Of Trust Funds and Lockboxes; Social Security's Dirty Little Secret
By Congressman Joe Pitts
April 22, 2005
Washington 's dirty little secret is that the government spends Social Security money on much more than just retirement benefits. Once all the Social Security benefits for current retirees are paid out, the surplus is used to purchase Treasury Bonds. The funds from this sale go into the general government account and end up funding road projects, farm subsidies, foreign aid, student loans and other government programs.
The Treasury Bonds, meanwhile, are held by the Social Security Administration and cashed in when necessary to pay out Social Security benefits. This is what we know as the Trust Fund. It is debt owed by one government agency, the Treasury Department, to another, the Social Security Administration. And you can find it in a file cabinet in West Virginia (see photo at right) full of IOUs waiting to be redeemed.
This was not the intended purpose of Social Security. But it was the scheme put in place to deal with the surplus. How can government just leave money sitting around, right?
In the 1990s it was fashionable to talk about a "Social Security Lockbox." I supported this idea which would have walled off the surplus to be used only for Social Security benefits or to fund reform of Social Security and Medicare.
Many in Washington hated this idea because it would have prevented them from using a sizable pool of money that currently funds other programs. But if we had succeeded in getting it into law, it would have served two purposes: stopping the spending of the Trust Fund and cutting down on the national debt.
Today, there is no lockbox. Once you retire, the monthly retirement income you receive under Social Security is calculated using a formula roughly based on your earnings and the amount you paid into the system. By 2041, the jig is up on this scheme and, at the current rate of spending and retirement age, Social Security runs out of money - lockbox or not. It's not that Treasury Bonds are unreliable, there simply are not enough workers entering the workforce to support those leaving it. If we don't do something, adequate Social Security benefits will not be there for the next generation. It is simply immoral to ask younger workers to pay into a system that is not going to be around when they need it.
I feel the best way to address this problem is through allowing workers the opportunity to voluntarily save some of their own money in their own account for their own retirement. This is the only lockbox that will prevent Washington from spending workers' Social Security on something else. And it would offer workers the opportunity to save money in a place that earns more interest and allows them to build a nest egg for their family.
For example, a worker born in 1970 who lives in Strasburg , Pennsylvania earning the average salary for this area can expect a return of about .09 percent on his Social Security taxes. His total retirement benefit (the sum of monthly payments) would equal $355,046. However, if he were to pass away, his family would be entitled to only a portion of this based on a government-computed formula.
However, if this same worker put his monthly Social Security tax into a personal account, allocating most (65 percent) to bonds and the rest to stocks, his total retirement benefits would be $939,407. When he passes away, depending on how he chooses to set the accounts up, this nest egg legally belongs to his family and the government cannot take it away.
With personal accounts everyone wins. Workers have a nest egg they own, can pass on, and receive more retirement money. The government does not have to go into more debt, does not have to manage complex calculations of benefit payments, and would only have to oversee the accounts.
I believe you should be in control of your retirement. And I believe you can be, if government would allow it. This is your money we're talking about here. You sacrificed for it. You earned it. And if you decide you can get a better rate-of return than under the current system, then they should have the right to do it. Government should not stand in the way.
Now, I'm not talking about padding the wallets of stockbrokers. In fact, the accounts I support would be managed by the Social Security Administration and controlled by workers who voluntarily choose to save money in any one of several different funds, or a mix of them. Federal employees have used this model for years. It's called the Thrift Savings Plan and is essentially a government-managed 401k program.
However, if you are like me, this idea is scary primarily partly because we are not sure how our grandkids would handle the idea of saving their money. While my grandkids are too young to really know how they handle money, I share that fear with you. I want them to control their own retirement, but I want to make sure they do not gamble away their savings.
On paper, personal accounts give rates of return 4 and 5 times greater than the current system. That's why millions of workers love their 401k plans and IRAs. They put the money you work to earn, to work for you. That's why I want my grandkids to capitalize on the potential of these accounts.
In reality, however, we need to make sure that young workers do the right thing and make wise choices. Regardless of what comes out of this debate, we need to impart the values our kids need to make the right choices with their money and plan for the future.
America must keep its promise to those who have worked hard, played by the rules, and earned the right to a secure retirement that cannot be taken away. However, Social Security, as it is currently set up, will not be able to keep this promise to our kids and grandkids.
We need to save and strengthen Social Security.