My first policy job was as a junior Social Security analyst for the Cato Institute. That was back in 1998-and I remember looking at the numbers from the Social Security Administration (SSA), which indicated that the program was on the road to financial ruin. Back then, the date Social Security was expected to begin running a deficit was around 2013. That seemed a long ways off.

It turns out, that day of reckoning has arrived a little early. To add to our already considerable federal budget woes, this year, Social Security will add to, rather than mask, the total deficit. The shortfall won’t affect Social Security payment since SSA has trillions in government bonds in its “Trust Fund” that it will now begin cashing in. Bankrupting America has a good overview of how this works, and why the existence of the “Trust Fund” should be of no comfort to taxpayers:

The SSA will have to begin cashing in its bonds from the Treasury.  Who will reimburse Social Security?  The general Treasury.  Do you see the problem?

To pay SSA for those bonds, the Treasury will have to issue new debt, collect more money from taxpayers, or cut spending to free up money to give to SSA.

The Social Security Trust Fund encapsulates the problem with so-called “intra-government lending,” which is essentially lending money from one of your pockets to the other.

Imagine if an individual used this system of budgeting.  You allocate a certain portion of your income to “food.”  For years, you spend less than your food budget, and use that “extra” money to buy clothes, electronics, and to slightly reduce your credit card debt.  You write your food budget IOUs for all the money that you’ve taken from it so that after a few years the food trust fund has thousands of dollars of IOUs.  Yet when your income goes down and you actually have to cash in those IOUs, you’ll find that they are useless.  You have to pay yourself back.  That means you still have to come up with the money to cover those food bills while paying for everything else.

The $2.4 trillion in the Social Security Trust Fund isn’t an asset.  It’s a taxpayer liability.  It only means that Social Security has first dibs on money that comes into the general Treasury – that’s little comfort to policymakers trying to balance the budget or to taxpayers who are on the hook for all of government’s liabilities.

SSA explained that the recession thas led to Social Security’s premature financial troubles: more people are taking early retirement and collecting benefits, while the high unemployment rate means there are fewer people to pay the payroll taxes that support Social Security. This is the problem with a “pay-as-you-go” retirement system: when something changes-whether it’s the system’s underlying demographics (like a big uptick in beneficiaries and historically low birthrates) or economic changes like those we’ve experienced during the last few years-the whole system is in jeopardy.

Retirement systems are only financially sound when they have real assets locked away that cover promised benefits. That’s what we were writing back in the 90s, and it remains true today.