The Social Security Trust Fund Is Full of IOUs, Right? Wrong.

The Federal Insurance Contributions Act, or FICA, "requires that the revenue be dedicated to Social Security, only to be used for the payment of benefits and related administrative costs. Until the funds are needed, the law requires that the monies be held in trust and invested," she explained. "From the beginning, Congress has required that the funds be invested in the most secure investment around — Treasury bonds backed by the full faith and credit of the United States. These are not casual promises to pay, but legal instruments that have the same legal protection and standing as all other treasury bonds."

The "IOUs" pejorative was "first used in the 1936 presidential election by Alf Landon to try to discredit the newly enacted program," Altman continued, and those who still call them IOUs "are either uninformed or deliberately seeking to undermine confidence."

BPC's Akabas, who assisted Fed Chairman Jerome Powell in his work on the federal debt limit, and now steers BPC's Commission on Retirement Security and Personal Savings, told ThinkAdvisor in his email message that the Social Security OASI trust fund "is indeed an accounting mechanism rather than a store of value, but it is important for both political and policy reasons."

Why? "First, by law, the program cannot pay out more in benefits than its income once the trust fund's assets are exhausted. That would mean a 23% cut to benefits in 2034. So there are serious practical implications of the trust fund balance, which is one reason why it's important to have that information disseminated."

From a policy perspective, he continued, "the program for many years took in more than it paid out (reducing annual budget deficits), so on a cumulative basis, the program has more than paid for itself to date and has not yet added to debt held by the public. For that and other reasons, there is a compelling case that reforms to make the program sustainable can and should be phased in gradually."

The trust fund is also a focal point for political action, Akabas added. "If the trust fund didn't exist and there was no automatic change in benefits on the horizon to keep the program in balance, then the will for political action to reform the program and make it sustainable would likely be even lower than it is today. In fact, the trust fund is what forced action in the 1980s deal that extended the life of the program for more than half a century."

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