Breach of Trust Fund

One of the things that we have argued about in these pages is the nature of the Social Security Trust Fund. What I have said about that institution is confirmed by this story.

WASHINGTON (AP) -- Social Security will post nearly $600 billion in deficits over the next decade as the economy struggles to recover and millions of baby boomers stand at the brink of retirement, according to new congressional projections.

This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday.

Social Security will run a deficit this year and large deficits over the next decade. Why should that matter to the struggling economy if, as some readers have said, the trust fund has the program covered for decades to come? Then there is this:

Last year, Social Security posted its first deficit since the program was last overhauled in the 1980s. The CBO said at the time that Social Security would post surpluses for a few more years before permanently slipping into deficits in 2016.

But the new projections show nothing but red ink until the Social Security trust funds are exhausted in 2037.

So we're good until 2037, right? No.

Social Security is a "pay-go" system. Payroll taxes coming in are not invested; they go right out as benefits. For decades, the system ran surpluses. What happened to the extra bucks? The surplus went directly into the general treasury and every dime of it was spent. It's long gone.

In return for the money, trust fund bonds are issued covering the money paid into the treasury plus interest. These are IOU's. To be sure, they are backed by the full faith and credit of the United States. They are not, however, assets of the government; they are liabilities.

What happens now that the program is running a deficit? Those bonds are "redeemed", which means only that the flow of cash is reversed. Money is now moving out of the treasury to pay Social Security benefits.

So what is the significance of the 2037 date? Only this: until the Trust Fund is exhausted, the transfer of monies from the treasury is automatic. After 2037, assuming the projections are correct, Congress will have to act to authorize a continued supply of funds.

The Trust Fund guarantees payments from the Treasury for decades after the system goes into the red, but in involves an element of fraud. It disguised the fact that money collected in the name of social security was spent on other things. That fraud is still operating a bit in the AP article, but the appearance of that article suggests that the jig is up.

Comments

[A.I.]

And I will ask yet again, as I have in past postings on this issue, what better solution was there back in the 80's when this plan was devised? What other entity other than the treasury might we have used to back the build up of the trust fund so it could carry the program through the baby boomer retirement years? Why is this in any way a fraud, especially if compared to investing private pension funds in stocks, municipal bonds, etc.?

You keep posting this stuff, but you never answer those simple questions. Quite frankly, the real fraud is the Social Security is broke myth or that there was any better, less risky way to provide for the baby boomer years. So come on KB, tell us the alternative, put up or, well, you know the alternative.

[Allen W. Smith, Ph.D.]

"what better solution was there back in the 80's when this plan was devised?"

The intent of the 1983 legislation was that all of the surplus money would be saved and invested by using the money to purchase pre-existing maretable Treasury bonds in the open market. Then, when the money was needed to pay benefits, the Social Security trustees could resell the bonds in the open market. It is as simple as that. By buying pre-existing marketable bonds in the open market, the public debt would have been paid down by $2.6 trillion between 1985 and the present. If this had been done, the trust fund would today hold $2.6 trillion of "good-as-gold" marketable Treasury bonds which could gradually be sold between now and 2037 so that full benefits could be paid. The reason this was not done is that the surplus money would have ended up in the hands of the investors from whom the bonds were bought instead of in the Treasury. This would have deprived the politicians of their giant secret slush fund which they could spend on whatever they wanted to spend it on.

Of course it is fraud. In my opinion it is "the greatest fraud ever perpetrated against the American people by their own government." When the first surplus revenue,resulting from the 1983 payroll tax hike, came in in 1985, the Reagan administration made a deliberate decision to put the money in the general fund and spend it. They replaced the looted money with government IOUs which they called "special issues of the Treasury," or "trust fund bonds." Once Reagan set the precedent, it was never broken. Presidents Reagan, Bush I, Clinton, Bush II, and Obama all participated in the looting of Social Security. I stumbled onto this more than ten years ago while doing research for my first Social Security book. I was outraged and I wanted to tell the whole world, but nobody wanted to listen. I have devoted the past ten years of my life to researching and writing about Social Security funding. During the whole decade, I have tried to expose the great Social Security scam. Please visit my website at www.thebiglie.net for more information.
Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University

[Donald Pay]

The right has no solution to these problems because they want to take apart the social safety net. Their dream is a third world country where the rich rule and the middle class is destroyed. They would be quite happy to see Social Security bankrupted. They spent the entire Bush presidency running up the debt, letting Wall Street nearly take this nation down and proposing various schemes to privatize part or all of Social Security. Asking them to propose a fix to our problems is the exact wrong approach. They don't want a fix. They want bankruptcy.

[Ken Blanchard]

A.I.: If we are going to know what to do about Social Security, we first need to understand what it is. That was the chief point of my posts. If you are right that the system as designed is the best possible system, then it is indeed doomed.

You could have designed a system that wouldn't run a surplus. If more money is coming in than is needed to pay the current level of benefits, then either raise benefits and/or refund payments. Doing both would have made beneficiaries a little better off in past decades, and they would have gotten out of the system at least what they paid in instead of less. It would also have benefited workers paying in. I am no economist, but I am guessing a simple formula could have been written into law to take care of this.

Such a formula would have to define a target level of benefits, as the current formula does. Obviously the point of the system is to make sure retirees are not impoverished. Just as obviously, the system cannot escape economic realities. If the system is not fiscally sound it may bankrupt the Federal treasury and/or become a debilitating drag on the productive economy. So the formula could be designed to float both payments and taxes depending on economic and demographic conditions. In boom times benefits would go up and taxes down. In leaner times, or as the population grays, the opposite would happen. Put in a floor for benefits based on some kind of cost of living standard, and you'd have a system as sustainable as it could be.

That, or something like it, is what Congress might have done. Instead, it has preserved a very inflexible system and used the surplus to surreptitiously underwrite more discretionary spending. That's fraudulent.

To see how inflexible the system is, just look at Donald's post above. It is obvious to anyone who is rational and modestly well informed that the system is in crisis. But anyone who proposes a viable remedy will be denounced by Democrats for wanting to destroy Social Security. To fix the system we desperately need to make changes. Taxes will probably have to be raised. The retirement age will have to be raised. Benefits will have to be cut. President Obama isn't in favor of any of these things. Democrats are salivating at the thought that Republicans will push any of them. That is the real crisis that Social Security faces.

[Donald Pay]

Wrong, KB. Viable remedies for any problems in the SS system aren't that difficult to devise. When you invent lots of non-existent problems with the system and hype them into a non-existent emergency there is no reason to take what you have to say seriously.

It is great, however, that the right is finally coming around to understanding that the Reagan manipulations to nation's fiscal system, including Social Security, were unfortunate and ill-advised. They led to a lot of distortion and other problems in federal budgeting and spending.

[BillW]

Donald,

" When you invent lots of non-existent problems with the system and hype them into a non-existent emergency there is no reason to take what you have to say seriously."

You mean like the left does with global warming?

[Jimi]

Allen Smith (above) pretty much nails it. I have done my own research, and I belelive Allen Smith (above) pretty much has it nuts on. The only thing I would add is, that the original mistake, besides the assumptions made at inception, was the "Unified Budget" from the Johnson Administration.

It is clear that the accounting of S.S. is sound.....it makes sense, and all the numbers add up. The problem being that the American people can't seem to understand that now that we are cashing in the dedicated Tresury Bonds, we have to either 1.) raise taxes for the general fund, 2.) borrow more money and increase the deficit of the general fund or 3.) cut benefits and increase the age of the beneficiary.

In my opinion, the people who keep running around and acting like there is nothing wrong with S.S. are cmpletely off base.

One area where I can actually agree with the left in this country is, I would be open to means testing.

[A.I.]

Thank you KB for finally offering your alternative to what was done to sustain a reasonably stable level of Social Security benefits for we baby boomers relative to those enjoyed by our parents. Only problem is, your solution does not provide stable benefit levels, would throw millions into poverty when revenues are low and would likely make the program so unpredictable as to make it politically unpopular to the point it would be abolished. Please excuse the snark, but aside from those and a few score of other problems, good plan.

A few other notes:

While S.S. has historically been primarily a pay-go system, it has seldom if ever been totally so. For example, the trust fund was established in 1939--two years after the program began payroll deductions. The first retirement benefits were not paid until 1940. In other words, reserves were built before the system started paying those benefits.

There is nothing surreptitious about how the trust fund operates; the information is available to those seeking facts rather than distortions.

Whether or not the S.S. surplus has been used to "underwrite more discretionary spending", which I take to mean additional spending beyond what would have otherwise occurred, is debatable. Every expenditure has it's champions whether it be something you endorse like the Iraq war or I endorse like climate research. My bet is congress would have found a way to pay for both with or without the surplus.

In any case, you still have not established anything resembling a prima-facie case that S.S. is in "crisis"; you've just kept repeating the unsubstantiated claim it is. Certainly the U.S. is in debt and at some point soon, revenues and expenditures must be brought further into balance. That does not mean S.S. trust fund securities will not be redeemed through the means available: taxation, borrowing and/or monetizing debt.

[Ken Blanchard]

A.I.: the system I suggested could easily prevent the parade of horrors you sponsor. As I said, one need only put a floor on benefits to prevent impoverishing the most needy recipients. My system wouldn't hurt beneficiaries, it would only make sure that they benefited more when the system is flush. The only party injured would be Congress, who wouldn't get to spend the excess money.

You say: "Whether or not the S.S. surplus has been used to "underwrite more discretionary spending", which I take to mean additional spending beyond what would have otherwise occurred, is debatable." In what universe? Social Security surpluses have provided enormous sums of money to be spent by Congress on other things, war included. This is not debatable at all. Why are you so comfortable with the fact that money collected from working families, intended to go to comfort the elderly, is spent in Iraq?

Do I really need to prove to you that Social Security is in crisis? It is right now a burden on the treasury at a moment when the treasury is in big trouble. If you include Medicare, the two programs will exhaust all federal revenues a few decades from now. What, for heaven's sake, do you think a crisis is?

[Switzer]

If the system is not fiscally sound it may bankrupt the Federal treasury and/or become a debilitating drag on the productive economy. So the formula could be designed to float both payments and taxes depending on economic and demographic conditions.

[Bachelor of Applied Fitness]

What other entity other than the treasury might we have used to back the build up of the trust fund so it could carry the program through the baby boomer retirement years?

[Electrical Service Indiana]

The only thing I would add is, that the original mistake, besides the assumptions made at inception, was the "Unified Budget" from the Johnson Administration.