In my last post, I talked about how over a third of the national debt falls into a category called intragovernmental holdings – much of which maps to so-called “trust fund” balances. The largest and most well-known of the trust funds are associated with Social Security and Medicare. I also posed the following question:

How can programs like Social Security and Medicare drive up the national debt? After all, Americans pay into these systems via payroll taxes and the government invests this money for future beneficiaries. There should be a corresponding set of assets in these trust funds to offset the amount outstanding – right?

Here is the answer: there is no money in the trust funds. Since their inception, the "investments" made by U.S. citizens into Social Security and Medicare, via payroll taxes, have never been invested; they’re spent immediately by the U.S. Government on other programs. The trust fund balances consist of Government Account Series (GAS) securities – effectively an IOU issued by the Treasury Department. The Social Security Administration (SSA) likes to say, “…money flowing into the trust funds is invested in U. S. Government securities.” But, GAS securities are by definition non-marketable, meaning they have no market value; they cannot be used to make payments. Instead, a government agency has to redeem the GAS securities with the Treasury department - who then has to come up with the money from another source. At best, the balances of the trust funds track whether incoming collections are exceeding, matching, or lagging behind outgoing benefits.

Many people, after hearing this explanation, correctly say “Oh, I get it. It’s a Ponzi scheme.” The use of the term trust fund tends to obfuscate the matter, as do the defenders of these programs. Consider how the SSA responded to criticisms of the trust funds (www.ssa.gov/OACT/ProgData/fundFAQ.html),

Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Do you see the deception? The SSA is effectively saying “we’re good for these obligations.” But the criticism isn’t about whether the government will make future payments. The criticism is that the trust funds contain no funds. And this criticism is valid.

In a future post, I’ll explain why the trust funds are also not an accurate indication of the government’s true liabilities. In the meantime, visit www.UnderstandingTheUSDebt.com to learn more.