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Where the Government Puts Your Payroll Tax Money

Danielle Kurtzleben

It's two weeks into the new year, meaning the first paychecks of 2013 are going out to many Americans. Those paychecks will be smaller than workers are used to, due to the end of the Social Security payroll tax cut. That money is the key source of revenue for Social Security. But if some experts are to be believed, the pool of money that keeps the program running is just a figment of the government's collective imagination.

"[D]espite what the public believes, there is no Social Security Trust Fund," wrote Bob Eisenbeis, vice chairman and chief monetary economist at Cumberland Advisors, in a commentary this week. "What the government calls the 'Social Security Trust Fund' is nothing but an accounting entity whose only assets are Treasury debt."

A quick background: what many people refer to as the "Social Security Trust Fund" is in fact two trust funds: one for old-age and survivors insurance, and one for disability insurance (hence the "OASDI" designation that may appear on your pay stubs, though it may also be listed under "FICA," or Federal Insurance Contributions Act).

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All told, the trust funds together had nearly $2.7 trillion in assets as of the end of 2011, according to the latest Social Security Trustees' Report. The money in that trust fund is all invested in Treasury securities, yielding around $114.4 billion in interest in 2011.

$2.7 trillion in assets and $114.4 billion in interest, --not to mention the hundreds of pages that the Social Security Trustees write every year to assess the program's finances, might seem like enough evidence to silence any doubts of the trust fund's existence. But to critics, the problem is that the trust fund is not full of cash for paying out benefits. Rather, because it's all Treasury securities, some have said it's full of "IOUs."

There's a certain bit of truth to that, in the sense that the trust fund is not a bank account full of usable assets. It is, rather, essentially a ledger of credits to the account. The Social Security trust funds do not represent a certain amount of money that the fund can pay out at a moment's notice to beneficiaries. Rather, the Treasuries in the account represent a claim on government revenues. Jason Fichtner, a former chief economist at the Social Security Administration and a senior research fellow at George Mason University's Mercatus Center, explains that people who believe the trust fund is a fiction have a problem with the government's dual roles in this equation.

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"Because the government is both the borrower and the lender, [the assets in the funds] don't have any real 'value' in that sense, and what they are is just obligations on future taxpayers. So it depends on which view you want to take," he says.

For his part, he says he takes a "middle approach": "I'm not saying they're not real, but I am going to be honest and say they are real obligations on real taxpayers."

Then again, look in a mutual fund or even your own 401(k), and you could very well see a stash of Treasury bills. To any investor, those bills mean something: they are a store of value, and to the Social Security Administration, that notion is no different.

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"Some of my retirement savings is in a mutual fund that invests in government debt," says Paul Van De Water, a senior fellow at the Center on Budget and Policy Priorities. "The trust fund holdings of government debt are just as real as the government debt in my mutual fund."

Yes, the trust funds are technically accounting entries that represent government debt, he says, but there is still no ambiguity.

"Clearly the trust fund does exist," he says.

So when Americans look at their slightly smaller paychecks this week and wonder where that little bit of lost money is going, it counts toward the Social Security trust funds, even if those dollars are not in fact sitting in an account, waiting to be paid out to future beneficiaries.

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