Are The Social Security Trust Funds A Mirage?

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Proposals to fix the deficit are coming fast and furious in Washington these days. One major target: Social Security.

Whether you favor cutting Social Security may depend on how you view the Social Security trust funds, which currently contain $2.5 trillion for retirement benefits. That's $2.5 trillion that, according to some people, don't actually exist.

Here's the back story.

If you look at your paycheck, in the spot where it lists deductions, there's a line that says "FICA." That's the money that gets taken out of your check to pay for Social Security.

For the past 25 years or so, the amount of money the government has raised through those taxes has been greater than what it's been spending to fund Social Security.

The surplus came largely from the baby boomers -- and we're going to need that extra money when they retire and start collecting Social Security.

This is where the $2.5 trillion trust funds come in.

The government has invested all that money in Treasury bonds, which are traditionally considered among the safest investments in the world.

But a Treasury bond, remember, is the way the government borrows money. So the government is lending the Social Security surplus to itself. And the obligation to repay those loans is the trust funds.

"They are nothing like any trust fund that any one of us would think of," says Maya MacGuineas of the New America Foundation. "It conjures up an image of really holding savings, and it doesn't do that at all."

But there's another way to think about what the government is doing here.

The federal government owes $2.5 trillion to the Social Security trust funds. And if the government doesn't pay that money, it will default on its debt -- something the U.S. has never done in its history.

By the middle of the next decade, the Social Security surplus will turn into yearly deficits as more Baby Boomers retire. And the government will have to come up with hundreds of billions of dollars a year to cover its obligations to the trust fund.

At that point, the debate over whether or not the trust funds exist becomes a moot.

"The policy choices that we have to make good on Social Security obligations are exactly the same with the trust fund or if we'd never had the trust fund," MacGuineas says. "Raise taxes, cut Social Security benefits, cut other government spending, or borrow the money. That's the only way to repay the money."