How "real" is the Social Security Trust Fund?

Debate is raging these days about how we should think about the Social Security Trust Fund. What matters, of course, is not how we think about the Trust Fund itself, but what implications for policy our thinking about it in one way or another might have. Fundamentally, if we could determine what set of future policies were best, it wouldn't matter how we thought about the Trust Fund, except insofar as such thinking created issues about the ability to make credible commitments that needed to be part of the determination.
On one side, President Bush took his clown show to West Virginia yesterday, for a photo op at the Bureau of Public Debt Office. This is the place that - to sound like Eric Idle, doing his hilarious documentary-reporter routine in the Monty Python-affiliated Beatles satire "All You Need is Cash" - one can actually visit to actually find where the actual Trust Fund is actually kept. Or at least, the office contains a file cabinet with physical evidence of the bonds that the Trust Fund holds or is deemed to hold (more on that choice of terms in a moment).
Bush, whose expressive range is limited, the poor devil, but who does jejune sneering rather well because it comes from the heart, later stated: "Imagine, the retirement security for future generations is sitting in a filing cabinet."
It is, of course, a bit amusing to have the U.S. President sneering at the reality of U.S. Treasury obligations. Is he also planning to visit the Department of Defense, find a room where weapons procurement contracts are kept, and sneer: "Imagine, the means for our country's future national defense are sitting in a filing cabinet."?
Note, by, the way, that the retirement security for future generations could indeed be sitting in a filing cabinet if, say, the cabinet held sufficient value in bonds that had been issued by foreign governments and were certain to be honored.
Aiding the Democratic side of the debate, the above-linked article notes that, "[w]hile the paper IOUs are not negotiable instruments, they still represent trust fund Treasury bonds that are backed by the full faith and credit of the United States." And Democratic Congressional veteran Charles Rangel is quoted as saying that "Americans who paid into Social Security are legally entitled to have that money fund Social Security until 2052 — as estimated by the Congressional Budget Office — just as all other investors in U.S. bonds are entitled to their return on their investments."
Rangel is wrong as well, however. Now, it is true that, as the law now stands, Social Security claimants will be entitled to receive the benefits on the books for as long as the Trust Fund is deemed to have a positive balance, or until 2052 based on current projections. But Congress could change the law tomorrow by repealing Social Security, and all as yet unaccrued legal entitlements would vanish. This would not be a literal act of legal default in the same sense as refusing to honor bonds held by investors (although it is true that Congress could decide to authorize that as well).
Those taking Rangel's position would understand this if they thought it through a bit. If the two claims were the same, then reducing Social Security benefits effective in 2040, say, would be equivalent to announcing a reduction in the return that will be paid on outstanding U.S. government bonds. Everyone realizes that these two acts would differ, because less of a putatively unbreakable promise has been made in the future benefits case, thus permitting a change without creating comparably serious credible-commitment problems for the U.S. government in the future.
As I have discussed elsewhere, the Trust Fund is neither a "sham," as the Bush side would have it, nor an actual source of paying for future benefits, as the Rangel side would have it. You can't actually finance something with self-owed obligations, or I would pay for my kids' college education by stuffing my personal IOUs into my filing cabinet. The Trust Fund is essentially a historical record of certain cash flows, kept according to a mandated set of rules. But it is meant to create some level of political pre-commitment, albeit less than that which is created by issuing a U.S. government bond to a third party. By the way, this pre-commitment is meant to have elements of a sword as well as a shield, in the sense that Congress is expected to think twice about increasing benefits if the Trust Fund, as officially measured, is not expected to be able to cover them. So it offers something to foes as well as friends of benefit expansion.
In sum, while the Trust Fund does not contain assets of the U.S. government (or equivalently, it contains precisely offsetting assets and liabilities), it does represent a set of conventions that people have agreed to treat as at least somewhat meaningful. Bush's cavalier sneering misses this, just as Rangel overstates the degree to which we have locked in our permissible set of Social Security policy choices.
All this being said, if Bush's Social Security plan (i.e., buying lots and lots of stock on margin) made any sense, I certainly wouldn't regard the defects in his way of talking about the Trust Fund as counting against the plan. He is merely trying to dramatize the crisis aspect, which would be more germane to the debate if not for the fact that, as I noted in an earlier post, his plan "is a bit like saying: 'The house is on fire, and we have responded by drawing some snazzy floor plans for a tasteful renovation.'"