The financing of Social Security is being re-examined in a new debate.

• With dwindling trust funds, Washington's new leadership will grapple with the challenge of resolving Social Security's issues.
• This week, Senator Mike Lee of Utah, a Republican, criticized the program, stating, "We were promised a dream, but received a nightmare," and advocated for "real change."
• Lee's social media posts sparked renewed questions about the program's funding, with experts stating that the answers are not straightforward.

In Washington, D.C., new leadership has not yet been sworn in. However, Sen. Mike Lee, R-Utah, sparked a discussion on the future of Social Security through a series of posts on social media platform X.

The program, which supports over 65 million individuals with monthly payments, is facing potential funding shortages that could lead to reduced benefits within the next nine years.

"We were sold a dream, but received a nightmare," Lee stated in the X thread on Monday. "It's time for a wake-up call. We need real reform."

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It is generally agreed by experts on both sides of the aisle that it is better to tackle Social Security's funding issues sooner rather than later.

"Charles Blahous, senior research strategist at George Mason University's Mercatus Center and former public trustee for Social Security, stated that the system needs fixing. Ignoring the issue and acting as though everything is fine will not benefit the public."

Lee's statement comparing Social Security to a Ponzi scheme that's running out of new investors sparked differing opinions.

Elon Musk, who has been assigned the responsibility of reducing government expenditure under President-elect Donald Trump, reposted Lee's message while labeling it "fascinating." However, Social Security advocacy groups promptly defended the program they claimed has never failed to make a payment in almost 90 years.

Lee identified the issue of the "trust funds" mechanism used to pay benefits among the problems he faced.

"According to Lee in his X thread, the money does not reside in an individual account with one's name on it, but rather in a large account known as the "Social Security Trust Fund.""

What are Social Security's trust funds?

According to a recent Congressional Research Service report, payroll taxes paid by both workers and employers are the primary source of funding for Social Security.

The program also receives money from other sources, such as federal income taxes paid by some Social Security beneficiaries, reimbursements from the Treasury's general fund, and interest income from investments held in its trust funds.

The Social Security Administration states that the trust funds, which hold money not required for current year benefits and administrative expenses, are invested in special Treasury bonds guaranteed by the U.S. government.

The bonds of the trust fund are redeemed when they are needed to pay benefits or they expire, and the interest on those securities is linked to market rates.

Blahous stated that trust funds mainly monitor the contributions made by workers into the system.

The annual report on Social Security's financial outlook by its trustees often generates headlines due to the program's trust funds.

The two trust funds of the program are legally separate and usually do not have the power to borrow from one another.

If Congress does not act before 2033, the trust fund that pays benefits to retired workers, their spouses, children, and survivors will only be able to cover 79% of the benefits.

Politicians, including Lee, have questioned the trust fund structure of Social Security. In 2005, President George W. Bush compared the trust funds to government IOUs stored in a filing cabinet. More recently, Sen. Ron Johnson, R-Wisconsin, used a photo of a filing cabinet during a 2023 Budget Committee Senate hearing to discuss the program's funding.

"Johnson stated that the Social Security trust fund is a four-drawer file located in Parkersburg, West Virginia."

At the time, Stephen Goss, the chief actuary at the Social Security Administration, stated that the funds are entirely electronic.

According to Andrew Biggs, senior fellow at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration, politicians' reference to filing cabinets implies that trust funds are not real. However, if someone has a retirement account with Vanguard or a defined benefit pension, it would also be represented with a paper document, he said.

"These trust fund bonds are real," Biggs said.

Experts say the trust funds are misunderstood

Nancy Altman, president of Social Security Works, stated that Social Security's trust funds are legitimate, just like Treasury bonds are issued to China, a pension fund, or a grandmother on behalf of a grandchild.

"If Congress fails to pay it, it would be considered a default, so this is a legal matter, Altman stated."

In his post on X, Lee stated that the government frequently conducts raids on Social Security's trust fund.

The Social Security trust funds can be borrowed from the general fund of the Treasury, as per Congressional Research Service, and the funds are usually repaid with interest.

Jason Fichtner, chief economist at the Bipartisan Policy Center and a former senior official at the Social Security Administration, stated that this practice is standard accounting procedure and not considered raiding in a legal context.

According to Biggs, if Social Security has a surplus, it must be invested with the federal government, which means the government is obligated to borrow it.

Since Social Security no longer has surpluses, borrowing from it mostly stopped 15 years ago, according to Biggs.

In his post, Lee emphasized the potential for Social Security to earn more interest if its investments were more aggressively invested in stocks. Likewise, Senator Bill Cassidy, R-Louisiana, has advocated for investing in stocks on the program's behalf.

The Bipartisan Policy Center's Fichtner emphasized that Social Security should be viewed as a social insurance program funded by a payroll tax, rather than an investment.

Fichtner emphasized that the program's progressive design ensures that Americans with lower lifetime earnings receive a higher income replacement rate. By focusing on the income replacement provided by the program, we can determine which reform proposals are beneficial and necessary.

Fichtner emphasized the need for an open and honest discussion about Social Security's crucial role in ensuring retirement security for Americans.