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Personal Finance > Retirement

Paying back the $1.5T 'surplus'
The Social Security system has taken in more than it has paid out, but that money has been spent.
December 27, 2004: 2:11 PM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) Is there less cushion than we think?

For two decades, the Social Security system has been creating a "surplus," and that reserve is widely thought to be available to make up for shortfalls projected to begin in 2018, when more money has been promised to beneficiaries than will be taken in through payroll taxes.

But that surplus isn't a pile of cash waiting to be used. In fact, the money -- $1.5 trillion plus interest to date -- has already been spent.

In accordance with the law, the extra money Social Security takes in is loaned to the U.S. Treasury, in exchange for which it receives special-issue Treasury bonds. The actual cash goes into the government's general revenue pool.

The bonds are special because, unlike other government bonds, they can't be bought or sold on the open market, and they can be redeemed at any time at face value.

But just like other government bonds, the special-issue Treasurys pay interest and are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.

When Social Security looks to tap those special securities, starting in 2018, the government will have to come up with a way to pay the money.

It has several options. Among them, it can:

  • Borrow the money by issuing more public debt.
  • Raise the payroll tax, which is the percentage of your earned income that gets paid into Social Security.
  • Raise income taxes or other general taxes.
  • Cut spending on other programs.
  • Reduce Social Security benefits.

One might argue that any of these options comes at the expense directly or indirectly -- of U.S. workers, both those who paid the surplus into the system and their children.

In 1983, lawmakers sought to lessen the demographic strain on Social Security that would be caused by Baby Boomers retiring. So they raised the retirement age and increased payroll taxes to provide a cushion of funding over the next 75 years.

Whatever options the government chooses, "there will be budget pressure," said Craig Copeland, director of EBRI's nonpartisan Social Security Research Program.

The pressure may not be great initially, but it could grow as the shortfalls do. According to the 2004 Social Security Trustees' report, the shortfall in 2020 is projected to be $85 billion. After 2042, it's projected to be more than $960 billion; and by 2052, it will exceed $1.5 trillion.

However, not everyone sees the paying back of the surplus as a crisis. The options outlined above are the same ones the government can use to repay any bond it issued, according to Mark Weisbrot, co-director of the Center of Economic and Policy Research.

Weisbrot is among those who think changes should be made to account for long-term shortfalls, but not ones as dramatic or immediate as those suggested by proponents of a partially privatized system. (See more of his argument.)

And Copeland notes that though the surplus has been spent elsewhere, that doesn't necessarily mean that U.S workers haven't benefited.

Here's what he means: If the federal government didn't have use of that $1.5 trillion over the years, it either would have had to issue more public debt or raise taxes to generate that revenue. (Some argue that if the government didn't have access to the Social Security surplus in the first place, it would have spent less.)  Top of page

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