Misleading the Public: How the Social Security Trust Fund Really Works

Misleading the Public: How the Social Security Trust Fund Really Works
Published on September 2, 2004 by David John Executive Memorandum #940

[1] See David C. John, “Misleading the Public: How the Social Security Trust Fund Really Works,” Heritage Foundation Executive Memorandum No. 940, September 2, 2004, at http://www.heritage.org/Research/SocialSecurity/em940.cfm.

[2] ” Sabo Answers Bush Challenge on Social Security Reform,” press release, March 3, 2005.

[3]Office of Management and Budget, Budget of the United States Government, Fiscal Year 2000: Analytical Perspectives (Wash­ington, D.C.: U.S. Government Printing Office, 1999), p. 337.

As political leaders debate how best to fix Social Security, many policymakers are focusing on the wrong issue. Their sole concern seems to be the date when the Social Security retirement and survivors trust fund will run out of its paper assets. This mistaken emphasis misses the fundamental point about Social Security’s problems: There is no cash in the Social Security trust fund, and there never has been any.

The Social Security trust fund is merely an accounting device filled with IOUs that future taxpayers must repay. Far too soon, payroll taxes will be insufficient to pay all of the promised benefits. Unless Congress promptly takes action, taxpayers will have to pump hundreds of billions of additional tax dollars into Social Security to pay the promised benefits.

How the Trust Fund Operates.Workers pay their Social Security taxes through their employers. Each employer periodically sends a lump sum payment to the U.S. Treasury that includes all of the income taxes and Social Security and Medicare payroll taxes paid by both the employer and its employees.

The Treasury both receives the payroll taxes (and income taxes that higher-income retirees pay on their Social Security benefits) and pays monthly benefits on behalf of the Social Security Administration (SSA). The money stays in the Treasury’s hands until it is either paid out as Social Security benefits or otherwise spent by the government. In fact, no money ever goes into the trust fund. Instead, the trust fund balance is the result of two accounting entries by the Treasury.

First, the Treasury estimates how much of the aggregate tax receipts are Social Security taxes and “credits” the Social Security trust fund with that amount. Then the Treasury “subtracts” the total amount paid in monthly Social Security benefits from the trust fund balance. No money actually changes hands; these are strictly accounting entries.

Any “money” remaining in the trust fund is converted into special-issue Treasury bonds, which are really nothing more than IOUs. In addition, the Treasury pays interest on the trust fund’s balance by crediting the trust fund with additional IOUs. These are also strictly accounting entries, and again no money changes hands. After crediting the trust fund with the proper amount in IOUs, the government spends the extra Social Security tax collections just like any other tax revenue–to finance anything from aircraft carriers to education research.

At the end of 2002, the Social Security trust fund had a balance of $1.22 trillion. During 2003, the Treasury received $544 billion in Social Security taxes and paid out $406 billion in Social Security benefits. Therefore, the trust fund received $138 billion in these special-issue Treasury bonds, resulting in a trust fund balance of $1.36 trillion at the end of 2003.

Why the Social Security Trust Fund Differs from Real Trust Funds. Private-sector trust funds invest in real assets ranging from stocks and bonds to mortgages and other financial instruments. However, the Social Security trust funds are only “invested” in a special type of Treasury bond that can only be issued to and redeemed by the Social Security Administration. As the Congressional Research Service noted in a report on May 5, 1998:

When the government issues a bond to one of its own accounts, it hasn’t purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.

According to the Office of Management and Budget under the Clinton Administration in 1999:

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. [Emphasis added.]

In short, the Social Security trust fund is really only an accounting mechanism. The trust fund shows how much the government has borrowed from Social Security, but it does not provide any way to finance future benefits. The money to repay the IOUs will have to come from taxes that are being used today to pay for other government programs. For that reason, the most important date for Social Security is 2018, when taxpayers must begin to repay the IOUs, not 2042, when the trust fund is exhausted.

Conclusion. Social Security’s financial crisis will begin far sooner than many politicians claim. In less than three years, the first baby boomer will reach retirement age. Once that happens, Social Security (and Medicare) will be on a slippery slope toward insolvency. While Social Security can continue to use its tax receipts to pay full retirement benefits until 2018, Congress cannot wait that long to act. Misleading the public into believing that Social Security is secure until 2042 or beyond will only make the impending crisis more difficult to avoid.

Furthermore, huge impending deficits are only one of the problems facing Social Security. The sad reality is that millions of workers receive a dismal rate of return on their Social Security retirement taxes. Making matters worse, the current program does not enable workers to build up investments and cash savings to supplement their monthly Social Security checks.

The debate about Social Security’s future should be about how to improve each American’s personal retirement security and how to enable each American to build a nest egg for the future. Otherwise, Americans will lose a real opportunity to improve the lives of future retirees. The best way to fix Social Security is to provide younger workers with the opportunity to invest part of their Social Security taxes in personal retirement accounts.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


judge napolitano speaks the truth about social security fraud by the state


Dated: September 1953


Creator; Social Security Administration
c/o Office of Central Records Operation 300 N. Greene 8t
Baltimore, Maryland



Trustee: John Dee Doe

The Creator hereby conveys, assigns, transfers, and delivers to the Trustee the Social Security Identification Card and any such other assets and/or property as now and in the future may be of interest to the Trust as a matter of right according to the “Social Security Act of 1935” [all relevant parts of which are made a part hereof by reference], the receipt of which the Trustee hereby acknowledges, to have and to hold the said assets and/or property, hereinafter called the Trust Estate, unto the Trustee in trust for the purposes and terms as set forth below.

Beneficiary: This Trust is established for the benefit of the Social Security Administration

Trust Fund, as defined in the “Social Security Act of 1935”.

INVESTMENT-MANAGEMENT: The Trustee, or its General Manager or assigns, shall store, invest, and reinvest the Trust Estate in its discretion, without regard for any law prescribing or limiting the investment powers of fiduciaries, in any security, and not be limited to Contracts, Stocks, Commodities, Precious Metals, Mutual Funds, Real Estate, Bank CD’s and L/C’s, Warehouse and Elevator Receipts, Stamps, Waybills, Options, Commercial Paper, Accounts Receivable, Royalty and Limited Partnership Interests, Copyrights, Patents, Bequests Anticipated, etc.

PURCHASE AND SALE OF SECURITIES: Capital assets and securities may be purchased, even on the installment sales basis at the Trustee’s discretion. Commercial paper securities may be sold at any price, i.e., at, above or below cost at the sole discretion of the Trustee or its assigns. Investments may be hypothecated and loaned out, and monies etc. can be borrowed.

BANKING: Regular checking, saving, thrift and other saving accounts may be opened, maintained, and closed at the discretion of the Trustee or its assigns. The Trustee or its assigns may appoint third party bookkeepers to manage, deposit, and withdraw from said accounts.

FORMATION AND PROTECTION: This Trust is formed under English Common Law.

LEGAL STATUS AND VALIDITY: The validity of this Trust is existent and subject only to the courts of its Situs.

DONORS AND SELLERS: Anyone may donate assets to this Trust, and anyone may sell assets to the Trust. Sellers who have the right of first refusal under a Buy/Sell Agreement may exercise their rights at any time the Trust remains in operation or as long as the Trust’s Successor remains in operation.

DISTRIBUTION AND TERMINATION: The Trustee or its assigns shall hold in Trust for, or distribute, all net income to the Beneficiary, or on its behalf, for the duration of this agreement as are needful according to terms and conditions of the said “Social Security Act of 1935”. Any net income above and/or beyond that which is needful to support the terms of said Act may be distributed to A Reasonable Wage for the Trustee as need may arise. After its creation this Trust is irrevocable.

LAW SUITS: This Trust shall settle, compromise, pursue, and/or oppose law suits, fines, liens, levies, assessments, purported claims for debts, restrictions, libel, etc., by both public and private parties and agencies. The Trustee shall have full authority to speak for the Trust in all legal matters and places.

TAXES: The Trustee is to pay all properly due taxes and to file all properly due tax returns. This Trust shall be properly operated as a “Simple Trust” and distributes all net income to its legal Beneficiary.

TRUSTEE WAGES: The Trust shall pay the Trustee “A Reasonable Wage”, which is defined as: payment of all of Trustee’s expenses, including but not limited to, all living expenses. Trustee wages may additionally be provided as stated in the DISTRIBUTION AND TERMINATION section above.

OUTSIDE HELP AND ADVICE: The Trustee or its assigns may utilize outside consultants, brokers, agents, attorneys, accountants, appraisers, custodians, employees, independent contractors, and pay them compensation as the Trustee may deem advisable.

BONDS AND FEES: The Trustee or its assigns may transfer, assigns, mortgage, apply and remove liens on property, perfect title, and furnish copies of bills of sale, deeds, trust indentures, corporate charters, resolutions, and such other legal paperwork as may be necessary to effect legal change of ownership of real estate property, etc. Trustee may serve without Bond or Fees.

OWNERSHIP TITLE: Title to assets may be held in the name of this Trust, in the names of the Trustee or its assigns, in street name, or in bearer name. This Trust was created with a name that sounds exactly like the name of the person the Creator placed in the capacity of Trustee to facilitate its ability to acquire and hold assets. Any monies received by an agent-nominee for and on behalf of this Trust shall not be considered to have been constructively received by said agent-nominee, but shall accrue solely for the benefit and legal ownership of this Trust. Any ownership and/or possession of assets and/or property held for the Trust as described herein shall not constitute a common ownership interest unless such a common ownership interest is specifically described in the title documents for the acquisition or ownership of the assets and/or property so held.

SOCIAL SECURITY NUMBER; The Creator assigned an account number, commonly known as the “Social Security Number”, to identify donations from this Trust to the Social Security Administration General Trust Fund in accord with said “Social Security Act of 1935”. Where the names of the Trust and the person acting as Trustee are so similar as to sound identical and are only distinguishable by capitalization in spelling, the Social Security Number so assigned must be used to designate: tax payments, ownership and/or acquisition of assets, accounts and/or property held separately by the Trust.

TRUSTEE RESIGNATION OR DEPARTURE: Should the Trustee resign, cease to exist, or depart for any reason, the successor Trustee shall be as per schedule A of this agreement.

IRREVOCABLE: This Trust is irrevocable and cannot be changed, revoked, or terminated or even blocked by the Creator, Trustee, or Beneficiary. No other parties are legally associated.

IN WITNESS WHEREOF, said Creator and Trustee have hereunto set their respective hands and Seals.

Social Security Administration John Dee Doe

BY: Acts of issuing the SSA#, 546-00-6666 BY: signature and acceptance
Distributing the Social Security Identification Card,
And holding an open account under said SSA number

Social Security Administration _____________________________
Creator John Dee Doe, Trustee

Done now September 29, 2003 and nunc pro tunc on the date of the Trust’s creation in September 1953
Taxpayer Identification Number: [666-32-6666].

Subscribed and sworn before me this 29th day of September 2003

County of Douglas
State of Kansas

____________________________ Seal:
Notary Public or Three Witnesses signature


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