I'm a progressive in favor of Social Security. I'm also an investment banker with many years experience in finance. I'm writing this because it appears to me that Social Security does raise issues that require answers now, and that the Social Security Trust Fund doesn't provide any solutions but merely creates confusion. Social Security may be facing something it hasn't before -- annual cash deficits, where SS benefits to be paid out during the year are greater than SS taxes collected in that year. Accordingly, a decision must be made about where the federal government should find the cash to fund a such deficits. And there aint no cash in the Trust Fund.
In 2010, for the first year ever, current year Social Security tax revenues may be less than current year benefit payouts ("Social Security to see Payout exceed Pay-in this Year." NYT, 3/24/10). If this turns out to be the case, then this will be the first year in which the federal government needs to raise cash from outside the SS system to pay this year's SS benefits. By contrast, in prior years, SS receipts exceeded benefits. And in each of those years, the government spent the surplus on non-SS items.
The Social Security Trust Fund does not contain the extra cash needed to cover the SS deficit. Rather, the Trust Fund merely maintains the legal separateness of SS revenue from other government revenue. This works as follows: When the federal government takes a SS surplus and spends it on non-SS items, it makes a note of the cash it has taken by placing in the Fund an obligation to pay that cash back in the future. Then, if there's a deficit, the government can legally pay SS benefits out of non-SS revenues to the extent that it has previosuly taken and spent earlier surpluses. This is important because the Social Security laws provide that the program must be self-funding over its life: at any given time, the total SS benefits paid out cannot exceed the total SS tax revenue taken in over the life of the program. When people talk about the "solvency" of SS, they are referring to that rule: that over the life of the SS program, SS cannot pay out more benefits than SS taxes raised over the same period. Since the program ran surpluses over its life so far, lots of SS revenues were raised in the past that weren't spent on SS benefits, so there's a notional/legal "excess" in the program. This way, SS can and is expected to run future deficits, which can legally be covered from general funds until all of that excess is burned through -- at which time the program is legally insolvent. All agree that the program won't be legally insolvent for years.
But legal solvency is one thing. This year, the government will need to find real cash if it turns out that there's a current deficit, and the SS Trust Fund is not a source of cash for payment of benefits. The surplus cash was generated, but the federal government spent the cash on other non-SS items and substituted the government's own obligations. Those obligations simply represent the government's promise to repay cash to the SS program as needed. And that's a good thing. But the obligations in the trust fund aren't cash themselves, and thus can't be used to pay cash benefits. To turn those obligations back to cash, the federal government must find cash from its usual sources: either by raising taxes, cutting non-SS benefits or, most likely, increasing borrowing.
There it is. So:
Question 1: Does anyone have a different factual understanding than the one presented above?
Question 2: If what's presented above is correct, then where do we, the vocal progressive community, suggest the government get this cash, understanding that this means either tax increases, other spending cuts, or more borrowing?
UPDATE: Folks seem to think that I don't like Social Security and am critical of it. What I'm saying is that either we are now at or a few years from the time when current SS benefits exceed current SS income, which means cash needs to come from somewhere. And the Trust Fund of course hold government securities, but those securities aren't cash, and benefits are paid in cash, not in Treasury securities. To raise money, the government can of course issue more debt. It does that constantly. I'm just trying to point out that on a cash basis, Social Security is either this year or by 2016 projected to be underwater. And if we agree that given this recession, the best thing to do is to pay the shortfall through increased borrowing, that's fine. And I'm fully in favor of raising the cap, even though that means that I will pay in way more than what I could ever get out. But I don't hear us progressives even acknowledging this issue, and that's frustrating. I expect that on the right -- but we're supposed to think.