The Social Security Trust Fund every retiree is relying on is not what most Americans believe it is.
The brutal truth is this $2.85 trillion fund, which is supposed to keep the Social Security program solvent until the year 2033, has no money in it whatsoever.
The entirety of the Social Security Trust Fund is held in "special obligation bonds," a type of government bond issued for a single purpose (in this case, the funding of Social Security benefits).
In other words, this "fund" is actually debt.
And unlike marketable Treasury bonds, these special obligation bonds can't be sold. They only have value if the U.S. government buys them back.
They also differ from marketable Treasuries in that they exist in paper form. All of them are stored in two loose-leaf binders in a filing cabinet at the "Bureau of Public Debt" in Parkersburg, W.Va.
But what many people fail to realize is that what the paper bonds represent isn't money that can be sent to Social Security beneficiaries, but debt owed by the U.S. government.
President George W. Bush made that clear on a little-remembered visit to Parkersburg in April 2005:
"A lot of people in America think there's a trust, in this sense — that we take your money through payroll taxes and then we hold it for you, and then when you retire, we give it back to you. But that's not the way it works.
"There is no 'trust fund,' just IOUs that I saw firsthand, that future generations will pay — will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.
"The office here in Parkersburg stores those IOUs. They're stacked in a filing cabinet. Imagine — the retirement security for future generations is sitting in a filing cabinet."
While the public is generally unaware of this, those in the government have always known.
President Bill Clinton's 2000 budget proposal included a description of the Social Security Trust Fund similar to that of President Bush:
"The Social Security Trust Fund does not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures."
But if the Social Security Trust Fund is just a pile of debt, where did the money go?
You're not going to like this answer, either…
All of the Social Security Trust Fund Money Was Spent
Most people know that Social Security is funded primarily by payroll taxes levied on all U.S. workers. The money is spent as it comes in, sent out to beneficiaries.
But in most years there's a surplus, which the government is supposed to set aside for when the payroll tax receipts can't cover the cost of the benefits.
Investing that money in those special obligation bonds allowed the government instead to add the surplus to the general budget – where it was promptly spent on everything from defense to welfare to foreign aid.
That’s right. The government spends all the excess Social Security tax money in the year they receive it, replacing it with the paper IOUs that now sit in the filing cabinet in Parkersburg.
Over the years, different presidents have been accused of "raiding" the Social Security Trust Fund to finance this or that program, but that's understating what's actually happened.
The truth is, every president since Franklin Delano Roosevelt has overseen this "borrowing" from the Social Security Trust Fund. And as long as the program's receipts exceeded its expenditures, it didn't matter all that much.
But that's about to change…