The latest news on Elon Musk’s foray into Social Security is his recruitment of Antonio Gracias, a private equity investor, who is digging into the way Social Security is financed. First reported in the New York Times, Gracias was quoted as saying there were “material weaknesses” in the system.
The Times article correctly explains: “The Social Security trust funds grew over decades as Americans paid more taxes into the program than they took out in benefits. Tax revenue submitted to the trust funds did not sit there; the federal government instead used the cash to pay its regular expenses over time. In return, the Treasury gave Social Security special bonds that it could redeem to help pay for the program in the future.”
Then it goes on to say, “As Americans now take out more in benefits than they pay in taxes, Social Security has been cashing in those special bonds—which cannot be bought or sold by the public—depleting the so-called trust funds. In short, there is no actual money in the trust funds.” (Emphasis mine)
This is the kind of misleading statement that undermines trust in the system. And it’s from the New York Times! By saying there is no actual money, it implies the trust fund has no assets at all. The article does not bother to explain that the special-issue Treasury securities held by the trust fund represent one of the safest assets in the world. These debt instruments, like Treasury securities held by pension funds, sovereign governments, and individual investors around the world—even though these specific ones are not bought or sold by the public—represent proof that the U.S. government promises to pay back the loan—with interest—that it received from the purchaser.
Now, it certainly can be argued that trust in the government’s ability to repay its loans has been weakening. The three credit agencies that evaluate U.S. debt—Standard & Poor’s, Fitch Ratings, and Moody’s Investor Service—have all downgraded U.S. debt citing various factors such as weakening policymaking and political systems in the midst of fiscal and economic challenges (S&P in August 2011); a steady deterioration in standards of governance over the last 20 years (Fitch in August 2023); and the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability (Moody’s in November 2023). And obviously, the more debt the U.S. takes on, the greater the interest burden becomes.
But this is a different discussion from the actual composition of the trust fund and how Social Security is financed. We’ve talked before about the two budget perspectives. Under the trust fund perspective Social Security is self-financed from payroll taxes, with excess taxes held in trust and invested in those special-issue securities. Under this perspective the combined OASDI trust fund is projected to exhaust in 2035, at which time 80% of benefits can continue to be paid from the ongoing collection of payroll taxes. But make no mistake, under this perspective you can’t say there is no money in the trust fund. As of December 31, 2024, there was exactly $2.721 trillion worth of special-issue Treasury securities in the trust fund.
Under the unified budget perspective there is no trust fund. (Here, saying there is no money in the trust fund is an accurate statement, but if you’re going to say it you have to explain that there is no actual trust fund under the perspective you are using.) Payroll taxes are thrown into the U.S. Treasury along with income taxes and other revenue sources (maybe tariffs?), and Social Security benefits are paid directly from the Treasury. The U.S. government is legally obligated to pay these benefits. If payroll taxes are not sufficient to cover them, the money will come from somewhere else, even if the government has to borrow it. And this is why Musk, et.al., are freaking out over Social Security. Under the unified budget perspective Social Security IS adding to the federal budget deficit along with all the other expenses that are not matched by an equal amount of income. As of now the U.S. owes $36 trillion. The deficit—that is, the amount by which expenses exceed income—is $1.15 trillion. And rising.
One of these perspectives is not more accurate than the other. They are just two ways of looking at how Social Security is financed. Under both perspectives it is getting more difficult for the government to meet its Social Security obligations. As we continue to discuss here, there are many possible solutions to this math problem, all involving some change in the equation between income (i.e., taxes raised) and spending (i.e., benefits paid). Reform proposals usually use the trust fund perspective, but they would be beneficial to the system under the unified budget perspective too.
Let’s hope all the tinkering with Social Security, whether by Musk, et.al., or by Congress, will restore solvency and preserve the program for generations to come. In the meantime, it will be crucial to have an accurate understanding of how Social Security works and to spread the word to the public so they will not be swayed by misleading claims by the various news sources, even one as reputable as the New York Times.