The Federal Insurance Contribution Act (FICA) tax was created to fund our two large social insurance programs, Social Security and Medicare. Over time, as receipts from these taxes exceeded disbursements, they were "saved" into two trust funds, the Social Security Trust Fund, and the Medicare Part A trust fund. Both funds consist of special, non-marketable US Treasury Securities, that are now (or soon will be) gradually amortized to meet the obligations of both of these programs, as disbursements exceed tax receipts going forward. However, both programs were constructed under flawed economic understandings of the realities of the way in which a sovereign currency issuer, such as the United States, spends money.There is no financial meaning to a sovereign currency issuing nation saving its own money. The US Federal Government is the monopoly issuer of US dollars, and thus has absolutely no need to "save" them for a later date. This is roughly akin to someone holding their breath and claiming to save the air for later.
Unfortunately, the debates on "entitlement reform" among the economic illiterates in Washington have been totally misplaced and useless. Because so few people (D's and R's alike) understand how the US government spends money, almost the entire discussion has been about increasing taxes or decreasing benefits. Neither of these changes are actually necessary, while the real problem, the absurdly high cost of healthcare provision in the United States, has been mostly ignored. Ok, now lets get onto the details.
It is legally true that both trust funds exist, and will in fact be drawn down to meet the liabilities of their respective programs. For example, what the Social Security trust fund basically says is "The Social Security Administration has the right to write $2.3 trillion in Treasury checks." However this accounting reality has no real economic meaning, since a sovereign currency issuing nation always has the ability to meet any and all of its liabilities anyway. No Treasury check will every bounce, regardless what "fund" it is drawn from. Additionally, a broader look at federal spending operations reveals that there is no distinction between how the Treasury writes checks for SS recipients/Medicare providers, or how it writes checks for anything else. The Treasury writes the checks, and the Federal Reserve clears them, pure and simple (more on these operations later). The fact that some people at the CBO and Social Security Administration choose to account for this spending by adding or subtracting numbers out of a certain funds does not mean that any special spending is going on. This is because all dollars are fungible; there is no difference between dollars spent on a tank for the military, or an air tank for a Medicare patient.
Unfortunately, high unemployment is the norm, and is directly caused by the government taxing too much/spending too little. Therefore, the current funding scheme basically serves to delay consumption. This may be useful during times of high inflation, but this is the exception, rather than the rule. This is also a ridiculous government policy, since any society can always afford to consume everything it is capable of producing. Will the future American economy be able to send real goods and services back in time? Of course not!
Where the trust funds do have value is in politics. In fact, FDR and his economic advisers quickly realized the economic realities of their new Social Security program.Mariner Eccles, the Chairman of the Federal Reserve at the time, desperately pleaded to FDR to get rid of the payroll tax system of funding social security, since these new taxes were draining aggregate demand during Great Depression, a time when it was desperately need. Nevertheless, FDR correctly assessed that having Americans think they were "saving" or "pre-funding" their retirements was critical to the survival of the program. By creating a sense among American taxpayers that they were "entitled" to the retirement benefits they had paid for in taxes, FDR knew attempts to unwind these programs would be politically suicidal. This structure was an asset to the program for most of its existence, although it has always been open secret among policymakers that such a structure is unnecessary. The reason that I feel the need to move beyond this way of thinking is because I fear that the perception of a need to fund these programs through dedicated income streams of the FICA tax and trust fund amortizations has now become more of a liability than an asset to their existence.
I regularly hear well meaning Americans worrying that their benefits will not be there for them, because at some point disbursements will exceed receipts, and the trust funds will be fully amortized (ie "Its going broke ahhhh!!!") There is a widespread misconception that SS and Medicare have a special economic status, and must be funded through dedicated revenue streams. The reality is that accounting for these programs in this way was a political decision, and we can just as easily decide to no longer do so, by paying for these programs out of revenue from taxes and bond sales, just like everything else. Much of this fear emanates from decades of right wing scare tactics, led by Pete Peterson and his myriad of propaganda outlets with innocent sounding names. While many of their tactics have been downright dishonest and manipulative, I also feel that Democrats that try to fight back are also standing on shaky ground when they neglect to explain the financial imperatives of a currency issuing government. So while the oft-touted fact that a modest increase in the cap on income subject to the OASDI portion of the FICA tax will make SS solvent until 2075 is true, I feel that this is not a necessary point to be making.
Another reason why the current funding scheme is undesirable is because FICA is a regressive tax. Because the amount of income subject to the OASDI portion of the tax is capped around $110,000 but has no floor, it fall disproportionately on those who work for a living and live on modest means. And at this point, it doesn't take a PhD in economics to realize that working class Americans have been getting the shaft since 1980 (hmmm, what happened then??) As I see it, the only real way that this generation of Americans will ever get the standards of living they rightly deserve is by decoupling SS funding from the FICA tax, and greatly increasing the payments made to retirees. It is my sincere hope that the millions of working Americans who never earned what they deserved may finally get just compensation in their golden years. My proposal then, is to eliminate the FICA tax system entirely, and fund SS and Medicare entirely through general revenues. As a precursor, it will be necessary to educate the American public about the realities of modern public finance.
So the next time someone asks you about the perils of the dwindling trust funds, ask them "where is the Department of Defense Trust Fund? How about the Farm Bill Trust Fund?" There are no such things, because money for these programs is simply appropriated and spent, without any savings or planning ahead involved. There is absolutely no reason that we could not fund SS and Medicare in the exact same ways, without the misleading accounting gimmicks that are the trust funds.
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