Social Security is a federal government “social insurance” program. The formal name of the program is “Old Age, Survivors and Disability Insurance” (OASDI). Social Security provides retirement and other benefit payments, funded by payroll taxes withheld from employee paychecks.
Social Security was created in 1935. At the time, the basic retirement age was set at 65, where it still resides today. At first, Social Security only paid benefits to retired workers, but it soon added benefits for qualifying spouses and children. It began paying benefits to disabled workers in the 1950s, and later added the families of disabled workers. In the 1970s, amidst accelerating inflation, the federal government began to add cost-of-living adjustments to benefit payments.
Late in the 1970s, amidst a looming depletion of the “Trust Fund” (see below), Congress enacted fundamental changes to the program, increasing taxes and reducing benefits. Those changes didn’t work very long, as concerns about depletion arose again in the early 1980s. Those early-1980s changes – including a hike in the full retirement age, significantly higher payroll taxes, and the introduction of new taxes for wealthier participants – laid the basic groundwork for the program we have today.
For many years, the Social Security “insurance” program included many more workers than retirees and collected more money than it paid out. But the annual surplus wasn’t saved in a bank account or elsewhere. It was used for other government spending, while the Treasury issued special nonmarketable securities to the “Trust Fund” for the growing amounts it owed. These interest-bearing securities are included in what the Treasury reports as “Total Public Debt Outstanding,” which includes “Debt Held by The Public” as well as “Intragovernmental Holdings” (including the special Treasury securities issued to the Social Security and Medicare Trust Funds).
Beginning in 2010, Social Security began paying out more in benefits than it collected in payroll taxes. Under current law and policy, the developing boom in baby-boomer retirements implies a sharply negative cash flow which will deplete those “intragovernmental holdings.” Once those debts (which the government claims are debts the government owes to itself, not to Social Security recipients) fall to zero (currently expected in 2034), the government by law will have to reduce promised benefit payments sharply.
The Social Security Administration is led by a Board of Trustees, which produces a massive annual report on the financial condition of the Social Security system. The analysis in that report leads to how the Social Security system is included in the annual Financial Report of the U.S. Government.
The government develops projections for future Social Security tax receipts and benefit payments under current law and policy, and then develops estimates of their present value under financial discounting formulas. It does this for three different groups of participants – current participants that are eligible for benefits (and receiving payments), current participants that are not yet eligible for benefits, and future participants (the young and the unborn).
The government reports a massive trillion-dollar shortfall for the Social Security program, because, with a developing wave of baby-boomer retirements, the present value of future benefit payments swamps the value of expected future receipts. But as noted above, the government does not consider “intragovernmental holdings” as debt owed to Social Security participants. The government states that those are debts the government owes to itself.
This provides some background for where the government reports the massive hole in Social Security. The trillion-dollar unfunded obligation is NOT REPORTED AS A LIABILITY on the federal government’s balance sheet! Instead, it is reported in the “Statement of Social Insurance” within the Annual Financial Report of the U.S. Government (along with Medicare, which is treated similarly).
What justification does the government offer for not reporting Social Security as a liability on its balance sheet? Social Security officials have stated that this is because the government controls the law, and can change it at any time.
See this article, for some background on what this means for those future benefit payments the government tells us to expect.