Here is a brief history of how the Social Security trust Fund has been treated in federal budget accounts, in particular how it has switched from on-budget to off-budget, why it was switched, and the consequences. There are several points to note. First, as I read this, the Trust Fund is required to hold Treasury bonds or notes, but it does not specify that these be non-marketable and there have been time periods when a substantial fraction of the Fund has been in the form of marketable securities. I was under the impression that they had to be non-marketable, but this document from the SSA appears to say otherwise. Second, there are arguments for both unified budget and separate budgets. This is, to me, simply a matter of what question is being asked. For some questions a unified presentation is best, but for others such as assessing the state of the general fund easily, a separate presentation is best. Third, though not all of the relevant discussion is included below, a close reading of the document suggests that the flip-flops from on-budget to off-budget, including the SSA funds in trigger calculations, and other changes almost always improve the budget picture for the current administration making it easier to avoid raising taxes or cutting spending to balance the new definition of the budget.
I want to thank everyone for their comments over the last few days. I have learned a lot writing these posts and responding to comments and as a consequence of comments and further thought, my views have shifted somewhat since when I first began writing about this yesterday. Much thanks to james oneill in a comment at Angry Bear. The following brief history summarizes the material in a link he provided from the SSA. I found the history of how the Trust Fund has been treated in budget accounts interesting:
THE FINANCING PROCEDURES
In the Social Security Act of 1935 the income from the payroll tax was to be credited to a Social Security "account." Benefits were to be paid against this account, but there was no formal trust fund as such. … the payroll taxes were just credits in the Social Security account on the Treasury's ledger under the initial law.
The investment rules governing payroll tax income were also established in the 1935, and are essentially the same ones in use today. Specifically, the 1935 Act stated: "It shall be the duty of the Secretary of the Treasury to invest such portion of the amounts credited to the Account as is not, in his judgment, required to meet current withdrawals. Such investment may be made only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States<." (See Title II, Section 201of the 1935 law)
In the 1939 Amendments, … a formal trust fund was established for the Social Security program and the credits already on the Treasury's books for the Social Security program were to be transferred to this Fund, along with all future revenues raised for the program.
The investment procedures adopted in 1939 were modified only slightly from those in the original Act of 1935. … Both the 1935 and the 1939 laws specified three types of purchases that might be made: 1) securities on original issue at par; 2) by purchase of outstanding obligations at the market price; and 3) via the issuance of "special obligation bonds" that could be issued only to the Social Security Trust Fund. These special obligation bonds were not to be marketable, although the other two forms of securities could be. …
Consequently, over time the Social Security Trust Funds have included a mix of marketable and non-marketable Treasury securities. Over the years, the proportion has shifted heavily in favor of special obligation bonds as the main asset held by the Social Security Trust Funds. Prior to 1960, the Treasury's policy was to invest primarily in marketable securities, although this policy was not always followed. Since 1960, the policy has been to invest principally in special obligation bonds, unless the Managing Trustee of the funds (i.e., the Secretary of the Treasury) determines that investment in marketable securities would be "in the public interest." In fact, since 1980 no marketable securities have been added to the Trust Funds. (For a more detailed explanation see the Office of the Actuary's Actuarial Note #142.)
These financing procedures have not changed in any fundamental way since payroll taxes were first collected in 1937. What has changed, however, is the accounting procedures used in federal budgeting when it comes to the Social Security Trust Funds.
THE ACCOUNTING PROCEDURES
… Over the nation's history, the procedures involved in federal budgeting have varied a great deal, with a few major changes. (For a highlight summary of some important milestones see the excerpt from the Senate Budget Committee's report on the budget process.)
Modern federal budgeting has its origins in The Budget and Accounting Act of 1921. This law formalized the budget process. ... From that point on, the President and his budget office controlled the presentation and content of the federal budget, and the appropriations committees in the Congress received the President's budget and acted upon it.
… From the beginning of the Social Security program its transactions were reported by the administration as a separate function in the budget. This is sometimes described in present usage by saying that the Social Security program was "off-budget." This was the budget representation of the Social Security program from its creation in 1935 until 1968.
In early 1968 President Lyndon Johnson made a change in the budget presentation by including Social Security and all other trust funds in a"unified budget." This is likewise sometimes described by saying that Social Security was placed "on-budget."
… The concern … was not specifically with the Social Security Trust Funds, but rather it was an effort to rationalize what the Commission viewed as a confusing budget presentation. At that time, the federal budget consisted of three separate and inconsistent sets of measures, and often budget debates became bogged-down in arguments over which of the three to use. … Consequently, the Commission's central recommendation was for a single, unified, measure of the federal budget--a measure in which every function and activity of government was added together to assess the government's fiscal position. …
Keep in mind that the Congress in the late 1960s had no independent budget process of its own. Although numerous legislative efforts had been undertaken over the years to produce a budgeting process in the Congress to parallel that of the Administration, most of these efforts proved to have little staying power. It was not until 1974 that Congress … created both the Congressional Budget Office and the standing budget committees in the House and Senate.
So, traditionally, the way the administration chose to present its budget material defined how the federal budget was presented. When the Congress began its own independent budgeting activities in 1974 it adopted the existing convention of treating Social Security as part of the unified budget.
In the 1983 Social Security Amendments a provision was included mandating that Social Security be taken "off-budget" starting in FY 1993. This was a recommendation from the National Commission on Social Security Reform (aka the Greenspan Commission). The Commission's report argued: "The National Commission believes that changes in the Social Security program should be made only for programmatic reasons, and not for purposes of balancing the budget. Those who support the removal of the operations of the trust funds from the budget believe that this policy of making changes only for programmatic reasons would be more likely to be carried out if the Social Security program were not in the unified budget." (Note that this was a majority recommendation of the Commission, not the unanimous view of all members.) …The actual form of the 1983 change was somewhat complex. … in this rather complicated fashion, the Social Security program was again off-budget by FY 1985. Perhaps the more important date here, however, was the 1993 date because that date exempted the Social Security program from the potential of generalized budget-cuts.
The next important change in Social Security's budget treatment came in 1985 with the passage that year … as Gramm-Rudman-Hollings … [which] pushed forward from 1993 to 1986 the date by which the Social Security program would be made immune from generalized budget reductions. However, GRH also mandated that the Trust Funds be included in the budget for the purpose of determining if the total budget exceeded the deficit targets in the law. … The import of this provision was that … while the Social Security program was off-budget, and immune from sequestration or other generalized budget cuts, its surpluses were still being used to reduce the size of the budget deficit.
So, by 1986, Social Security was technically off-budget, but it was still being used in the deficit calculations. … However, in the Omnibus Budget Reconciliation Act (OBRA) of 1990 the law was changed to stop the use of the Trust Funds for any function in the unified budget, including calculations of the deficit. …
The … budget treatment of Social Security basically remains the law to the present day. Specifically, present law mandates that the two Social Security Trust Funds, and the operations of the Postal Service, are formally considered to be "off-budget" and no longer part of the unified federal budget. (The Medicare Trust Funds, by contrast, are once again part of the unified budget.) So where matters stand presently is that the transactions to the Social Security Trust Funds and the operations of the Postal Service are "off-budget" and everything else is "on-budget."
However, those involved in budget matters often produce two sets of numbers, one without Social Security included in the budget totals and one with Social Security included. Thus, Social Security is still frequently treated as though it were part of the unified federal budget even though, technically, it no longer is.