Social Security: the reports of its death are greatly exaggerated.

• Author: Hymans, Saul H.
• Position: Social Security

How many times have you heard a Washington politician or a talking head say something like, "The government is spending the Social Security surplus"? And what did you think when you heard that? If you're under 65, chances are you thought something like, "After all my years of paying payroll taxes into the system, there won't be anything left to collect when I retire." It makes sense that you'd think that, except that the premise itself is entirely phony. The federal government is not spending the Social Security surplus. In fact, nobody is; it's sitting there fully invested and earning interest: an effective rate of 6.7 percent in 2001, (1) which is probably more than any of the invested funds you had control over earned last year.

Let me try to help you separate the sense from the nonsense.

The Surplus

First, what is the Social Security surplus? Most folks under 65, and employed, know that federal taxes are withheld from their paychecks. Included among those taxes is a 5.3 percent levy (and an equivalent amount paid by their employers) that goes right to the Social Security Administration (SSA) to support the retirement program known formally as the Old-Age and Survivors Insurance, or OASI, program. Think of those tax payments as SSA's income. Most folks over 65 collect retirement benefits paid to them by SSA. That's SSA's outgo. In 1999, SSA's income exceeded its outgo by $67 billion. Add to that $50 billion in interest earnings, and SSA wound up with $117 billion beyond what it needed to pay out in 1999. That $117 billion was the Social Security surplus for 1999. (2)

Exactly what did the Social Security Administration do with that $117 billion surplus it ran in 1999? It invested all of it in interest-bearing bonds issued and fully guaranteed by the federal government, both the $67 billion by which its tax income exceeded its outgo and the $50 billion it earned in interest on the government bonds it had purchased with all its prior years of surpluses.

SSA has actually run an annual surplus in all but 11 years since its origin in 1935. The total of all those surpluses had accumulated to just over one trillion dollars by the end of 2001. The accumulated surplus is what is referred to as "the Social Security"--actually the OASI, Trust Fund.

Why not invest at least some of the surplus in corporate bonds, or stocks, or bank certificates of deposit (CDs), or real estate? Because federal law mandates that SSA invest only in securities fully...