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Posted at 4:49 PM ET, 03/11/2011

What the Social Security trust fund is worth

By Ezra Klein

There’s an interesting argument going on today between my colleague Charles Krauthammer and OMB Director Jack Lew. Krauthammer makes a case for both the ease and necessity of Social Security reform, and in particular a case against the Treasury securities that the Social Security program invests its surplus in. “They are worthless,” Krauthammer writes. “As the OMB explained, they are nothing more than ‘claims on the Treasury.’ ”

Lew fires back over at the White House blog, noting that “these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are, making them anything but ‘worthless IOUs’ as Krauthammer suggests. The government has just as much obligation to pay back the bonds in the Social Security trust fund as we do to any other bondholders.

I’m actually pretty sympathetic to arguments against trust fund accounting, because I a) think the trust funds confuse people, and b) think that they cramp our options for funding Social Security. At the end of the day, there is one federal government. It raises a certain amount of money, engages in a certain amount of spending, and a dollar it uses for one purpose is a dollar that it cannot use for another purpose. When I talk about Social Security and Medicare, I often get e-mails from liberals saying these programs are self-financed and they don’t have any relationship to the deficit. That’s true in the sense that they are not increasing deficits now, but it’s untrue in the sense that they are projected to vastly increase deficits later. When their revenues stop meeting their expenses, in other words, they will begin increasing the deficit. They are not separate in any serious way.

That said, it’s important to take Lew’s point about Treasury securities seriously. Treasury securities are considered among the single safest investments on Earth. It’s not overstating matters to argue that much of the modern financial system rests upon the confidence investors have in them. When you hear that investors are making a “flight to safety,” it means they’re buying Treasury securities. The same Treasury securities that the Social Security system purchases. If the government defaults on those bonds, the economy will fly into a tailspin.

Krauthammer knows this well. “You can’t not pass it,” he said of an increase in the debt ceiling. “It is catastrophic.” What would be catastrophic in that scenario is the Treasury failing to pay back holders of its securities. We won’t do that. We can’t do that. And that’s true for the bonds that Social Security holds as well as the bonds that investors hold. They are not worth less when the government buys them than when private investors buy them. And, incidentally, Treasury yields are very low right now, suggesting that investors think the government overwhelmingly likely to make good on its IOUs.

Now, that judgment is really saying that the market is confident that we’ll eventually make the decisions needed to bring total government revenue a lot closer to total government spending. That might require changes to Social Security, though it doesn’t strictly need to require changes to Social Security (Social Security could be funded through revenue from the income tax, for instance). Either way, the Treasury bonds that Social Security is holding aren’t worthless, or, if they are worthless, we’re in much worse shape than most people realize.

By Ezra Klein  | March 11, 2011; 4:49 PM ET
 
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Next: What I’m going to tell the doctors

Comments

interesting statistic from howard dean last night, do not know where the data came from, but "60% of the nat'l debt by the year 2019 will be from the bush tax cuts." if this is so, it seems their is an easy solution - easy yes, requiring determination and courage - yes.

Posted by: sbvpav | March 11, 2011 5:12 PM | Report abuse

Social security has already started to pay out more than it takes in: http://money.cnn.com/2010/08/05/news/economy/social_security_trustees_report/index.htm
So that means that it already is contributing to the yearly deficits. It is a liberal fantasy that those treasury securities can now be cashed in without affecting the debt.

Posted by: cummije5 | March 11, 2011 5:29 PM | Report abuse

Here's proof the Social Security debt is real. The $2.6 trillion trust fund is part of the $14.3 trillion debt ceiling that will be subject to a vote later this spring. Debt held by the public, i.e., China, Japan, whomever, accounts for less than $10 trillion of that $14.3 trillion we're about to exceed. Various government trust funds are the rest.
When those trust funds are "used," i.e., converted from debt held by the government to debt held by the public (through selling a bond to China or whomever), the total debt of the U.S. does not go up by a dime, and the debt ceiling will not have to be raised to accommodate it. It simply moves from the "government held" side of the ledger to the "publicly held" side of the ledger.

It would be the height of irony if foreigners refused to buy our bonds because we refused to honor the very real Social Security debt already accounted for in U.S. bookkeeping.

Posted by: gooznews1 | March 11, 2011 5:40 PM | Report abuse

The money you owe monthly on your mortgage, the money you owe on your credit card, and the money you owe to your fiance are all "monies that Ezra owes". But they are very, very different. Especially if you're short this month.

Posted by: GBMcM | March 11, 2011 5:42 PM | Report abuse

When you say that “at the end of the day, there is one federal government,” you risk glossing over some important distinctions in who pays and who benefits. The trust fund holds treasury securities, because it has built up a surplus. That surplus is the consequence of decisions made in the 1980s to raise social security taxes. Those taxes are highly regressive, but they were justified on the grounds that revenues were used to fund benefits, not to fund the government’s general needs. If we now cut social security benefits to reduce the deficit, while the surplus is still in place, then we are in effect using revenues from social security taxes to fund the government’s general needs, and that funding should be from a progressive tax. Worse, we are using the revenues of a regressive tax to correct a deficit created to a substantial extent by tax cuts enjoyed by the wealthy. I do not see any justification for that.

Also, this does not change when “their revenues stop meeting their expenses.” At that point, and for many years thereafter, the trust fund will still hold treasury securities, which are the product of surpluses in prior years. The situation changes only when the trust fund fully liquidates its securities. That is not expected to happen for several years.

Posted by: tfbush | March 11, 2011 5:44 PM | Report abuse

I don't think it is any secret that certain people wish to dismantle Social Security for the simple fact that it means more people will be buying stocks & securities. It is a great way to start a stock bubble.

The "realists" understand that they can't just do away with Social Security, so they invent phoney crises to try to induce the government to invest Social Security surpluses in the private stock market where the returns are better. That is, until they are not better.

Posted by: willows1 | March 11, 2011 5:52 PM | Report abuse

gooznews1 points to a path to raise the debt ceiling without raising it. Declare the Social Security Trust Fund to not be part of the balance identified for purposes of the debt ceiling (this will make GOP happy because it's a way of saying "it's not real" even while it can be treated as meaningful). Suddenly there's a good bit of slack in the balance identified for purposes of the debt ceiling, so room is made without raising it.

Posted by: bdballard | March 11, 2011 5:55 PM | Report abuse

Willows1 is exactly right, and this is what was behind Bush trying to privatize also .
Wall St was salivating at the prospect of the fees alone on even a partial privatization . There will be continued assaults on Social Security we just have to make it untouchable .

Posted by: sligowoman | March 11, 2011 6:08 PM | Report abuse

Ezra Klein has just muddied up the waters with a big helping of misinformation to add to all the misinformation that is already out there.

Ezra knows very well that the government did not save a dime of the $2.6 trillion in surplus revenue, generated by the 1983 payroll tax hike. The money was all diverted to the general fund and used to replace the lost revenue that resulted from the unaffordable Reagan tax cuts. Much of the extra contributions that the baby boomers were required to make, allegedly to prepay the cost of their own benefits, ended up in the pockets of the super rich in the form of income-tax cuts. Apparently journalists are afraid to report this story that the government does not want reported for fear they will become future "Dan Rathers." BUT THE AMERICAN PEOPLE HAVE A RIGHT TO KNOW THE TRUTH ABOUT WHAT HAPPENED TO THE SOCIAL SECURITY MONEY! I have devoted the past ten years of my life to researching and writing about Social Security funding. During that entire period I have been trying to expose the great Social Security scam. Ezra knows about the scam, every member of Congress, with the possible exception of some freshman members, knows about the scam, and President Obama knows about the scam. But since the government does not want the public to know about it most journalists have gone along with the scam just like Ezra is doing in this article.

The scam is the fact that for the past 25 years, under five presidents and their Congresses, the government has siphoned every dollar of the surplus Social Security into the general fund where it becomes indistinguishable from other government revenue. The money has been used to fund tax cuts, two wars, and other government programs. Since all the money was spent, none of it was saved. You can spend money or you can save it. If you save it, you can also invest it. But once money is spent, there is nothing left to invest.

Since Ezra writes a lot about Social Security, I want to beg him, if that is what it takes, to study the federal budgets of the past 25 years and show us where the savings money to invest in bonds came from. The total spending by the federal government, including paying Social Security benfits, has greatly exceeded the total income of the government, including payroll tax revenue. The government has spent all of its general revenue, plus all of the Social Security surplus revenue, plus an enormous additional amount of money which it borrowed from the public. If none of the Social Security money was saved, then none of it could have possibly been invested in government bonds or anything else. The IOUs in the trust fund are not real bonds. They are just an accounting record of how much Social Security money was spent by the government. THE $2.6 TRILLION IN SOCIAL SECURITY SURPLUS IS GONE!

Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University
www.thebiglie.net
ironwoodas@aol.com
1-800-840-6812

Posted by: ironwoodas | March 11, 2011 6:09 PM | Report abuse

Ezra, please. You miss a part of the analysis that is important to many of us. I, for one, have been paying extra taxes for nearly 30 years on the promise that it was a debt to be re-payed by the government.

This is more than an accounting gimmick. It's a promise of a debt owed to American taxpayers. Failure to pay this is as bad as a default on debt to Chines bondholders.

Any politicians who fail to honor this debt debt will suffer at the polls. So it would be smart for Republicans to get Obama to sign off on SSA cuts. This would result in mass defections from the Deomcratic party.

Posted by: ftkyte | March 11, 2011 6:25 PM | Report abuse

This article is the most comprehensive revelation of the truth about the trust fund I have seen. It confirms everything I have been saying for the past decade.

If it's solvent until 2037, why pick on Social Security?
By Tom Curry National affairs writer
msnbc.com msnbc.com
updated 3/10/2011 3:43:56 PM ET 2011-03-10T20:43:56


Excerpts:



What's in the trust fund?
“What people sometimes forget is that when somebody my age goes to collect on their Social Security I want money, cash,” Bowles, who is 65, replied. “And I go to present that obligation to the Social Security trust fund and it doesn't have cash. What it has is the government IOUs there which are as good as gold. But the government has to go out into the marketplace and borrow the money. And so it increases the national debt.”…

… Where does the excess money go?
For most of the past 30 years, since the reforms designed by the 1982 Greenspan Commission to extend Social Security’s solvency, the system has collected more in revenue from Social Security taxes on workers than it has paid out in benefits to retirees, widows, orphans, and the disabled.
The excess revenues did not go into “an ironclad lockbox where the politicians can't touch them,” as Al Gore proposed as a presidential candidate back in 2000.

As a Congressional Research Service (CRS) report explained in 2000, “Contrary to popular belief, Social Security taxes are not deposited into the Social Security trust funds ... Along with many other forms of revenues, these Social Security taxes become part of the government’s operating cash pool, or what is more commonly referred to as the U.S. treasury. In effect, once these taxes are received, they become indistinguishable from other monies the government takes in.”
But the Social Security revenues are “accounted for separately through the issuance of federal securities to the Social Security trust funds … but the trust funds themselves do not receive or hold money. They are simply accounts.”
“What often confuses people is that they see these securities as assets for the government,” the CRS report said. They aren’t really assets, but liabilities.
Or as the Congressional Budget Office explained in a report to Congress, “The balances in the trust funds (in the form of government securities) are assets to the individual programs (such as Social Security) but liabilities to the rest of the government.”
“When an individual buys a government bond, he or she has established a financial claim against the government,” the CRS said. But “when the government issues a security to one of its own accounts, it hasn’t purchased anything or established a claim against some other person or entity. It is simply creating an IOU from one of its accounts to another.”
The bonds are a promise to pay benefits in the future — but not the ability to pay those benefits.”

Link to entire article:
http://today.msnbc.msn.com/id/41997468/ns/politics/

Posted by: ironwoodas | March 11, 2011 6:28 PM | Report abuse

This is not rocket science. The Treasury borrowed the money from the Trust Fund. And spent it. The Treasury spends all of the money it borrows, that's what it borrows money for. Now it has to pay it back. It can't pay the same money back, that money has been spent. It must raise new money. That's how borrowing and repayment works.

Yes, we could reduce the deficit if we didn't pay back all or part of the debt. If we defaulted on regular bonds the market would exact a heavy financial penalty. If we defaulted on the special bonds to the Trust Fund, I'm pretty sure that those who paid that money in consideration of Social Security benefits would exact an equally heavy political penalty.

Technically, the government owes that money to itself and can alway renege. Equitably, it owes that money to the payers of the payroll tax, who expect retirement benefits, as promised, in return.

What part of "full faith and credit" is so hard to understand?

Posted by: jtmiller42 | March 11, 2011 6:34 PM | Report abuse

Ezra, your contention that Social Security can be funded from the income tax is wrong. It can only be funded thru the FICA tax. The law that established Social Security has a clause in it that makes it illegal to fund Social Security payments from the general revenue of the United States.

In 2037 the "trust fund" will be depleted. When that happens Social Security will only have enough money to pay 72 percent of promised benefits. Which means that everyone collecting from that time on will have their benefits reduced 28 percent and it will remain solvent.

Posted by: bjeagle784 | March 11, 2011 6:34 PM | Report abuse

Ezra, I think the point is it is not a crisis of social security, but a US budget crisis. Paul Krugman has tried to make this point, but I don't think he has been clear enough.

Here is an imperfect metaphor. Imagine that we paid our social security taxes into a bank trust fund instead of a government managed fund. That bank later takes our deposits and uses them to loan money to borrowers. There is actually very little actual money in our checking accounts. We worry when we think the bank will not live up to its promise or there will be a run on the bank.

With social security, the two main worries are that US government bonds will be worth junk or that there will be a run on social security.

The social security crisis is the fact that less money is coming in than going out.

The budget crisis is that the US government feels the need to borrow money from social security. But it would borrow that money without social security - probably from China at a much higher interest rate.

So yes, there is no actual money in the trust fund but social security on its own is not causing our budget crisis. That money would just be borrowed from somewhere else. It is a budget crisis, not a social security crisis (yet).

@Allen Smith - I have a PhD too and I don't see how that makes you any smarter than other people.

Posted by: yonimorse | March 11, 2011 6:35 PM | Report abuse

Below is a short excerpt from an article by Paul Craig Roberts, former Assistant Secretary of the U.S. Treasury


U.S. : Stealing From Social Security to Pay for Wars and Bailouts ( 7) Print This ShareThis
By Paul Craig Roberts
Center for Research on Globalization
Friday, Mar 11, 2011

The robbed Social Security Trust Fund can only be made good by the US Treasury issuing another $2.8 trillion in US government debt to pay off its IOUs to the fund.
When a government is faced with a $14 trillion public debt growing by trillion dollar deficits as far as the eye can see, how does it add another $2.8 trillion to the mix?
Only with great difficulty.
Therefore, to avoid repaying the $2.8 trillion that the government has stolen for its wars and bailouts for mega-rich bankers, the right-wing has selected entitlements as the sacrificial lamb. A government that runs a deficit too large to finance by borrowing will print money as long as it can. When the printing press begins to push up inflation and push down the exchange value of the dollar, the government will be tempted to reduce its debt by reneging on entitlements or by confiscating private assets such as pension funds. When it has confiscated private assets and reneged on public obligations, nothing is left but the printing press.

Link to complete article:
http://axisoflogic.com/artman/publish/Article_62484.shtml

Posted by: ironwoodas | March 11, 2011 6:44 PM | Report abuse

No! No! No! The trust fund is real. Krauthammer is just another right wing liar. Basically, the government has raided (borrowed) the excess payroll taxes and are now trying to welsh on their obligation to repay. It's time to pay the piper. Of course, when could you ever trust that den of thieves and liars known as congress. The shortfall is small compared to the current payroll taxes. Let them pay! I would rather see the trust fund exhausted and let retirees get 75 %. At least, those thieves will not be able to rob these funds and there is plenty of time to set up a personal account such as a Roth IRA of safe, low risk securities out of reach of congress and Wall Street.

Posted by: cicco_cf | March 11, 2011 6:55 PM | Report abuse

When Klein gets worried about Social Security solvency, why doesn't he ever mention the simple and obvious solution: let people who make over $105,000 (twice the median income BTW) simply continue to pay FICA at the usual rate? Presto, chango -- no SS crisis.

Oh yeah. Can't mention that because rich people own the government and want to stick it to the suckers who can't buy Congresscritters.

Posted by: janinsanfran | March 11, 2011 7:46 PM | Report abuse

"Treasury securities are considered among the single safest investments on Earth. It’s not overstating matters to argue that much of the modern financial system rests upon the confidence investors have in them. When you hear that investors are making a “flight to safety,” it means they’re buying Treasury securities. The same Treasury securities that the Social Security system purchases. If the government defaults on those bonds, the economy will fly into a tailspin."

Ezra,

Do you really believe the above statement is true in its entirity? I strongly suspect that you don't, and I certainly hope you don't believe all of it literally.

The first sentence, "Treasury securities are considered among the single safest investments on Earth." is absolutely true, and if you had stopped there,I would have no quarrel with you. But you tacked on a bunch of excess baggage, most of which is not true. The way you have worded it, you are saying that the good-as-gold public-issue marketable U.S. Treasury bonds that are traded on world markets, and owned by the Chinese government, Warren Buffet, and pension funds, are

"The same Treasury securities that the Social Security system purchases."

I have used your exact words above, and I think, after reflecting upon them, you may want to retract some of them. We all say things that we do not mean at times, and you should have the opportunity to say "I misspoke." SO IF THAT IS NOT EXACTLY WHAT YOU MEANT TO SAY, PLEASE POST A CORRECTED STATEMENT ON THE BLOG SO THAT WE CAN ALL KNOW WHAT YOU MEANT TO SAY. OTHERWISE, WE WILL HAVE TO ASSUME THAT YOU SAID WHAT YOU MEANT.

First of all, the Social Security system has not purchased any real bonds for many years. Social Security is allowed to hold public-issue, marketable Treasury bonds, and it has held them in the past. But it does not hold them now. Social Security doesn't purchase anything with the surplus revenue, which it never sees. The money flows directly into the Treasury, the Treasury spends it as general revenue, and then the Treasury unilaterally issues IOUs that are technically called, "special issues of the Treasury." These IOUs are not marketable, and they cannot legally be held by anyone but the trust funds. They are a gimmick that allows the government to spend the Social Security money and still tell the public the money has been invested in "Treasury securities." The IOUs have no monetary value. The only way the government can redeem them is by 1) raising taxes, 2) reducing other government spending or 3)borrowing the money from the public. It seems to me that this makes the IOUs a little different from the "good-as-gold" type that can be sold any day of the week. If the IOUs are redeemed by rasing taxes, American taxpayers will be double taxed for the $2.6 trillion. WHY DIDN'T THE GOVERNMENT INVEST THE MONEY IN REAL MARKETABLE TREASURY BONDS AS IT WAS SUPPOSED TO HAVE DONE?
Allen W. Smith, Ph.D.
www.thebiglie.net

Posted by: ironwoodas | March 11, 2011 7:46 PM | Report abuse

Consider a person who earns $50,000/yr for 40 years, and dedicates $10,000 each year for retirement. However, rather than put that money in a bank account or an index fund, this person issues $10,000 bonds to himself, and actually spends $50,000 each year.

Does this person actually have $400,000 plus interest available to him in retirement?

Of course not. His asset (the bonds) is equal to his liability (the bonds), and the net value is zero.

This is what the Social Security trust fund is - just an accounting fiction.

Posted by: justin84 | March 11, 2011 8:11 PM | Report abuse

"Consider a person--"

Thanks for putting that up front, so that we know to ignore everything that follows, given that all analogies based upon personal finance are plain stupid.

Time is precious, after all.

Posted by: pseudonymousinnc | March 11, 2011 8:42 PM | Report abuse

I wonder in what specific way the trust fund discussion would have been different under any alternate fiscal scenarios. That is, if the US had run surpluses since 1983 (which of course no one expected in 1983), we'd have zero national debt and a bunch of bonds.
How is the discussion different because we have two sets of bonds, from our debt and from social security? How can one set of bonds be fictional due to the existence of another set of bonds?

Posted by: windshouter | March 11, 2011 8:45 PM | Report abuse

Wow, seeing basically all the commenters plus Ezra himself completely misunderstand our monetary system! The government spends by electronically crediting accounts at the Fed. What difference does it make if it simply credits the accounts of SS holders with $X or engages in a meaningless dance of buying it OWN debt and then again crediting the same account with $X?
It is like you'd write yourself an IOU and then start worrying you might default on yourself.
The money for SS benefits does not come form bonds or taxes. It comes from where it always comes in fiat regimes - from the thin air. The only constraint is not to create too much of it in excess of the ability of the economy to absorb.
Ezra, you seriously did not understand a word of what Jamie Galbraith was telling you, did you...

Posted by: pdrub | March 11, 2011 9:49 PM | Report abuse

"If the government defaults on those bonds, the economy will fly into a tailspin."

The government cannot and will not ever default on any of its real marketable bonds. Any attempt to do so would panic world financial markets and permanently damage the credit standing of the United States in the eyes of the rest of the world. That is why the Social Security surplus was supposed to be invested in real marketable bonds. If the surplus Social Security revenue had been used to purchase pre-existing marketable Treasury bonds, such bonds would have been default- proof. But if that had been done, the money would have ended up in the pockets of those investors from whom the government purchased the pre-existing bonds, and there would have been no money left for the secret slush fund. The government did not like this arrangement, so they diverted the money into the general fund, where it was spent for general government operations. For every dollar of Social Security money spent on other programs, the government issued a dollars worth of IOUs in the form of "special issues of the Treasury." These are not real bonds. They are certificates of indebtedness that show how much Social Security money the government spent on other things.

The government CAN default on its debt to Social Security if it chooses to do so. I think it would be a terrible thing to do, and I have been making that point for more than a decade. Ezra is offering false comfort to those who fear the government might default by saying "the economy will fly into a tailspin," if that happens. He is mistaken.

There is no way the government can selectively default on any of its marketable Treasury bonds, no matter who owns them. A default on any marketable bond would be like a default on all marketable bonds, so it can never happen.

The government's debt to Social Security is a different matter. The government has the legal power to declare that debt null and void, and it can use that power if it chooses to do so. As long as the government continues to honor all marketable bonds, it will not have a major problem with foreign investors, who would probably view such an act as a domestic matter between the U.S. government and its citizens. In a 1960 ruling by the United States Supreme Court (Fleming v. Nestor), the court ruled that nobody has a “contractual earned right“ to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Thus, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security.

It is legally possible for the government to default on the Social Security debt but it might not be politically feasible for them to do so. We MUST MAKE SUCH A BIG FUSS OF THE LOOTING OF THE TRUST FUND THAT THE POLITICIANS FEAR THE WRATH OF THE VOTERS!

www.thebiglie.net

Posted by: ironwoodas | March 11, 2011 10:20 PM | Report abuse

I recall how it was done in Oz a few decades ago, probably still today: every year it's determined how many people qualify for pensions (counting 1 for each person old or disabled, 1/4 for those who lost an eye, etc.), it's determined how much tax money should be allocated to pensions, and then they divide the money by the number of pensioners to determine the amount of their equivalent of social security. Simple, and political, as it should be IMO. AARP shouldn't worry about it being political, because the pensioners are a huge pressure group. But this decision is out there along with the other decisions about where the government should spend its money, which is where it belongs, rather than hiding behind "trust fund" mumbo jumbo and pretending to be special.

Posted by: Jim19 | March 11, 2011 10:20 PM | Report abuse

They are both right. The SI bonds are Parri Passu (equal in law) to the Treasury securities owned by the public. But they can't get paid.

We have federal debt. It grows every year. It is rolled over. When one bond comes due, a new one is issued and sold to the public. So our debt is never paid back. Just refinanced.

But that is not what is going on with SS. Now that they are cash flow negative they have to redeem their old bonds. It was $49b in 2010. It will be more than $500b in decade. It will be $4 trillion in the next 20.

So unlike Federal debt, SI bonds actually do have to be paid back and they can't be refinanced.

So Treasury will have to come up an extra 4T. Can't be done. Won't work. Don't even go down that road. To do that would muck up the real economy. That plan would kill those on SS more than any other group.

You have to look at SS from above. When you look down you see something that seems to be working per plan. But actually it is killing the host.

Posted by: bkrasting | March 11, 2011 10:45 PM | Report abuse

WHY HAS IT TAKEN SO LONG FOR THE PUBLIC TO SEE THE SOCIAL SECURITY FRAUD?

The 1983 Social Security "fix" laid the foundation for what I consider to be the greatest fraud ever perpetrated against the American people by their own government. The legislation, which was based on the recommendations of the 1982 "Greenspan Commission," required the baby boomers to be the first generation ever to be required to prepay the cost of their own benefits, in addition to paying for the cost of the preceeding generation. As a result, the baby boomers have contributed more to Social Security than any other generation, and they have already paid for their benefits. The surplus revenue was supposed to all be saved and invested in public-issue marketable Treasury bonds, in order to build up a large reserve with which to pay benefits to the boomers.

The plan worked just the way it was supposed to work, except for one thing. The payroll tax hike has generated $2.6 trillion in surplus revenue which would be enough to pay full benefits until 2037, when the oldest of the boomers would be 91 years old. If all aspects of the plan had been followed, the trust fund should today hold $2.6 trillion in "good-as-gold" marketable Treasury bonds which could be resold in the open market to raise the money needed to pay benefits.

So what went wrong? Instead of saving and investing the $2.6 trillion in surplus revenue, the government diverted every dime of the money to the general fund and spent it for tax cuts, two wars, and other government programs. THE MONEY IS ALL GONE! The trust fund holds only IOUs which are nothing more than claims against future tax collections. We were warned over and over, but no action was taken to end the looting of Social Security. Some of the warnings:

“…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.”
--Senator Ernest Hollings of SC,October 13, 1989

“There are no stocks or bonds or real estate in the trust fund. It holds nothing of real value to draw down.”--David Walker, Comptroller General of the GAO, January 21, 2005

“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”
--Summary of the 2009 Social Security Trustees Report,

"With dismal clarity, Smith lays out the step-by-step history of how a national pension plan was transformed into an outright shakedown of working people"--The Boston Globe in review of "The Looting of Social Security"(2004)
www.thebiglie.net

Posted by: ironwoodas | March 11, 2011 11:04 PM | Report abuse

"Thanks for putting that up front, so that we know to ignore everything that follows, given that all analogies based upon personal finance are plain stupid."

Please enlighten us, then. How does one create value by placing the same security on both asset side and liability side of the balance sheet?

Whether it is a person, corporation or government doesn't matter, no matter what the people you outsource your thinking to might tell you. If you read a little bit more, you might have figured that one out by now.

Posted by: justin84 | March 11, 2011 11:34 PM | Report abuse

I guess Ezra doesn't take the law seriously or else he would not say that Social Security is "not separate in any serious way." Social Security trust fund receipts and outlays are legally not part of the US Government budget, by law passed in 1990. Yes, it's the law. That law declared social security to be off-budget and the president, who emphasizes a total/unified budget proposal, must include separate columns for on-budget and off-budget. It's legally-mandated transparency.

Posted by: pjro | March 12, 2011 12:12 AM | Report abuse


If you are planning a mortgage refinance then you should search online for 123 mortgage refinance before you decide they found 3.25% refinance with bad credit history and also did instant analysis of my mortgage.

Posted by: lindagunter77 | March 12, 2011 1:07 AM | Report abuse

The rest of the story: Social Security, the good, the bad, and the ugly: http://www.slideboom.com/presentations/318947/The-Government-Can-Diagnosis

Posted by: pappyg | March 12, 2011 4:46 AM | Report abuse

These arguments miss the point entirely. The point is not whether securities held by the SS trust fund are good as gold, by the way they're special obligation bonds, or SOBs. The point is how they were created in the first place. They were created under the pretense that you and I were giving up an additional piece of our paychecks so we might have a surplus to fund the now retiring 78 million baby boomers. History reveals that for every retirement dollar extracted from workers paychecks, a new dollar of debt was created; the SOBs. Now rather than having 2.54 trillion in retirement assets we have 2.54 trillion in retirement debt; the SOBs, that's a 5 trillion dollar net loss, and that's what this conversation has to be about. The government can radio show, 9am (eastern) weekdays: http://www.blogtalkradio.com/pappyg

Posted by: pappyg | March 12, 2011 4:57 AM | Report abuse

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