What we all need to understand about Social Security
Or: Dear President Obama, I am already eating peas
A reasonably brief history of Social Security
The very first “social security” program in the United States of America, was a program to assist widows; which gave widows a license to sell ale. (Hence the term ale-wives.) Yes, it was. Originally, the term “social security” described any program intended to help people with limited resources: the poor, the disabled, the socially deprived such as orphans, the ill, the mentally ill, and the indigent elderly.
The first widespread program was the Civil War Veteran Pension program, to veterans disabled in battle and the widows of Union soldiers. (Confederate veterans and their families were not included….) In 1894, more than a third of the federal government’s expenditure went to military pensions.
The beginnings of Social Security as we know it today go back to the Depression years of the 1930’s. Millions of Americans had no job, or couldn’t earn enough to feed their families. In 1932 Franklin Roosevelt was sworn in as President having campaigned on the idea of “social insurance.”
The Social Security Act (SSA) became law in 1935. Originally, the plan was simple: workers would place a small percentage of their pay into a government account over the course of their working lives and would draw on the account upon retirement to help meet their monthly expenses. The SSA was amended to establish a trust fund for any surplus funds. The managing trustee of this fund was the Secretary of the Treasury. The money could be invested in both non-marketable and marketable securities.
The intent was that the specific trust account would grow, earning interest, even while payments continue to come in. Surplus revenue, not needed to pay current benefits was to be invested for the payment of future benefits. Yes, this was the intent.
The second part of the 1939 amendment was the removal of taxing provisions from the Social Security Act to place compliance responsibility in the Internal Revenue Code, renamed the "Federal Insurance Contributions Act,” thus making participation in Social Security mandatory and collection of contributions part of the IRS responsibility.
Now all earners and taxpayers – no, change that to everyone who had a job or filed a tax return -- was now a participant in this federal insurance program, whether they desired to be or not.
But no sooner was this trust fund created, than its very creators forgot their intent. One can assume that big pool of money was just too much temptation. Yes, President Roosevelt, himself, borrowed from the fund to finance the Manhattan project and build “the bomb.” Truman used the funds to finance the Marshall Plan (the rebuilding of war torn Europe and Japan), Eisenhower used the fund to build the Interstate and Kennedy and Johnson to finance the Vietnam war. In fact, every congress under every president since the inception of the “trust fund” has used it. (Anyone who tells you Johnson was the first is misinformed.)
How have they done this? A further act of congress decreed that Social Security surpluses (funds not needed in that year to pay existing beneficiaries) must be loaned to the Federal Government. Of course, the federal government is legally required to pay back this money – with interest, and it has always done so.
Though it has consistently and immediately borrowed them again.
It didn't take long for the fund intended to be invested for growth to hold nothing more than the funds required for that accounting period's immediate needs, that instead of a "trust" fund, there was a pay-as-you-go-and-spend-the-rest system in effect.
So it should come as no surprise that in 1983 when Reagan ordered the Greenspan commission to investigate the financial state of the Social Security fund, they came to the conclusion that the Social Security trust fund was perilously close to insolvency; that looking forward, the now-unfunded liability would bankrupt the nation once that bizarre bulge in demographics called the “boomers” began to retire and draw their SS benefits (often referred to as the ‘hog moving through the python.”)
In order to cover this completely foreseeable but entirely ignored conundrum, what would have to be done, said the actuaries, was to tax more heavily those very persons who would eventually retire; so instead of using current workers' money to pay for the Boomer's Social Security payments in 2020, the Boomers themselves would prepay for their own retirement.
Reagan got Daniel Patrick Moynihan and Alan Greenspan together along with a few other politicians and economists to form a commission on Social Security reform. After due examination they recommended a near doubling of the Social Security tax on the then-working Boomers. That tax would create -- for the first time in history-- a giant savings account that Social Security could use to pay for the Boomers' retirement.
This was a huge change.
Prior to this, Social Security had always paid for today's retirees with income from today's workers -- "pay as you go." The Boomers were to be the first generation that would pay Social Security taxes to fund both current claimants and prepay their own retirement. And after the Boomers retired and the savings account-- to be called the Social Security Trust Fund-- was exhausted, the hog would have finished its journey through the python and Social Security could go back to a pay-as-you-go system. That big hike in FICA in 1983 was rationalized with this intent.
"...On that chart in emblazoned red letters is what has been taking place here, embezzlement. During the period of growth we have had during the past 10 years, the growth has been from from two sources. One, a large credit card with no limits on it, and, two, we have been stealing money from the Social Security recipients of this country."--Senator Harry Reid (D-NV) Speech on Senate Floor, October 9, 1990
But by 1985, when those surpluses began to accumulate in their brand-new savings account, the reduction in revenues from Reagan’s tax cuts also created a giant governmental budget shortfall. So, rather than increase the debt ceiling (again) or default, congress chose to raid the boomer’s retirement funds.
This was further enabled by another change. The funds had been vested into, not standard Treasury Bonds which are marketable but charge a penalty for early liquidation, but by issuance of a special non-negotiable Treasury certificate, used only for the trust funds, which is basically a promise to pay – an IOU. In other words, instead of repaying the fund with "real money" (i.e. standard bonds,) it was now repaid with "future money." (i.e. we will pay you one day...)
And about that interest the government owes the fund? Also paid in the form of an unmarketable commodity that the government will have to find funds from other sources to cover – either by borrowing or increasing taxation.
$2.5 trillion in Social Security bonds stored in filing cabinet in downtown Parkersburg, W.Va.
---- Sunday, March 14, 2010 10:45 AM
In this Feb. 23, 2005 file photo, Susan Chapman, director of the Division of Federal Investments, sorts through paper securities pulled from a file at the Treasury Department's Bureau of Public Debt offices in Parkersburg, W.Va. while President George W. Bush examines the file's contents.
PARKERSBURG, W.Va. (AP) -- The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.... [read whole article here]
On October 13, 1989, Senator Ernest Hollings of SC stood on the Senate floor and warned, “…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund…in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”
And things have continued pretty much along that “yellow brick road” since. All Presidents and all Congresses, whether Republican or Democrat, since have taken all the funds collected for Social Security and either A) paid out current benefits, (B) spent it on administrative overhead of the program or (C) “borrowed” the beneficiaries money, spent it and replaced it with an IOU.
"To make sure the retirement savings of America's seniors are not diverted in any other program, my budget protects all $2.6 trillion of the Social Security Surplus for Social Security, and for Social Security alone."--President George W. Bush, State of the Union address, February 27, 2001
"There is no trust fund, just IOUs that I saw firsthand that future generations will pay--will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs."--President George W. Bush, Speech at West Virginia University at Parkersburg, April 5, 2005.
In 1999, Republican Congressman Wally Herger sponsored a "lockbox" bill in the House of Representatives. This law would have restricted Congress from using money borrowed from the Social Security program to spend on other government programs. It passed the House by a vote of 416 to 12.
Senate rules allow for a "filibuster," in which certain votes can be blocked unless 60 of the Senate's 100 members agree to let it take place.  In the Senate, Republicans attempted to bring this bill up for a vote, and it was blocked by a filibuster conducted by Democrats. All 55 Republicans voted to allow the bill to move forward. All but one of 45 Democrats voted to block the bill, and one Democrat did not vote.
Al Gore ran on a campaign promising to keep Social Security in a locked-box. Indeed, so vociferous was he on this point he was harpooned as Mr. Lock-Box on Saturday night live. He lost – maybe.
Now, there are two ways to spend borrowed Social Security funds.
The first is to move the surplus Social Security fund to general operating funds and pay down the principle of the national debt, in which case the money owed to the beneficiaries is offset by a lower amount owed to other creditors – in which case the net result on the national debt would be zero. And there would be no hue and cry of “we can’t afford to pay for ‘entitlements.” This is called keeping the fund in a “locked-box.”
The second is to move the funds to the general operating fund and spend it on whatever comes up – wars, foreign aid, government salaries, congress’s gold standard health and retirement plans, Wall Street bail-outs, stimulus spending and of course, the short-fall of the non-budget due to reduced revenues. This is what has been done, is being done and most likely, until the day Social Security needs to call in Uncle Sam’s IOU’s [this year by the looks of it], will continue being done.
Yes, all the Social Security dollars, including the special savings account that was to fund the baby boomers is gone, gone, gone and all we hold in place is $2.6 trillion dollars of IOU’s, not standard Treasury Bonds which are good as gold, but special certificates of no market value that represent a promise to pay “protected by the full faith and credit of the United States of America.”
An empty promise now “on the table” for compromise. The government says it can’t afford to pay it back.
Not if our leaders want to wage two or three wars – is it three now? I’ve lost count – run 768 foreign military bases; continue to lower tax rates in the hopes that this time it will magically produce jobs; fund any number of useless and ridiculous programs, including some unworkable hybrid of universal health care through private for profit providers that will only line the pockets of those responsible for the crisis in the first place….. While cutting education and child welfare; doing nothing about off-shore outsourcing flooding the market with goods so cheap it is impossible to manufacture them here; and close to 50% of American GDP is finance related, producing nothing other than electronic data representing non-existent dollars, while the national infrastructure crumbles and a spate of weather catastrophes have left a good portion of country either flooded, destroyed or in terrible drought…. Well, you all know where existing priorities lie.
No money! It was spent as fast as it came in without one thought for tomorrow. So what to do?
Has there been one President, one elected representative, a single senator so stupid they didn't know what they were doing when they did this? Did they truly believe the birds would never come to roost? Or was it all okay, so long as it didn't happen on their tour of duty?
Most of us have lived with some serious and dangerous misconceptions about Social Security.
First misconception: All revenue received from the Social Security payroll tax is used to fund current Social Security benefit payments first, with any surplus not needed to pay current benefits saved and invested for the payment of future benefits. The Social Security trust fund holds U.S. Treasury bonds that can be sold and used to pay for future benefits.
The truth: None of the Social Security surplus revenue has ever been saved, nor invested, not in Treasury bonds or anything else. All revenue not immediately needed to pay current benefits has been put into the general fund and used to pay for wars, tax cuts, and other government programs. Every single dollar of the $2.5 trillion that is supposed to be in the trust fund has been "borrowed" and spent for other purposes. The trust fund does not hold any real marketable government bonds or any other kind of real assets -- nothing that can be sold, not even for a penny on the dollar. It holds only IOUs in the form of "special issues of the Treasury." They are nothing more than accounting devices.
Second misconception: I am entitled to my SS benefits. It's my money. I’ve paid into the program my entire life.
"There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense.… Congress clearly had no such limitation in mind when crafting the law. ... Benefits which are granted at one time can be withdrawn.…"
No, even though you were forced into paying Social Security through FICA and your tax return, the money is not yours, nor does the government have any obligation to pay you benefits. (Don’t ask me for any legal or moral reasoning behind this, but it is the truth.)
Here is the exact wording from section 1104 of the 1935 Social Security Act:
“The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.”
In 1960, in the case of Fleming v. Nestor, the Supreme Court upheld the decision to deny benefits to Nestor, even though he had paid into the program for 19 years and was already receiving benefits. In thjs ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.”
As a result, the future of Social Security is totally in the hands of Congress and the President who have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease or cease altogether Social Security benefits.
Therefore, Congress does have the right to decide to renege on Social Security promises, those non-marketable special Treasury certificates which simply say I owe you 2.6 trillion dollars. Better that, they say, than on the public and international bonds. That would lead to financial chaos, whereas defaulting on Social Security is likely to be seen by the rest of the world as a private matter between the U.S. Government and its citizens.
But I say it is an abuse of the public trust. In fact, the entire history of Social Security is an abuse of the American people.
It did not have to be. If the fund had only been handled as what it was, a trust, and the “borrowed funds” repaid with standard Treasury Notes and other interest bearing investments, the welfare of our retirees would never come into risk.
"But it was never intended to be your sole means of support for the fifteen to twenty years after retirement people live today" – True! to give the conservative side of the argument its due.
Often in life, what is intended is not what arrives. Just as workers did not pay into Social Security with the belief that money would be taken and spent, leaving what should have been a $2.5 trillion surplus as a major liability now on the table for bargaining, particularly not those paying in since the reform of 1983, whose contributions have basically been embezzled, neither did they save and invest with the expectation of losing much of their net worth in the latest financial meltdown.
I work with the elderly. I know many of them are reliant on Social Security – too many. I’ve listened to many a story of a disappearing pension plan, ravaged investment portfolios and the sacrifice of money used to bail-out children in dire circumstances. Many have only Social Security left, through no fault of their own, other than the fact they haven't yet died. Some of them long ago paid off their mortgages and live in their clear-title homes, but can’t afford the upkeep on the $1,000 month they receive. I've seen them living in shameful circumstances, with leaking roofs, plumbing that doesn't work, electrical problems... Some live with children and need that money to contribute to the family’s finances. Almost all are struggling. Almost all paid into Social Security their entire working lives. Little as it is, take it away and they have nothing at all.
One thing they all have in common – they are scared. They hear their only means of support left to them called an “entitlement” in derogatory tones as though they were parasites for expecting the Government live up to the bargain they thought had been struck. The bargain they paid for. They are ashamed.
People my age – around sixty – have also paid in all their working lives. If you’ve paid close to the maximum Social Security during your professional life, say 25 years, you’ve paid in a rough minimum of $75,000. You maybe didn’t believe in Social Security – “nasty bit of socialism” – and didn’t want to, but you had to – by virtue of law. You could have put that money into a nice private pension and seen a good return.
You didn’t think you actually paid $75,000 more in straight taxes. But that’s what it boils down to.
If you’re comfortable, good for you, and maybe being swindled just makes you mad, but that’s the only consequence. If life hasn’t quite turned out as you had once hoped, and you were counting on that money to fill in the cracks, then you’re more than mad. You’ve got a problem. And if you’re one of those working Joes who just made ends meet most of the time, and you got laid off at age 53 and Social Security was going to be your bread and butter at 67 to round out the measly wage you're earning collecting carts at the supermarket, you’re screwed.
All moral judgments as to whether or not someone should count on Social Security aside, the truth is most Americans thought they could trust the program. If they hadn’t they’d have rebelled against the idea decades ago. The only moral question I see, is why the Government felt justified in squandering the money of the working people until debt was all that was left? It was paid in trust, whether willingly or not.
Now, for a personal note: I will never collect Social Security, that is unless my husband dies and I inherit his. I would have to work into my seventies to qualify. But don’t worry about me; I have Canada Pension Plan as well as some private funds. I will not live large, but I will get by so long as I live frugally and conservatively. So I write this not from a personal point of view, but as one on the outside, looking in.
I have no vested interest other than that of a student of the world. What I see is a major scam, an outright theft, a con-job that is now being dressed up and marketed as a socialist program of the worst sort, a misplaced function of the nanny state, a Ponzi scheme by those who would choose to renege on those who’ve spent a lifetime paying in. Says President Obama, we all need to share in the sacrifice – and eat our peas.
On behalf of so many:
Dear President Obama, I’m already eating peas (and beans and rice.) Take those away, and you may as well tell me to eat cake.
--- Lynda M Martin, July 28th, 2011
For more information, read the linked articles and reports on Social Security by Allen W. Smith, PhD, Author of The Big Lie, How the Government Hoodwinked the Public, Emptied the SS Trust Fund, and Caused the Great Economic Collapse.
(Sorry, but I had to take the quoted passages out of this hub. The hub was unpublished because of the duplicate content rules, so in order to comply, I removed them. Too bad -- but please do follow the link and pay particular attention to chapter IV Obama and the Ticking Social Security Bomb.)
More by this Author
For thirty years I worked in child protection. It became a driving force of my life. Today I share a small part of this experience.
A history of the United States National Debt, from 1788 to 2009, in text and pictures. Ponder the true foundations of this $12 trillion and growing debt, the changes in policy and values along the way, the personalities...
A sequel to the Hub, The Myth of Perpetual Growth, we take China as a case study and examine the COST of economic growth. A shocking look at the state of affairs in China.