SOCIAL SECURITY TRUST FUND RESTS ON HOLLOW PROMISES.

Byline: Gary M. Galles

Whenever the impending future bankruptcy of Social Security generates substantial media attention, the Social Security Administration reassures people that any problems are far off.

Perhaps their biggest ``proof'' is that the Social Security Trust Fund, now at about $600 billion and growing by about $50 billion a year, is expected to last until 2029 under current law. With funding assured for more than 30 years, surely there is no need for concern.

Unfortunately, however, the Social Security Trust Fund is a fraud. There is, in fact, no fund or resources set aside for Social Security beneficiaries. As a result, a positive current balance in the trust fund provides no real assurance of the future survival of the program as we now know it.

How can a trust fund with $600 billion in it not really exist? When it consists of IOUs from the federal government to itself.

The federal government borrows current Social Security Trust Fund surpluses in exchange for ``special issue, non-negotiable bonds'' from the U.S. Treasury. Those dollars, and the resources they represent, are then spent by the government on current programs, leaving Treasury IOUs, but no real fund to ``back'' them. The result is no different than if you ``saved'' up to buy something by writing an IOU to yourself each week.

Since the Social Security Trust Fund consists of federal IOUs, whose proceeds have already been spent, how will the U.S. Treasury come up with the funds to redeem them when they come due? It will require new taxes, over and above currently legislated Social Security taxes and all other federal taxes that go toward other programs, or reduced spending on other federal programs (and which of these do you think is more likely?), because that is the only way for the federal government to acquire the necessary resources to live up to its Social Security Trust Fund commitments.

In other words, the trust fund consists of nothing more than a massive commitment to future tax increases; hardly reassurance of fiscal solvency.

The fact that there is no real Social Security Trust Fund also means that Social Security will need a taxpayer bailout far sooner than 2029, when the fund reaches zero (with assumptions that may well turn out to be overly optimistic).

Ironically for those relying on the trust fund for financial assurance, that bailout will begin just after the trust fund reaches its forecast peak in 2012. The trust fund must then start paying down, which means that the Treasury will have to start making good on its IOUs, and that will require new taxes beginning then, not 17 years later.

If the trust fund doesn't really exist and a positive balance doesn't assure solvency, why do politicians talk about it as if it matters? It seems to exist because it allows politicians to fool the American public by double-counting.

The current Social Security surpluses are counted as adding to the trust fund, appearing to put it on a sounder footing, even though the future benefits being committed to outweigh the current ``excess'' taxes being imposed, so that its financial footing is really slipping.

At the same time, that current surplus is included in the federal budget figures, lowering the reported deficit by an equal amount, a subterfuge which President Clinton admitted earlier this year was necessary for the so-called balanced budget deal to work.

Backed by a trust fund that will do nothing to delay its day of fiscal reckoning, Social Security in its current form is not sustainable for nearly as long as official reassurances indicate (although it will last until after current decision-makers are safely beyond electoral accountability). The status quo is therefore not an option (something ignored in a recent poll which found a majority favoring keeping the system as it is over several alternatives).

So the question becomes which alternative should be reserved.

Privatization plans that are capable of increasing the returns to retirees over those now generated by Social Security are the only ones that appear very promising, having worked well in other countries (e.g., Chile, Britain).

It is true that there will be both implementation difficulties and inevitable pain in such plans, but Social Security's unfunded promises (estimated at present value of $11 trillion today), means there is no painless alternative. However, before we can really begin an informed public discussion of the real alternatives, we need to stop deluding ourselves with an imaginary Social Security Trust Fund security blanket.