What Ever Happened to the Social Security Trust Fund?
Using Social Security as a Political Weapon
July 17, 2011
Come August 2nd, the United States Government will find itself in the embarrassing position of not having enough cash to meet all of its obligations as they come due.
Being a huge organization with billions of dollars worth of tax and other revenues coming in daily, the U.S. Federal Government will not exactly be out of cash. Instead, while it will have a huge stash of cash on hand that day, the bills coming due that day and the following days will be greater.
When the bills exceed the cash, decisions have to be made as to who to pay and who not to pay. As the nation’s chief executive officer, it is President Obama who, in the event he is not allowed to borrow funds to cover the difference, will have to decide which obligations to pay and which ones to postpone.
In an effort to force his opponents in Congress to raise the debt limit, thereby allowing him to borrow the funds needed to cover the shortfall, President Obama and his allies have started to name a few areas where cuts are likely to be made and the August payments to retired citizens dependent upon Social Security are among the few being mentioned by name.
As readers of my other Hubs on Social Security know, I am a long time opponent of that program. Since I am not retired, the lack of Social Security checks in August will not effect me directly or even indirectly as I don’t have any relatives or close friends receiving or depending Social Security at the moment.
However, much as I oppose Social Security and big government in general, not paying those who have been forced to pay into this program their entire working lives, is totally unacceptable ethically as far as I am concerned. It will also lead to further cynicism and distrust of government which is not healthy for society.
That being said, this comes as no surprise to me as the Social Security program has been nothing more than a political gimmick and the biggest example of deceptive marketing since 1935 when the Social Security Act was passed.
Professor Walter E. Williams Social Security as Ponzi Scheme
Social Security Trust Fund and Social Security Tax Surpluses
Let’s start with the much acclaimed Social Security Trust Fund.
By the 1980s it was obvious that Social Security was headed for financial trouble. Following the steep decline in birth rates during the decades encompassed by the great Roosevelt Depression of the 1930s and World War II, birth rates suddenly increased dramatically as millions of troops came home, married and started having families.
This, what became known as the post war baby boom or boomer generation, was easily able to keep the pay as you go Social Security System afloat as there were multiple workers paying Social Security taxes to support each retiree receiving Social Security.
From the start, Social Security bore a resemblance to a ponzi scheme in that the Social Security benefit funds received by each retiree came not from the contributions paid by the retiree during their working years, but from the Social Security tax funds being paid by current workers.
In essence each generation of retirees depend upon the following generation of workers for their Social Security benefits. Such a system might have worked had life spans, birth rates and the price level remained unchanged.
Demographics and Inflation Upset the Planner's Static System
However, this wasn’t the reality. Instead, people began living longer, the boomer generation produced fewer off spring and inflation continually reduced the purchasing power of money.
By the 1980s it was clear that the retirement of the boomer generation would result in the Social Security taxes paid by the smaller generation behind them being insufficient to pay the benefits promised to the boomers.
Instead of switching to a more rational and financially sound system (such as privatization of Social Security accounts) progressive supporters of the system turned to their usual remedy of raising taxes.
However, people were becoming not only disenchanted with but also increasingly distrustful of big government by that time. They were also starting to become wise to some of the financial shenanigans used by Democrats and other progressive elements in Washington.
Creatively Balancing the Federal Budget by Including Off-Budget Programs
Toward the end of the administration of President Lyndon Johnson political leaders in Washington realized that if they added Social Security and some other so called off budget programs (off budget items usually refer to programs, like Social Security, that are funded from special revenue streams and the funds are earmarked for that program alone) to the budget they could report a budget surplus rather than a budget deficit.
As the Social Security Administration’s web page puts it: One way to estimate the immediate impact of this accounting change is to look at the government's actual expenditures for FY 1969. Under the current unified budget rules, the government reported a surplus of $3.2 billion for FY 1969. Removing the "off-budget" items from the calculation would result in a net deficit of $507 million.(http://www.ssa.gov/history/BudgetTreatment.html)
Thanks to a relatively low number of retirees, relatively low payments to retirees and a relatively strong economy, the Social Security program’s surplus continued to grow as payments to retirees were lower than Social Security taxes collected. However, the extra funds were not set aside for the future but instead were invested in U.S. Treasury bonds.
People's Fears About Misuse of Social Security Surplus Calmed by the Words "Social Security Trust Fund"
Despite being a very safe and sound investment for outside investors (i.e. people and entities other than the U.S. government itself) there was no advantage to the U.S. taxpayer with this method.
In fact it meant that the taxpayers ended up paying twice for the same thing. Once as Social Security taxes deducted from their pay and a second time when the Social Security Administration cashed in the bonds to pay benefits and received funds collected a second, albeit later, time with funds they paid as Federal Income taxes as the money, originally collected from their Social Security taxes had been spent on something else.
There was no question that if the Social Security program was to remain unchanged and if the boomer and later generations were to receive their promised benefits at retirement, that Social Security taxes had to be raised. However, in the years between the tax increase and retirement of the boomers, Social Security would be generating ever increasing surpluses.
To calm these fears, politicians and other supporters of the program began referring to the surplus funds as The Social Security Trust Funds, giving the impression that these funds were separate and distinct from other Federal Government funds.
In the words of the Social Security Administration’s webpage: The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance(DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs. (http://www.ssa.gov/oact/progdata/fundFAQ.html)
This sounds very reassuring. However, instead of purchasing the U.S. Treasury’s regular bonds, which anyone can buy (each bond has a $1,000 face value) and which can only be redeemed on a specific maturity date, the surplus Social Security funds were now to be invested in a special Treasury bond that only the Social Security Administration could purchase and which could be redeemed at any time.
Of course, once the Social Security Administration purchased a bond, the funds used for the purchase became a part of the Federal Government’s general funds and could be spent on any appropriation authorized by Congress.
Social Security Featuring Ron Paul
Current U.S. Taxpayers are Now Paying Twice for Social Security
The extended Obama Recession has forced many unemployed people nearing retirement to take early retirement in order to survive. This, plus the decline in Social Security tax revenues due to the high unemployment resulting from the recession, has led to the Social Security Administration having to begin cashing in their bonds in order to make up for the shortfall between the payments due retirees each month and the Social Security taxes collected each month.
Current taxpayers are thus paying twice for Social Security, first with the Social Security taxes deducted from their pay and second with Federal Income Taxes, also withdrawn from their pay, which are used to redeem the bonds for Social Security.
By law, the U.S. Treasury has to redeem the bonds purchased by the Social Security Administration on demand. That, of course, assumes the Treasury has the money to pay for the bonds redeemed.
However, there is no legal requirement making the Social Security bonds superior to other Treasury obligations which gives President Obama the opportunity to decide who gets paid and who waits to be paid.
As we can see the so called Social Security Trust Fund is really nothing more than an accounting fiction with a secure sounding name.
Unlike a real trust fund which has real assets set aside for a specific function, there is really nothing to this fund other than a pile of IOUs backed by the government’s plan to honor them with the proceeds from future taxes on the American people.
Gold Would Have Been a Better Asset for the Trust Fund
While it is unreasonable to have had the government purchase real assets in the form of the stocks and bonds of American corporations as the massive amounts of money involved would have given the government a controlling interest in many of these corporations, there were some other options.
One would have been to invest the money in gold, a market that the government already invests in as part of its reserves. Only in this case the gold could have been stored in a separate vault at Fort Knox and used only to be sold for funds to pay Social Security recipients.
A second alternative would have been to invest in the bonds of foreign governments (like the Chinese Finance Ministry invests in U.S. Treasury bonds) which it also does currently as part of its exchange reserves, but again kept totally separate for Social Security payments only.
If nothing else, these two options would have allowed the government to meet its promised responsibilities to pay Social Security recipients while only taxing the taxpayers once for the money.
Social Security has Been a Political Tool From its Creation
President Obama is, if nothing else, a very shrewd politician who can be expected to distribute the limited resources at his disposal in a way that will provide maximum political return for him and his supporters. This includes holding Social Security recipients hostage in order to get the tax and spending increases he wants.
Here we see the real genius behind Franklin Roosevelt’s Social Security program. It was never about taking care of the aged. Instead, the program was all about enshrining and preserving the big government created by Roosevelt and the early 20th Century Progressive Movement.
The program was intended to create a large bloc of middle class voters, in this case retirees, dependent upon big government for their survival. Like big government or not, with a large portion of their monthly income on the line, such people have no choice but to vote for Democratic politicians whose careers relied on big government.
Franklin Roosevelt Refers to Social Security as a Pension
Social Security Has Been Deceptively Marketed by Its Supporters From the Beginning
As the story of Joseph Stalin and the Chicken which I recited in my Hub on Social Security’s Achilles Heel illustrates, one of the best ways to keep an unpopular government’s population in line is to make them dependent upon that government.
One only has to see the way President Obama and other politicians in the Democratic Party have used perceived threats against Social Security and its sister program, Medicare, to scare those dependent upon these programs into voting for them.
Despite marketing the program to the voters, from Roosevelt’s time to the present, as an insurance and retirement program, its designers and supporters have been very careful to craft the legislation as a simple income tax and welfare program.
While Roosevelt and other 20th Century Progressives managed to blow loopholes in the Constitution big enough to fly a jumbo jet through, it was impossible for them to twist the Constitution enough to justify the Federal Government creating a mandatory retirement and insurance program that would pass muster with even very liberal 20th Century judges (although, with his ObamaCare, President Obama is attempting to get 21st Century judges to stretch the Constitution to do this).
Milton Friedman - The Social Security Myth
Supreme Court's 1937 Ruling in Helvering vs Davis Declared Social Security to Be a Simple Income Redistribution Program
Shortly after the passage of the Social Security Act in 1935, the law was challenged and the case, Helvering vs Davis, went all the way to the U.S. Supreme Court. In that case, the government won by arguing that the law was neither a retirement program nor an insurance program but simply an income transfer program in which current workers were taxed to raise funds to pay retired workers.
The government also pointed out in their defense of the program that there was no such thing as a Social Security Program, but two separate laws that were being used together could be used separately at the discretion of Congress.
One law was an income tax which was allowed under the Sixteenth Amendment to the Constitution (the income tax amendment) and the other a welfare program justified under the General Welfare Clause of the Constitution - this clause had already been stretched by previous court cases to cover a multitude of things.
The government also pointed out that Congress, by a simple majority vote, could repeal or amend either or both laws at any time which meant that it didn’t have any of the contractual aspects of a retirement or insurance program..
The Court ruled in the government’s favor.
1960 Supreme Court Decision in Flemming vs Nestor Declared that People Have No Enforceable Right to Social Security Benefits
The program was challenged and went to the Supreme Court a second time in 1960. This case, Flemming vs Nestor, involved an ex-Nazi prison camp guard who had lied about his Nazi past on his immigration papers when he applied to enter the country and when he applied for citizenship.
This fellow, Nestor, had worked and paid taxes, including Social Security taxes, and then retired and began collecting Social Security payments before he was finally exposed, stripped of his citizenship and deported. He also had his Social Security cancelled.
While no one can feel sorry for Nestor, the government had to look beyond him to the Social Security program itself in defending the case. So, the defense again rested on the fact that Social Security was NOT a retirement program and the Social Security taxes that people paid were just that, taxes, and not contributions to a pension fund or other plan that contractually gave them a right to any future compensation for the taxes paid.
The Supreme Court agreed and, in their opinion clearly stated: THE NONCONTRACTUAL INTEREST OF AN EMPLOYEE COVERED BY THE ACT CANNOT BE SOUNDLY ANALOGIZED TO THAT OF THE HOLDER OF AN ANNUITY, WHOSE RIGHTS TO BENEFITS ARE BASED ON HIS CONTRACTUAL PREMIUM PAYMENTS.
This applies to all citizens who pay Social Security taxes and not just criminals like Nestor.
The Question is Can Current and Future Retirees Count on Social Security?
So, not only can President Obama favor other programs, such as his high speed train and electric car subsidy projects, over existing retirees in the current debate over raising the debt limit, Congress can also change or abolish the program any time they want.
There is already talk about making the program more financially solvent by reforming it to exclude the rich. However, if the goal is to make the program more solvent the term rich would have to include a large portion of the middle class.
This uncertainty also makes retirement planning for those of us who are near retirement, but still employed, very difficult as we face the question of whether or not we can depend upon income from Social Security in our plans or if we should plan on Social Security being a high risk unknown only slightly more certain than funding our retirement with hoped for lottery winnings.