How Do the Social Security and Medicare Trust Funds Work?

BY busadmin  June 8, 2009 at 2:28 PM EDT

safe; rpongsaj via Flickr

Question: How do the Social Security and Medicare trust funds work? My understanding is that there is no money there, so that general government revenues have to be tapped to answer calls on them. Thus they are insolvent now?

Paul Solman: Your understanding is correct, as we discovered when we actually VISITED the Social Security Trust Fund back in the summer of 2001. (It’s a pretty funny story. I’d advise anyone who hasn’t seen it to take a look, though, admittedly, I may not be the most impartial of sources.)

But I have a question for you: What do you mean by “insolvent”? Let’s say that I, your humble economics servant, earn several trillion dollars a year and my assets are in the many trillions. Let’s also say I set aside a “fund” in which I promise to pay claimants — oh, my kids and grandkids, maybe — from my future revenues. I’ve never missed a payment in my history, which spans several centuries. I’ve been growing in income and wealth pretty much the whole time.

Granted, the only asset of the “fund” is my promises to it. I’ll make good on them with future revenues or, since I constantly run my budget at a deficit, with future BORROWING. But everyone in the world seems happy to lend me money, at fairly reasonable prices (interest rates).

So, I ask you: am I “insolvent”? Substitute “Uncle Sam” for “your humble servant” and what changes?