Trusting the Trust Funds

Fortune magazine's cover story on Social Security is today's must-read budget article, and while you can quarrel with their stance that the program will need a "bailout," the story makes a vital point, which is that Social Security's troubles are much closer than most people think.

A lot of the debate around Social Security centers around a comforting idea, which is that the program has been socking away huge amounts of money in a trust fund while the baby boomers are in the workforce, and that when the boomers retire, the government will just draw down on that money to keep the checks coming. Under the current projections, the trust fund will last until 2037.

Unfortunately, this is only partly true, and sustained by a certain amount of creative accounting. In fact, the federal government uses all its revenue in a given year to pay all its expenses. That includes the Social Security surpluses, which the government borrows to reduce its annual deficit, giving the trust fund a special kind of "intergovernmental" Treasury bond in return.

There's nothing secret or illegal about that, and there's nothing wrong with the bonds. And as long as the trust fund exists, the government is legally obligated to provide Social Security benefits.

The problem is that pretty soon (the latest projections say 2016), the Social Security system is going to have to start cashing in those bonds. And where will the government get the money to pay those debts? From the rest of its budget, either from taxes, or spending cuts elsewhere.

This is already happening with Medicare, which dwarfs Social Security as a fiscal problem. The Medicare trust fund started redeeming its bonds back in 2008, and will cash in $30 billion more this year. In a more than $3 trillion federal budget, that's still a pretty minor problem. But Medicare's trust funds are projected to run out in 2017, a mere eight years away.

Again, you can argue whether cashing in bonds that have been put aside for years counts as a "bailout." After all, American workers and employers have been dutifully paying Social Security taxes assuming that benefits will be there for retirees when the time comes – whether the government put the money into bonds or not.

But you can't contest the fact that this is going to put increasing pressure on the federal budget. This started out as a simple shift of funds from one government pocket to another, but pretty soon the government's going to start scrambling to cover these expenses, in the context of an overall federal budget that's headed into deep trouble. So while the trust funds may have years to go, we're going to be feeling the pain long before they run out.