The Implications of Social Security’s “Missing Trust Fund”

Publication Date: June 2019

Publisher: Center for Retirement Research at Boston College

Author(s): Alicia H. Munnell; Wenliang Hou; Geoffrey Sanzenbacher

Research Area:

Keywords: Social Security; retirement; retirement benefits; Social Security Trust Fund

Type: Report

Coverage: United States


As policymakers consider restoring financial balance to Social Security, understanding the reason for the shortfall is important. If the cost of currently scheduled benefits simply exceeds what today’s workers are paying into the system, the traditional proposals to reduce benefits or raise payroll taxes would be most relevant. However, the cause of the shortfall lies elsewhere. Specifically, the program’s “pay-as-you-go” approach – with the exception of the recent build-up and spend-down of a modest trust fund in anticipation of the baby boom – makes the program expensive. This financing approach is the result of a policy decision in the late 1930s to pay benefits far in excess of contributions for the early cohorts of workers. The decision essentially gave away the trust fund that would have accumulated and, importantly, gave away the interest on those contributions. This brief, based on a recent paper, explores the implications of the “Missing Trust Fund.”

The discussion proceeds as follows. The first section discusses the origin of the Missing Trust Fund and its cost implications for current workers. The second section discusses how the Missing Trust Fund relates to Social Security’s Legacy Debt and the pattern of net transfers over the generations. The third section lays out alternative paths forward – funding vs. pay-as-you-go and payroll taxes vs. income taxes.

The final section highlights three implications. First, Social Security costs are high, not because the program is particularly generous, but because the trust fund is missing. Second, the beneficiaries of the trust fund giveaway were early generations; in contrast, the much-maligned baby boomers are scheduled to pay for their full benefits. Finally, if policymakers choose to maintain Social Security benefits at current-law levels, little rationale exists for placing the entire burden of the Missing Trust Fund on today’s workers through higher payroll taxes; that component could be financed more equitably through the income tax.