'s are notes from the Treasury Department (or technically, they're an accounting entry made in the ledger for Social Security). To pay them off, the government will either need to borrow more (by issuing Treasury Bonds), or raise the income through taxes. There just isn't any saved. Really.

Optimists say the Treasury Department never defaults on payments, and that's true, too. Next week, we'll see why they're right: even though there isn't money saved, Social Security is not in crisis.

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