Assuring the Solvency of Social Security for Free

One possible definition of solvency with respect to Social Security is that, for all future years, the contents of the Social Security Trust Fund, largely special non-marketable government bonds, do not become exhausted as they are redeemed by the Treasury to make up a yearly shortfall in the ability of payroll taxes to make the social security payments required by law. Under current conditions, redemption is expected to start in about 2018.

Presently, the special government bonds earn an interest rate of about 6% which is also paid by the Treasury.

With the interest rate of 6%, the Trust Fund is projected to become exhausted sometime in the 2042-2052 time frame.

In the 1980's, the interest rate earned by the Trust Fund bonds went almost to 12%.

Considering all of the above, there is some interest rate, probably less than 10%, which would assure that the Trust Fund would never be exhausted, as long as its only allowed distribution is to fill in the shortfall of the payroll tax wih respect to the social security payment requirements.

What economic effect would result from the increase in the interest rate paid on the special bonds?

None.

Every year that a shortfall in the payroll tax exists, only enough bonds are redeemed to make up that shortfall. This shortfall is entirely independent of the value of the remaining contents of the Trust Fund. As long as the Trust Fund is not exhausted, the number of dollars that the Treasury must borrow from the public (for example) to redeem bonds, will not change due to different interest rates earned by the special bonds.

This logic is unassailable, as long as you believe in Santa Claus, the Tooth Fairy, and the reality of the Social Security Trust Fund.

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