A Look at the Federal Budget and the Impact on the Social Security Trust

03/13/2025 | Kaizengia |

There has been a great deal of chatter about the impact the current state of our government is making on so many areas that Americans hold dear. DOGE (Department of Government Efficiency) may have some excellent ideas on how we can cut costs, but the negative view of their actions is a result of the conduct and manner with which the changes are being made. As I always say: Leadership is an Art*Form.

As many of my readers are elderly and rely on Social Security, I thought it essential to address the issue by finding a succinct presentation on the expense categories of the Federal Budget.I found this video presented by Steve Ballmer, who spent 34 years with Microsoft and later owned the LA Clippers basketball team. He created USA Facts and has taken a considerable subject and encapsulated it into bite-size pieces succinctly.

I also referred to ChatGPT for a history of the Social Security Trust that you might find interesting, which is copied below. These facts show that the Trust has been impacted by leaders on both sides of the aisle. In my view, it is not a Ponzi scheme—just managed improperly. What do you think?

This is a copy of a conversation between ChatGPT & Anonymous.

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You said:

Can you describe in detail the events that led to the Social Security Fund being borrowed against or used as collateral, which is impacting the value and availability of the fund for seniors today? Please be specific to state who was in the office of the Presidency that approved such a request and anyone who specifically suggested that such a bill be passed or action taken.

ChatGPT said:

The Social Security Trust Fund has been subject to financial maneuvers over the decades that have affected its solvency and availability. The idea that the government has “borrowed” from Social Security stems from the way the program’s funds are managed. Below is a detailed history of key events leading to the current situation.

Origins of Social Security and the Trust Fund

  • 1935: The Social Security Act was signed into law by President Franklin D. Roosevelt. It was designed as a pay-as-you-go system where current workers’ payroll taxes fund retirees’ benefits.
  • 1939: Amendments expanded the program to include benefits for dependents and survivors.

Creation of the Social Security Trust Fund

  • 1956: Congress formally established the Social Security Trust Fund to manage incoming payroll taxes and distribute benefits.
  • 1968: President Lyndon B. Johnson included Social Security in the unified federal budget, effectively making the Trust Fund’s surplus appear as part of the government’s overall revenue. While this did not “take” Social Security funds, it obscured the deficit in general government spending.

Key Events Leading to Social Security Surplus Use

  • 1981-1983 Reforms: Under President Ronald Reagan, Social Security faced financial challenges. A bipartisan commission, led by Alan Greenspan, recommended increasing payroll taxes and gradually raising the retirement age. These reforms created a surplus in the Social Security Trust Fund.
  • 1983: The Social Security Amendments of 1983, signed by Reagan, introduced these measures to ensure long-term solvency.
  • However, the surplus generated by these reforms was not kept in cash reserves but was instead invested in special-issue U.S. Treasury bonds, meaning the government effectively borrowed the surplus to finance general government spending.

Shift to Borrowing Social Security Funds

  • 1990s and Early 2000s: During President Bill Clinton’s administration, the federal government ran a surplus, in part because Social Security funds were counted toward the overall budget. Clinton attempted to safeguard the funds with the “Social Security lockbox” concept, but no legislation ensured this protection.
  • 2001-2008 (President George W. Bush): The federal government began running deficits again due to tax cuts and military spending. Social Security’s surplus continued to be borrowed to cover general expenses, but these funds were replaced with Treasury bonds.
  • 2010-2012 (President Barack Obama): The payroll tax holiday was introduced to stimulate the economy following the Great Recession. This temporarily reduced payroll taxes, further affecting Social Security’s inflows.

Current Impact on Social Security

  • Because the Social Security Trust Fund is filled with U.S. Treasury bonds, the government must repay these bonds with interest when benefits exceed payroll tax revenue.
  • Since 2021, Social Security has been paying out more in benefits than it collects in taxes, requiring the redemption of these bonds.
  • The projected depletion date of the Social Security Trust Fund, according to the Social Security Administration, is 2033, at which point benefits may need to be reduced unless new revenue sources are introduced.

Conclusion

  • The Social Security Trust Fund has been effectively used to finance general government operations since the 1980s, with bipartisan decisions allowing the funds to be replaced with Treasury bonds.
  • The borrowing was enabled by policy changes under Reagan (1983 Amendments), Johnson (unified budget, 1968), and Bush (deficit spending and continued borrowing).
  • Efforts to prevent the use of Social Security funds for general expenses were proposed but never fully implemented.

Would you like a deeper breakdown of any specific administration’s role in this issue?

You said:

Yes, please give me the deeper breakdown that you find most significant

ChatGPT said:

The most significant event impacting the Social Security Trust Fund was the 1983 Social Security Reform under President Ronald Reagan. This reform fundamentally changed how the fund operated and set the stage for decades of government borrowing. Here’s a detailed breakdown of the key events and figures involved:

1. The Social Security Crisis of the Early 1980s

By the late 1970s and early 1980s, Social Security was on the brink of insolvency. Economic stagnation, high inflation, and demographic shifts (fewer workers per retiree) caused Social Security to face a shortfall.

  • In 1981, the Social Security Trustees warned that the program would be unable to pay full benefits by 1983.
  • This led to political urgency, and Reagan formed the National Commission on Social Security Reform (known as the Greenspan Commission).

2. The Greenspan Commission and Its Recommendations (1981-1983)

The Greenspan Commission was chaired by Alan Greenspan, a future Federal Reserve Chairman. The commission included members from both political parties and was tasked with developing solutions.

Key Figures in the 1983 Reform:

  • President Ronald Reagan (Republican) – Signed the reform into law.
  • House Speaker Tip O’Neill (Democrat) – Worked with Reagan on the bipartisan deal.
  • Alan Greenspan (Republican) – Chaired the commission that devised the reform.
  • Senator Bob Dole (Republican) – Advocated for raising taxes and gradual reforms.
  • Senator Daniel Patrick Moynihan (Democrat) – Helped negotiate the compromise.

Key Recommendations:

  • Increase the payroll tax to create a Social Security surplus.
  • Gradually raise the retirement age from 65 to 67 (this is still happening today).
  • Tax Social Security benefits for higher-income retirees.
  • Cover more federal employees under Social Security (such as some government workers).

The logic was that the extra payroll tax revenue would be saved in the Social Security Trust Fund and used when the baby boomer generation retired.

3. The Shift: The Federal Government “Borrows” from the Trust Fund

While the 1983 reform successfully created a Social Security surplus, what happened next set the stage for future problems:

  1. The Social Security surplus was not kept in cash.
    • Instead of setting aside the surplus in a protected account, the government was required by law to invest it in special U.S. Treasury bonds.
    • This meant that the surplus was loaned to the federal government in exchange for Treasury bonds.
  2. How did this work?
    • Social Security’s surplus flowed into the U.S. Treasury.
    • The Treasury used the money to fund other government programs (e.g., defense, infrastructure, tax cuts).
    • In return, the government issued IOUs (Treasury bonds) to Social Security.
    • These bonds accrue interest, meaning Social Security was technically still funded—but the government had to repay this debt.
  3. The Problem Emerged Over Decades
    • Throughout the 1990s and 2000s, both Democratic and Republican administrations relied on the Social Security surplus to mask the size of the federal deficit.
    • President Bill Clinton (1993-2001) attempted to protect Social Security funds by proposing a “lockbox” approach, but this was never fully enacted.
    • President George W. Bush (2001-2009) continued borrowing Social Security funds while also pushing for tax cuts and wars in Iraq and Afghanistan.

4. The Long-Term Impact: The Trust Fund Is Now Running Out

  • Since 2010, Social Security started paying out more in benefits than it collects in payroll taxes.
  • The only way to pay full benefits now is to redeem those Treasury bonds.
  • However, the federal government must raise money to repay these bonds—either by raising taxes, cutting spending, or borrowing more.
  • The Social Security Trustees estimate that the Trust Fund will be depleted by 2033.
  • If Congress does not act, benefits could be automatically cut by around 20%-25%.

Conclusion: Who Was Responsible?

The biggest turning point was the 1983 Social Security Reform under President Ronald Reagan.
However, both parties participated in continuing the practice of borrowing from Social Security:

  • Lyndon B. Johnson (1968): Merged Social Security into the general budget.
  • Ronald Reagan (1983): Created the surplus, but allowed it to be used for other government spending.
  • Bill Clinton (1990s): Proposed a lockbox but did not pass legislation.
  • George W. Bush (2000s): Borrowed more from the Trust Fund while cutting taxes.
  • Barack Obama (2010s): Payroll tax holiday temporarily reduced Social Security funding.

The Solution?

Fixing Social Security now requires political action. Some proposals include:

  • Raising or eliminating the payroll tax cap (currently set at $168,600 in 2024).
  • Gradually increasing the retirement age again.
  • Adjusting cost-of-living increases to slow spending.

Would you like me to analyze potential solutions in more depth?

You said:

What % is the Social Security trust fund earning at present?

ChatGPT said:

As of 2025, the Social Security Trust Funds are earning interest based on the rates of special-issue U.S. Treasury securities in which they are invested. The effective interest rate for these investments is calculated annually by dividing the interest earned by the average level of assets held during the year. While the exact rate for 2025 has not been published yet, recent trends indicate a rise in these rates. For instance, the Social Security Administration’s FY 2025 budget request notes an increase of $4 million over the FY 2024 level, attributing this to a rise in actual and projected interest rates on new issues to the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds.

Social Security Administration

Historically, the effective interest rates for the combined OASI and DI Trust Funds have varied. For detailed historical data on these rates, you can refer to the Social Security Administration’s records.

Social Security Administration

It’s important to note that these interest rates are influenced by prevailing economic conditions and federal fiscal policies, leading to fluctuations over time.