Given the numbers of people directly affected by it, either as tax payer or retiree, the Social Security Trust Fund may be the most misunderstood of all major economic instruments.
But it is simple really. It is a checking account. Payroll checks are paid in, disability and retirement checks are paid out. Like any checking account as long as you have money to cover the checks everything is cool. And for most of its history it was truly pay as you go: between the years between 1957 and 1985 year end balance never went below $19.8B and never went above $45.9 billion. What it is not, and never has been is a Savings account.
You do have a Retirement & Disability account with Social Security, it just has the most indirect relation with the Trust Fund. Your retirement and disability checks are indeed computed based on your lifetime earnings and contributions, but your money is not working for you, it went out the door to cover others retirement checks.
In 1982 the country as a whole looked at cash flow to this giant Checking Account. The largest demographic cohort in US history, the Boomers born between 1946 and 1965, were coming into prime earning years, but literally that could not last forever, by 2008 some would start becoming elibible for partial retirement and by 2030 or so all surviving members of the cohort would likely be drawing benefits and it appeared there would not be enough workers coming up behind to comfortably cover the checks. So it was decided to increase the payroll tax and set the money aside in interest earning bonds, hoping to use that money as a bridge loan.
This required a great leap of faith, that the government would have the money to redeem the bonds when the time came, that they would use this new infusion of cash in a responsible way, say by paying down other debt. That didn't happen under Reagan and Bush, they spent all this new money and built up huge public debt besides. But then again the big money had yet to flow to the system, the entire accumulated balance only hit $109.8 billion by year-end 1998.
Trust Fund Ratio. This is the Trust Fund balance expressed as numbers of years of reserve to pay beneficiaries. In 1988 this ratio was 41, which translates to 4.92 months of reserve, by 1992 it hit 96 or almost a year of reserve. But then due to a combination of factors the money started rolling in. By 1995 we had $491.6 billion or a ratio of 1.28 (1 year 2 months), by the end of 2003 we had tripled that to $1.5 trillion and a Trust Fund Ratio of 288 (almost 3 years).
Now the 1996 Report had not predicted this, or at least not directly.
Trust Fund Ratios under the Three Alternatives
The standard numbers, the Intermediate Cost alternative (II) had predicted it would top out at 240, but not before 2010, and then sink to exhaustion by 2030. But the more optimistic Low Cost Alternative ( I) produced a ratio very close to this one, and interestingly showed the Trust Fund ratio soaring to 400 by 2010 and then never dipping below that ratio. In Trustees' jargon this meant it was in "long-term actuarial balance". In my terminology this would mean that Social Security was "fixed", and fixed to the point that it would not be necessary to redeem the actual bonds, though it might be necessary for the General Fund to pay some cash interest into the system.
As we progress through the Trust Fund Ratio figure year by year Trust Fund Ratios we get a graph with a consistent shape, but in each case with a newer, higher starting point corresponding to the actual number scored in the year at hand. By the time we get to the 2004 Report Trust Fund Ratios we have our exhaustion dates for the High and Intermediate Cost pushed out pretty far, and the Low Cost a Trust Fund Ratio practically in the stratosphere.
We can draw two conclusions from this immediately. One, any year we beat the Intermediate Cost alternative the exhaustion date gets pushed back. Two, if we consistently hit or beat the numbers of the Low Cost alternative, our problem is solved.
But there is a third conclusion we can reach, one that moves us from the realm of the economic to that of the political. What is the real meaning of Low Cost?
