In the early 1980s, the Social Security program was in danger of running out of money to pay for the benefits it had promised to retired people.
A commission headed by Alan Greenspan (who had not yet become chairman of the Federal Reserve System) was asked to recommend solutions. The Greenspan Commission proposed sweeping changes that included increasing the retirement age in gradual steps and collecting more Social Security taxes.
Not only would these measures pay for current benefits, but they would "pre-fund" some of the benefits promised to baby boomers when they retired. The idea was to offer some relief to future workers who would have to pay for the enormous increase in the retired population that was expected to start in about 2010.
After Congress adopted these proposals, the Social Security trust fund -- the accumulated surplus of Social Security tax revenue minus benefits -- swelled. It stands at $2.7 trillion in 2012. Back in the 2000 presidential election campaign, candidate Al Gore famously proposed putting the trust fund in a "lock box" to keep it safe.
Actually, the trust fund is kept in a lock box. More accurately, it is kept in a locked file drawer in the Parkersburg, W.Va., office of the U.S. Bureau of Public Debt.
If you opened the drawer, you would find a three-ring binder containing sheets of office paper printed with IOUs from the U.S. Treasury Department for billions of dollars. That's right: The government has borrowed the trust fund and replaced it with a special type of bond that is issued when one federal agency borrows from another.
The fact that the lock box contains a stack of IOUs has touched off an acrimonious debate. Some claim that the Treasury has "raided" the trust fund, leaving worthless paper. Columnist Charles Krauthammer referred to the trust fund as a "fiction."
Others reply that the bonds in the trust fund are backed by the "full faith and credit" of the U.S. government -- an unconditional guarantee to pay interest and principal on the debt. If the bonds in the trust fund are worthless, some say, so are the Series EE savings bonds in our children's college funds.
This debate has taken on new importance with Monday's release of the annual report of the Social Security trustees. The trustees project that the trust fund will run dry in 2033, three years earlier than they projected in last year's report.
But a more ominous date may come earlier, in 2021, when Social Security taxes (plus interest on its bonds) can no longer pay for the benefits promised to retirees. That's when Social Security will have to start cashing the bonds.
The conflicting claims about the status of the trust fund can be resolved by economic reasoning and evidence. If the money that the U.S. Treasury borrowed from the trust fund reduced other government borrowing, then the trust fund represents a net addition to national savings.
In effect, it's worked as a piggy bank into which the baby boomers deposited their savings and from which they can pay for their retirement.
However, if government borrowing in other areas did not decrease, then the trust fund is not real. In that case, the surpluses in the trust fund simply enabled the rest of the government to run larger deficits.
The evidence does not look good. Do you remember when Bill Clinton was president and the government was running a large budget surplus? People even talked about retiring the federal debt.
In fact, the trust fund was responsible for those apparent surpluses in the government's "unified" budget in every year except 2000. The rest of the government was running a deficit. This suggests that the trust fund has not been used to increase national savings.
Economic studies support this impression of the trust fund. Sita Nataraj and John Shoven, two economists affiliated with the National Bureau of Economic Research, estimated that an increase in trust fund savings was at least partly and perhaps completely offset by a decrease in government savings (actually, an increase in deficit spending) outside the trust fund.
They concluded that working generations will not have more resources available to pay for the baby boomers' Social Security benefits. They will have to pay higher taxes or accept less government spending for other programs.
Nataraj and Shoven contrasted the current system to a hypothetical one in which the Social Security surplus would have been invested in individual retirement accounts. I know most people don't like this idea, so bear with me. Suppose the individual accounts held only risk-free government bonds. Does that sound better?
This seems like the current system, but it is not. In the hypothetical case, the bonds and the interest on them would be treated as expenses by the government, making the unified budget surplus lower (or its deficit larger). It is likely that in such a situation the government would spend less of the Social Security surplus.
The trust fund was used to keep taxes low on baby boomers' incomes and to provide more government services. This leaves our children's generation with no choices other than paying higher taxes or accepting fewer government services -- unless we agree to help by cutting our benefits.
This is a painful solution. But we're responsible for the mess. It's time to be adults and clean it up.
Roger Feldman is a professor at the University of Minnesota.