Each spring or early summer, the Social Security and Medicare Trustees issue their annual reports on the status of the programs’ Trust Funds. The news stories that follow primarily focus on the year when the Trust Funds will be exhausted. These stories also note that reforms to deal with the programs’ looming financial troubles need to happen sooner rather than later. This same annual ritual of reporting the date of the Trust Funds’ exhaustion and of stating that timely reform is necessary has occurred for many years now. Yet, the reforms have not come. They will come, eventually and out of necessity, but it appears that they will have to come later.
This past spring, the Trustees estimated that the combined Old Age, Survivors, and Disability Insurance Trust Fund will be depleted in 2034 - 15 years from now. Medicare’s Trust Fund for the Hospital Insurance portion of the program will be depleted in 2026 – just 7 years from now. But the focus on the Trust Funds’ exhaustion has left two incorrect impressions.
The first impression is that the Trust Funds can provide the necessary resources to pay Social Security and Medicare benefits that are separate from the rest of the federal government’s finances. However, the Trust Funds are essentially accounting conventions. Consider Social Security. From 1984 to 2009 the program ran surpluses as annual tax revenues exceeded the program’s expenses. These years of surpluses resulted from the last major reform in 1983 that advanced scheduled payroll tax rate increases and added taxation of Social Security benefits.
The surplus revenues in the years from 1984 to 2009 were used to buy special-issue government interest bearing bonds. This transaction simultaneously created an asset for the Social Security program and a liability for the rest of the federal government. Thus, on net, the surpluses were not used to build up assets external to the federal government. The Social Security surpluses in those years could then be used to finance other government spending, lower other taxes, or run lower deficits. While the Trust Fund’s bonds have created an authorization to pay Social Security benefits to 2034, in this current age of budget deficits, paying the Social Security benefits over and above the tax revenues must come from additional borrowing, regardless of whether the trust fund has a positive balance.
The other impression left by the existence of the Trust Fund is that there is still no present need for reform, even though the year in which the Trust Fund will be depleted is getting closer each year. The Social Security Trustees Report provides many other metrics besides the Trust Fund’s exhaustion date that quantify the current and future status of the program. These include the estimates of the program’s “unfunded obligations” over the next 75 years and over the infinite horizon. The unfunded obligations are basically the current, or present value, of the difference between projected future expenditures and revenues and less the Trust Fund balance. Over the next 75 years, Social Security’s unfunded obligation is $13.2 trillion and over the infinite horizon it is $34.3 trillion.1 These are huge numbers, but are not liabilities in an accounting sense, given that they are forward looking and include future expected benefit payments to and revenues collected from both current and future program participants. These metrics all point to the need for timely reforms, a need that is reiterated in language in the report.2
Perhaps the best metric quantifying Social Security’s “liability” is not in the Trustees Report. That metric is the accrued benefits of the program’s current participants, and it appears in one of the annual notes produced by the Social Security Administration’s actuaries.3 Workers’ accrued benefits are the amounts they would have to be given today based on their past participation in the program, and also the amounts retirees would have to be given in a lump sum in exchange for their continued receipt of their monthly benefits. This is a measure of the current debt owed to current participants today, based on past program participation.
At the beginning of 2018, total accrued benefits were $38.7 trillion. To put this number in perspective, it is 2.6 times the size of the federal debt held by the public and is equal in size to 40% of the Federal Reserve’s estimate of all households’ combined net worth in the United States!4
The actuaries’ estimate is based on the Social Security benefits that have already accrued to workers 22 years of age and above, and to current retirees, based on their past participation in the program. These are estimates of what Social Security owes these individuals based on their past work history.
This metric has much to recommend it. First, the accrued benefits measure of Social Security’s liability is most similar to the pension liabilities reported in the financial statements of private sector firms that have defined benefit retirement plans for their employees.
Second, because this measure is based on past participation in the program it meets that standard definition of a liability.
Third, the accrued benefit amount does not include any additional benefits based on future participation. It is also referred to as the maximum transition cost – or the amount that would be payable to current participants if the Social Security program was converted today to a defined contribution plan similar to a 401K. It is worth repeating that this is the same kind of accounting that is required of private sector firms that have defined benefit plans.
Fourth, accrued benefits are the best estimates of workers’ and retirees’ Social Security wealth. These are comparable to the other financial assets of retirees. Social Security benefits payable to participants who are 62 years of age and above totaled $14.4 trillion at the beginning of 2018.5 This amount rivals the size of the debt held by the public and is 37% of all Social Security accrued benefits. Workers who are on the cusp of retirement rightly consider their Social Security benefits an essential component of their retirement plans. For younger workers, the calculation appropriately reduces the estimate of their accrued benefits based on fewer prior years in the program.
Social Security benefit payments that retirees expect to receive each month are just as real to them as a pension payment from their former employer’s pension plan and should be accounted for in the same way. Accrued Social Security benefits are liabilities of the federal government and are assets of retirees and workers. If we begin recognizing them as such, federal liabilities are much higher than is normally reported, middle class wealth is also much higher than is normally reported, and measures of wealth inequality are significantly reduced.
 From the perspective of the entire federal government, the Social Security’s 75-year and infinite horizon unfunded obligations grow to $16.1 and $37.2 trillion when the trust fund is excluded as an offsetting asset.
 See the 2018 Trustees Report, p. 6. https://www.ssa.gov/OACT/TR/2018/tr2018.pdf Many alternative reform provisions have been scored by the Social Security Administration’s (SSA) office of the actuary and are available at: https://www.ssa.gov/OACT/solvency/provisions/index.html.
 The actuarial note in which Social Security’s accrued benefits are reported is: “Unfunded Obligation and Transition Costs for the OASDI Program,” by Daniel Nickerson and Kyle Burkhalter, Actuarial Note, Number 2018.1, June 2018. The note is available at: https://www.ssa.gov/OACT/NOTES/ran1/an2018-1.pdf .
 The estimate of the accrued benefits excludes the offset of the Social Security Trust Fund. The federal debt held by the public at the end of 2017 was $14.8 trillion. See Table B.101.h Balance Sheet of Households, Financial Accounts of the United States – Z.1, for the estimate of households’ net worth of $97.5 trillion as the end of 2017.
 Statement of Social Insurance, Social Security Administration, Agency Financial Report, Fiscal Year 2018, p. 44.