Social Security Interest? You Figure It

SOMETIMES government accounting and accountants perplex even the savviest financial wizards. Take Walt Wriston, for example.

You would think that Mr. Wriston, the retired chairman of Citicorp, would be able to figure out principal and interest.

That's what Wriston thought last week when he was at the final meeting of the President's Economic Policy Advisory Board. Wriston was explaining to such other luminaries as economists Herbert Stein, Paul McCracken, and Milton Friedman why the Social Security Trust Fund would be the sole buyer of US government securities in the mid-1990s. If this were true, the government would need to borrow less money from the public, he reasoned.

But, Joseph Wright, acting director of OMB, disagreed.

According to Mr. Wright, the interest that is accrued on the growing Social Security Fund is merely a bookkeeping transaction between the Treasury and the Trust Fund. No money changes hands until the Social Security fund actually needs it.

And, as Wright notes, ``Most of the build-up in the trust fund is interest credited by the Treasury.'' Call it the power of compound interest.

For example, if you add the interest to the trust fund, by the year 2030 it has a surplus of $450 billion and assets of $12 trillion. However, since no money actually changes hands when interest is accrued, the social security surplus actually will top out with $145 billion in the year 2005.

Won't the Treasury have to make good on its promise to pay interest in the future? ``Around 2030 it will become a serious issue,'' Wright says. This is because the government is not actually providing for the interest owed to the fund. It is a future unfunded liability of the government which will ultimately amount to trillions of dollars.

It is logical to ask: What about the billions of dollars contributed by taxpayers in each paycheck? Where does that go?

Yes, that goes into the Social Security Trust Fund which invests the money in Treasury securities.

However, Wright says this money will never be enough to fund the United States budget deficit.

Wriston, who calls himself, ``just an ordinary guy with a pencil,'' remains unhappy with the OMB acting director's explanation. ``If you have an extra $100 billion in taxes, it reduces the amount you have to borrow from the public.'' He concludes, ``I think we are two ships passing in the night.''