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Official National Debt Balance

According to the Treasury Department, the current Total National Debt is $11.1 Trillion. As of 04/03/2009, Treasury breaks down the debt as follows:

Debt Held by the Public: $6.868 Trillion
Intragovernmental Holdings: $4.278 Trillion

The $6.9 Trillion of “Debt Held by the Public” is a full-faith and credit obligation of the United States Government. Its held by the public, foreign and domestic. Obligations of the United States Government which must be paid back (or rolled over to future generations).

The Social Security Trust Fund Explained

As of December 2008, approximately $2.4 Trillion of the $4.3 Trillion in “Intragovernmental Holdings” listed above is held in the Old-Age and Survivors and Disability Insurance (OASDI) Trust Fund.

This $2.4 Trillion is the “non-negotiable/non-marketable I.O.U.s” that you speak of. I believe you are incorrect to assert that there is $7.58 Trillion of these special issue Treasuries. Here’s why.

As you say, the Social Security system is pay-as-you-go. Both the employee and the employer pay 6.2% of gross compensation up to a limit of $102,000, making the total Social Security tax 12.4%. By the early 1980’s the Social Security system needed reform and increased funding.

In 1983, Alan Greenspan chaired The National Commission on Social Security Reform which resulted in the 1983 Amendments to the Social Security programs. The 1983 Amendments excluded the Social Security Trust Fund from the unified budget.

As a result of the tax increases instituted by the 1983 Amendments, over the last 25 years the Social Security system has collected more taxes than it has paid out. Excess Social Security receipts are “invested” in special securities issued by the federal government. These securities are held in the (OASDI) Trust Fund. The Social Security receipts that are exchanged for these special Treasuries have been spent by Congress on general budget items over the last 25 years.

It is currently projected that Social Security tax receipts will exceed Social Security payments until 2017. In other words, the amount of Treasuries held in the Trust Fund will keep increasing for the next seven years. In even more words, payroll tax receipts will exceed Social Security payments for the next seven years.

An analogy for how the federal budget works. Let’s say we have a husband and a wife. Both spouses work. They agree that each is entitled to keep all of their earnings, but they decide to put all their earnings into a joint bank account. If one spouse earns more than they spend, they will put it in the joint bank account where the other spouse can access it. During this whole time, this couple has kept meticulous records of who earns what and who spends what.

For twenty five years, the husband (income tax) spends more money than he earns. Every year, the wife (Social security tax) earns more money than she spends. During that whole time, the couple uses the the wife’s excess income to fund the husband’s excess spending.

At some point, the wife switches to part time and her income goes down. She still earns enough to cover most of her spending but she needs to draw down on “her” savings in order to cover the rest.

Unfortunately, at this point (2017) “her” savings consist of nothing more than IOU’s from her husband. How will this couple continue to live? Either the husband (income tax) will have to find a second job, get a higher salary or borrow the difference.

Drawing Down on the Trust Fund

If no changes are made to system, around 2017 Social Security payments will begin to exceed Payroll tax receipts. Even if changes are made, at some point in the next few decades, payments will exceed receipts.

At that point, the Trust Fund will begin redeeming the special Treasuries. In order to pay these Treasuries back, the U.S. government will either have to raise income taxes or (more likely) borrow additional amounts, i.e., real Treasuries.

Under the current rules, and depending upon future economic growth, the Social Security Trust Fund is projected to be depleted sometime between 2042 and 2052. Once the Trust Fund is depleted, we get to the Unfunded (i.e. $13.6 Trillion) part of our Social Security future.

The only difference between what occurs before the Trust Fund is depleted and after the Trust Fund is depleted is that there are no Special Treasuries to redeem before Social Security payments are made.

That last sentence may seem like hyperbole but its really not. It is the reason why many people say that the OASDI Trust Fund doesn’t exist. The OASDI Trust Fund is, in many ways, just an accounting of the relative relationship between Social Security payments and Social Security tax receipts.

How Big is the Debt Burden?

The 2008 OASDI Trust Fund Report provides us with a best guess (and it really is a guess) at what the future of Social Security looks like as of today.

The projected 75-year actuarial deficit in the combined Old-Age and Survivors and Disability Insurance (OASDI) Trust Fund is 1.70 percent of taxable payroll ($4.3 trillion in present value terms)…

The projected actuarial deficit in the OASDI Trust Fund over the infinite future is 3.2 percent of taxable payroll (1.1 percent of GDP), or $13.6 trillion in present value terms.

Over an Infinite Horizon

Let’s start with the biggest number: $13.6 trillion. I believe that this is the Trustees’ current version of the $12.8 Trillion number that you keep referencing. What is this number? It is the Discounted Present Value of the shortfall that the Social Security program faces after the exhaustion of the Trust Fund and following current projected demographics and tax rates over an infinite horizon. Forever. To the end of time.

So, when the CATO Institute says that “Social Security is already $12.8 $13.6 trillion in debt,” they do not mean that we have borrowed $13.6 Trillion from Social Security. They mean that, over the infinite horizon, we face a shortfall of $13.6 Trillion in addition to the $2.4 Trillion “sitting” in the Trust Fund.

If demographics and tax rates stay the same, then expected future spending on Social Security will be $16.0 Trillion (OASDI Trust Fund balance plus Unfunded) greater than expected Social Security receipts. We will need to either raise taxes or lower benefits by NPV $16.0 Trillion in order to meet expected Social Security obligations over the infinite horizon.

The Next 75 Years

As I said earlier, I don’t believe that accounting for Social Security over an infinite horizon is a very good way to examine the problem. Its simply too long a time frame. If we can’t predict tomorrow’s weather or the economy for the next five years then we certainly can’t grasp/predict the future of Social Security over an infinite horizon.

I prefer to look at the problem using 75 year data. I know. Examining the data over 75 years suffers from most of the same problems that we encounter on an inifinite horizon. It is an improvement however.

Using a 75 year horizon allows us to examine the issue from the perspective of a ten year old child today. An American child that hasn’t started to pay into the system but is going to have to. Seventy-five years from now that child will be eighty-five and getting towards the end of their life. They will have paid into and received payments from the system. If we can focus on keeping the system solvent through that child’s lifetime, then twenty-five or forty years from now that child can re-adjust the system to reflect new realities.

So what does the next 75 years look like?

The projected 75-year actuarial deficit in the combined Old-Age and Survivors and Disability Insurance (OASDI) Trust Fund is 1.70 percent of taxable payroll: NPV $4.3 trillion. That means that in addition to depleting the amounts in the OASDI Trust Fund ($2.4 trillion), the Social Security system is expected to payout an additional NPV $4.3 Trillion more than it takes in through 2083.

That’s a total of NPV $6.7 trillion through 2083. That’s a total of NPV $6.7 trillion in tax increases or benefit cuts through 2083.

Conclusion: That in my opinion, is the real problem we need to get a handle on: NPV $6.7 trillion over 75 years.

Social Security as a % of GDP

One last note. Perhaps a more instructive way to view the projected cost of Social Security and Medicare is to compare the financing required to pay all scheduled benefits for the two programs with GDP. Costs for both programs rise steeply between 2010 and 2030 because the number of people receiving benefits will increase rapidly as the large baby-boom generation retires.


Beyond 2030, Social Security costs increase slowly for about 5 years, reaching a peak of 6.1 percent of GDP in the middle of the decade. Costs then decline slightly over the following decade to about 5.8 percent of GDP where they remain for the last 35 years of the projection period.

Social Security outflow amounted to 4.3 percent of GDP in 2007 and is projected to increase to 5.8 percent of GDP in 2082.

Note: To give you some idea how difficult it is to work with these numbers, the 2007 projections put Social Security outflow at 6.3 of GDP in 2081. In other words, in 2008, the Trustees are predicting that GDP will be a bit bigger in 2081 than they thought it would be in 2007. How do you really predict GDP 75 years out? You can’t, but we do it anyway.

A Few Random Thoughts

I wanted to include this here:

  • I am generally opposed to increases in the payroll tax, as opposed to the income tax. Why? Because the Baby Boomers are going to retire leaving a substantial SSI problem. Raising the payroll tax leaves that burden solely upon the working young. Raising income taxes places that burden upon all age demographics (but only wealthiest ~60% of society).
  • From a young person’s perspective, is the delay of Social Security reform really such a bad thing? If we aren’t willing to raise taxes by a certain amount now, do you really think we’re going to be more likely to raise them later? If reform is delayed, isn’t there the real possibility that we’re actually reducing the burden on future generations because a consensus might grow around the need to reduce benefits for wealthy?
  • Along the same lines, is the decline in housing prices really such a bad thing? At least for future generations that haven’t bought a house yet? Or bought stocks? A lot of the chickens that the financial crisis is bringing home to roost are more relevant to the Baby Boomers than they are to me or future generations of Americans.

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