Today's rude question: How Real Is the Social Security Surplus?

About 47.1 percent.

How we came to that figure involves a short lesson in the fine art of bookkeeping, government style.

We start our lesson at the website of the Social Security Administration where we can read the most recent Trustees report. There, in table II.F7 we learn that the assets of the OASI (Old Age Security Income) fund rose from a piddling $24,566 million in 1980 to $762,170 million by the end of 1999.

The increase did a lot to assure that retirees would get their monthly checks delivered on time: trust assets in 1980 were only sufficient to pay benefits for about 4 months. By 1999 they were enough to pay benefits for more than two years.

How did that growth happen?

Simple. Employment taxes were increased in 1983 and the OASI fund started to operate at a surplus. As the surplus accumulated, it was invested in Treasury obligations and they earned interest. The interest increased the surplus still further. In 1999 the fund grew by $109,062 million, of which $46,849 million was contributed by the net interest income earned on fund holdings in Treasury bonds.

Looking ahead, the Social Security trustees see the assets in the fund increasing to $2,630,266 million by 2009. That's enough to pay benefits for more than 4.5 years. It's also an incredible increase--- $1,868,096 million. In government numbers that's $1.9 trillion.

Surely, with figures like that, we should feel confident about future Social Security benefits.

Well, not exactly.

You can understand the problem by examining the components that build the surplus between now and 2009. Some $988,402 million of the total increase--- 52.9 percent--- is "net interest," money credited by the Treasury department but not paid in actual cash. In other words, a cool trillion is funny money.

The actual cash surplus over that period--- the amount by which real cash income exceeds real cash outgo--- is $879,694 million. While that's an impressive number, it is less than half of the projected surplus--- 47.1 percent. It's the only real cash that can be put to use.

Sources of Asset Growth for OASI Assets, Intermediate Assumptions

Year Net Interest (plus) Net Cash= Asset Increase Year End Assets
1999 $ 762,170
2000 $ 53,575 $78,902 $132,477 $ 894,647
2001 $ 62,375 $79,851 $142,226 $1,036,873
2002 $ 71,829 $83,880 $155,709 $1,192,583
2003 $ 80,895 $85,501 $166,396 $1,358,978
2004 $ 90,252 $86,691 $176,943 $1,535,922
2005 $100,782 $93,971 $194,753 $1,730,675
2006 $112,252 $92,646 $204,898 $1,935,573
2007 $124,860 $94,332 $219,192 $2,154,765
2008 $138,471 $93,419 $231,890 $2,386,655
2009 $153,111 $90,501 $243,612 $2,630,266
Total= $988,402 $879,694 $1,868,096


Economist Dan Mitchell at the Heritage Foundation in Washington explained it this way in a recent telephone interview. "The confusion (in the federal budget discussion) is on the Social Security side of things. By and large, it's a matter of accounting. The surplus goes to the Treasury. The Treasury issues a bond for the Social Security Trust fund. It's a wash. There is no asset. There is no value. There is only an accounting entry which shows that when the system goes into deficit, the Social Security system has a claim on government income."

In case that went by you a little fast, think of it this way: every time the Treasury gives the Social Security trust fund another $10 billion in Treasury bonds to hold in the fund, the assets of the trust fund increase by $10 billion and the liabilities of the Treasury increase by the same amount, $10 billion. The right hand owes the left hand money, but both are part of the same body, government.

Unless actual money has been invested in non-government assets, absolutely nothing is happening except that Social Security is a bigger creditor of the U.S. Treasury. The actual cash surplus, meanwhile, is available to government. Until recently, it was simply spent which means that every dime of extra employment tax that was paid between 1983 and the present did nothing but allow government to build its IOU collection.

This is the ludicrous system that Presidential Candidate Al Gore swore so passionately to protect in the first debate between the candidates.

Candidate Bush is offering a new option. Social Security can allow workers to invest a portion of the taxes they pay in individual accounts that will be their personal assets. The amount he is proposing is about equal to the actual cash surplus over the period and will have absolutely no impact on the operation of Social Security.

What will it do? Something wonderful: it will give young workers a real stake in real assets.