IB#30  

Introduction

Social Security traditionally has operated on a pay-as-you-go basis — that is, current taxes pay for current benefits. The 1977 and 1983 Amendments to the Social Security Act provided for a temporary departure from this approach — with the buildup of a significant trust fund. Currently the Social Security trust funds hold $1.7 trillion in special Treasury bonds. The question is whether this buildup of assets has been economically meaningful. Has it increased national saving and investment and thereby created additional future income? In some sense this may seem like an antiquated question since 2016 is the last year when annual cash surpluses are expected to contribute to fund balances. But, in fact, the question is still very relevant because any attempt to restore solvency will likely again produce large surpluses for several decades. This brief explores the effectiveness of building up assets in the Social Security trust funds. It first describes the economic rationale for such a buildup. It then looks at the debate about whether the accumulation of assets in the trust funds since 1983 has increased national saving. The final section explores ways that could make the accumulation of assets more effective — changing the budget treatment, restricting trust funds' investment in Treasury debt, and, finally, personal accounts...

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