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[X] TRUTH IN BUDGETING
[X] THE SOCIAL SECURITY DEBATE
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CONTENTS --- COMMENT AND COUNTER-COMMENT
[X] 1. The Social Security Trust Fund Doesn't Really Exist
[X] 2. A "Trust Fund" is
Just Moving Money From One Pocket to Another
[X] 3. Government Is Spending The Trust Fund Surpluses As Fast As They Are Accumulated
[X] 4. Social Security Has Only IOU's, Not Cash
[X] 5. Social Security Holds Special-Issue, Not Marketable Treasury Bonds
[X] 6. Social Security Is A Ponzi Scheme
1. THE SOCIAL SECURITY TRUST FUND DOESN'T REALLY EXIST
COMMENT - The Social Security works by transferring wealth from today's workers to today's retirees. A worker's payroll taxes is not held in trust until he/she retires. There is no trust fund. [From: "Oft-touted 'trust fund' simply doesn't
exist", letter to the editor by Robert G. Bastaja's in the ThisWeek Grandview (Columbus, Ohio) 4/21/05.]
COUNTER-COMMENT - The Federal Government now has over 200 trust funds that are used for managerial and accounting purposes. One of these funds is the Old-Age and Survivors Insurance (OASI) Trust Fund. This fund is managed by the Social Security Administration. Some 2/3 of the money paid out by OASI goes to retirees. There is no doubt, that the OASI managerial and accounting unit (trust fund) does exist. What does not exist is a full pay-ahead investment program. The OASI Trust Fund is designed to operate on a flow-through basis (when the population is stable), not a pay-ahead basis. The current building of a large nest-egg for the WW-II baby boomers is a one-time situation.
In 2004, OASI took in some $560 billion and paid beneficiaries $420 billion. One half to the 2004 annual surplus of $140 billion came from payroll taxes in excess of $560 billion. The other half came from interest income generated by the $1,350 billion surplus already in the Trust Fund, that is invested in Treasury bonds. When the Congress overspent the general operating fund by $600 billion in 2004, the newly added $140-billion surplus was invested in 15-year Treasury bonds. Of course, the Treasury Department had to sell the remaining $460 billion in bonds to someone else.
2. A "TRUST FUND" IS JUST MOVING MONEY FROM ONE POCKET TO ANOTHER
COMMENT - The
thinking behind a government trust fund is invalid. A down-to-earth illustration of why this is so follows:
* George agrees to keep $100 for a friend, and puts in a special money bag his left pocket.
* Later, George receives a $100 invoice
from his dentist.
* To pay the dentist, George first takes the $100 from the money bag and replaces it with an I.O.U. for $100.
* Then, he places the $100 in his right pocket for personal use.
* Next, George uses the $100 in his
right pocket to pay the dentist.
* Much later, when George's friend asks for his $100 back, George starts to hand him the $100 I.O.U., but the friend insists on $100 in U.S. currency (real money).
* To come up with the $100, George must now
either: (a) spend $100 less of his pay from his regular day job, (b) get a part-time night job, or (c) borrow the $100 from someone else.
* The lesson here is that government trust funds filled with interest-bearing U.S. Treasury bonds (I.O.U.s)
are just like George and his "special money bag". When the time comes to use the surplus money in a trust fund, the government must either:
(a) cut back spending elsewhere in the budget,
(b) raise taxes, or
(c) borrow money by issuing new
Treasury bonds.
COUNTER-COMMENT - George is a single person---with or without his special money bag. The Federal Government is comparable to a large family of people, not just one person. Accordingly, George and his money bag is not a valid analogy. A more fitting analogy would be to have George invest his friend's $100 (buy bonds) in his brother's business. In this instance, the family (George's brother) has spent the money on new equipment. But, George himself has invested the money in a $100.00 bond.
Then, when George's friend asks him to pay back the $100, George cashes in the $100 bond issued by his brother's business. Using this repayment plus interest, George gives the original $100 back to his friend, and his brother sells the $100 bond to someone else.
The disagreement over whether to view the Federal Government as a single-fund accounting system or a multi-fund accounting system is discussed on the page TRUTH IN BUDGETING [X].
When Social Security, or any other investor, cashes in its Treasury bonds, the Treasury's routine response is to pay the investor full value (plus interest) with new money obtained by selling new bonds. This "rolling over" of outstanding Treasury bonds is a daily event. After 2025, when Social Security is cashing in its bonds, the Treasury will still be rolling over cashed-in bonds to new investors.
3. GOVERNMENT IS SPENDING THE TRUST FUND SURPLUSES AS FAST AS THEY
ARE ACCUMULATED
COMMENT - "For the past 20 years, the Social Security Trust Fund has had surpluses of which the government has used to fund other programs and offset gigantic federal deficits. Imagine how much interest could have been accumulated
in the Social Security Trust Fund if the surpluses over the past 20 years were invested." [From: "Government Uses Trust Fund Surpluses", letter to the editor by Charles R. McAndrew, in the American Free Press, unknown date.]
COUNTER-COMMENT - The Social Security surpluses have been invested in Treasury bonds for the past 20 years. About half of the $145 billion annual 2004 surplus ($79 billion) came from interest paid on the $1.35 trillion now invested in Treasury bonds. When Congress over spends its general operating fund, the U.S. Treasury borrows money using interest-bearing bonds to cover this deficit. It sells the bonds to whomever will buy them, including the various federal trust funds. The Social Security Trust Fund now owns about $1.5 trillion in bonds that have been issued to cover the $7.8 trillion gross public debt.
From an accounting point of view, Congress doesn't spend the Social Security surpluses "as fast is it is accumulated". Even if Congress slowed its spending and the general operating fund started running an annual surplus, Social Security would still invest its new money in 15-year Treasury bonds. There is plenty of old debt being rolled over each day to supply new bonds to Social Security.
4. SOCIAL SECURITY'S HAS ONLY IOU'S, NOT CASH
COMMENT - "There is no trust 'fund'---just IOUs that I saw firsthand..." "The office here in Parkersburg [the Bureau of Public Debt] stores those IOUs. They're stacked in a
filing cabinet." [From: Comments by President George W. Bush during his 4/5/05, speech at the University of West Virginia at Parkersburg. The President had previously looked in the filing cabinet that holds the $1.7 trillion in Treasury bonds that have
been issued to the Social Security trust funds.]
COUNTER-COMMENT - No retirement fund holds cash in a vault awaiting future payout. All retirement programs invest their assents in order to gain interest (or capital gains) income. For fund mangers to do otherwise would be irresponsible. The term "IOU" used by Mr. Bush implies an informal interest-free loan. This is not true. In fact, the Treasury bonds held by the Social Security earned $79 billion for the trust fund in 2004. The average interest rate on the trust fund bonds was 4-1/2 percent.
5. SOCIAL SECURITY HOLDS "SPECIAL-ISSUE", NOT "MARKETABLE" TREASURY BONDS
COMMENT - Although the Social Security Trust Fund does have a surplus, it is made up of
only special-issue bonds. These bonds are not marketable Treasury bonds and they can not be traded on the open market. "The U.S. government bonds in the 'trust fund' are non-negotiable. They are not invested or owned by anyone, or anything, that draws
or pays interest. They do not increase in value. They just sit there." [From: "Confusion Over Social Security Continues", letter to the editor by James Harrold, Sr., in the American Free Press, 5/23/05.]
COUNTER-COMMENT - Some reformers try to discredit the surplus in the Social Security (OASI) Trust Fund by pointing out that the bonds are not "marketable". Their tactic is to infer, without saying so, that special-issue Treasury bonds are not as valuable as other Treasury bonds. This is not true. Other examples of non-marketable bonds are Series I Bonds and Series EE Savings Bonds that are sold to individuals. (This citizen has some of both types.) Another type of special-issue bonds are those that are sold to state government agencies. All Treasury bonds are equally safe.
Social Security maximizes its interest income by having the new surpluses paid, not in money or electronic transfers of credit, but rather in Treasury bonds. This way, the new surpluses start drawing immediately. Some reformers will comment on this interest maximizing procedure by saying: "Social Security doesn't even get money to put into its surplus. All it gets is I.O.U.s".
6. SOCIAL SECURITY IS A PONZI SCHEME
COMMENT - (A Ponzi scheme is a criminal activity which promises a growing base of new contributors unrealistically high future pay-outs. When the rate of new contributors levels off or declines, bankruptcy follows.) The Social Security program is
a Ponzi scheme that promises retirement benefits to current workers it cannot keep when these workers expect to retire. Official forecasts indicate that by 2015 there will be fewer workers per retiree than is now the case. [From: "Social Security is a
Ponzi scheme in dire need of repair", letter to the editor by Robert P. Case, in The Columbus Dispatch (Columbus, Ohio) 1/22/05.]
COUNTER-COMMENT - For years the Social Security trust funds have been building a surplus in anticipation of WW-II baby-boom demographic bulge when the program's tax income will be lower than beneficiaries' costs. This surplus is forecasted to peak in about 20 years at some $3.5 trillion. This planning ahead is not the characteristics of a Ponzi scheme. Naturally, the Trustees' 2004 intermediate forecast indicates the surplus will decrease as the baby-boom bulge passes. The Old-Age and Survivors Insurance (OASI) Trust Fund part of Social Security is forecasted to fall to zero in 2042, in 37 years. These forecasts are public information and not some secret Ponzi scheme.
Robert P. Case also points out in his letter that correcting the present system is likely to require either reducing benefits, raising payroll taxes, or some of both. This observation is much closer to reality than the claim of Ponzi scheme.
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This page last updated: October 22, 2005