05/01/2012 03:43 pm ET Updated Jul 01, 2012

Death to Social Security Trust Funds

The annual report of the Social Security trustees predicting when the funds they monitor (retirement, Medicare and disability) will be depleted has become a meaningless rite of spring that provides more heat than light. The news is always viewed as bad and ignored, a response that's helpful only to those who have a vested interest in suggesting that our government is dysfunctional.

The reality is that our government is quite functional in the operation of these programs. Millions of people regularly receive the benefits they've been promised via mechanisms that have very modest administrative costs.

But the trust funds that pay these benefits have become confusing artifacts that needlessly complicate efforts to make sure future benefits are adequately funded. For historic reasons, the system has a structure that allows today's workers to purchase future benefits by paying taxes that are used to provide benefits to those already receiving benefits. Eligibility for benefits is contingent on a work history.

Because the employment taxes are based on wages, those with high earnings pay much more than those with lower earnings. But everyone receives the same Medicare benefits* and while retirement and disability benefits rise as wage income increases, the system relies on formulas that provide a greater return on taxes paid by low-income workers.

In any event, today's workers can't receive future benefits in the absence of taxes paid by tomorrow's workers. The impossible goal of the trust funds is to create a balance that guarantees benefits for 75 years. We're not smart enough to deal with that time frame (think about it -- creating a policy during the Civil War provide benefits during the Great Depression).

Until now, the funds have generally collected more in taxes annually than they pay out in benefits, leading to a surplus that is socked away to earn interest and pay future benefits. This surplus is invested in the world's safest bonds -- those issued by the United States Treasury. So the fund surplus helps finance the deficit from other Federal spending.

It isn't clear why the trust funds make sense in today's environment. In the decades ahead, the Federal government will have to find funds to repay the trust fund borrowing -- which probably means finding added revenue by either raising taxes or borrowing elsewhere. Improbably it could mean cutting other spending, but that's extremely unlikely.

In the years ahead, it is likely the government will simply borrow money to repay the trust funds which will then use these dollars to pay promised benefits. Why this makes more sense than simply borrowing the money needed to fund budget deficits -- including Social Security benefits -- is a mystery to me.

It may be time to simply abolish the funds and pay for promised benefits via the budget using the same mechanism that's now used to finance other promised benefits, like pensions and healthcare for retired government workers and military retirees.

Abolition of the trust funds could have several benefits. It would allow a broader debate about public priorities when budgets are created by ending untouchable categories (think also of the gas tax and the highway trust fund) that discourage flexibility. For tens of millions of taxpayers who pay more in employment taxes than income taxes -- and particularly the millions who pay no income taxes it all -- it would bring them into a system of shared civic responsibility while undercutting the conservative argument about 45 million low-income workers who now pay no income taxes at all.

The trust funds now nothing more than an anachronistic diversion that adds confusion to the conversation about how we're to pay for what we get. Getting rid of them would be a positive step.

* This describes how the Medicare hospital benefit is financed. Other Medicare programs (Part B for outpatient and physician care and Part D for drugs) are optional and funded by a combination of beneficiary premiums and general revenues.

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