It’s Time to Tap the Empty Social Security Trust Fund
Allen W. Smith, Ph.D.
AP writer, Stephen Ohlemacher, sent shock waves throughout the nation this week with his story, “Social Security to start cashing Uncle Sam’s IOUs.” Social Security has been running large surpluses ever since the enactment of the 1983 payroll tax hike, and was projected to continue running surpluses until at least 2016. Instead, Ohlemacher reports that the cost of Social Security benefits will exceed payroll tax revenue by approximately $29 billion this year, because of the severe recession which has reduced payroll tax revenue at the very time that many unemployed Americans have been forced to retire early.
What it all boils down to is that, in order to pay full benefits this year, Social Security will have to come up with an extra $29 billion to supplement the inadequate payroll tax revenue. Where will that money come from? It will have to come from increased taxes or from borrowed money. “Wait a minute!” some readers will say. What happened to the $2.5 trillion in Social Security surplus revenue generated by the 1983 payroll tax hike? Wasn’t that money supposed to be saved and invested so there would be a nest egg when Social Security began to run deficits? Yes, that is what was supposed to happen. But it didn’t happen. The surplus Social Security money, that is supposed to be in the trust fund, has already been spent on wars and other government programs.
The American people were not supposed to find out about the great Social Security scam for another six years, and the government was hoping to continue to receive surplus money from the Social Security contributions of working Americans for at least that long. But the inevitable day of reckoning has come, six years sooner than anybody expected, because of the severe recession. And the government of the United States has been caught with its hand still in the empty Social Security cookie jar.
It has been clear for quite some time that the trust fund contained no real assets. David Walker, Comptroller General of the GAO, stated on January 21, 2005, “There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.” On April 5, 2005, President George W. Bush finally acknowledged the empty trust fund by saying, “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.”
If there was any doubt remaining, with regard to whether or not the trust fund contains any real assets, that doubt should have been removed by the following words in the 2009 Social Security Trustees Report:
“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.”
There is nothing ambiguous about the above words. They make it clear that the government does not receive any cash income from the alleged interest payments on the trust fund IOUs. The interest payments are made in the form of additional worthless IOUs. The government cannot sell the IOUs because they are not marketable and have no cash value. The IOUs simply represent a debt of one branch of the government (the Treasury Department) to another branch of government (Social Security). They cancel each other out.
The Social Security surplus revenue should have been saved and invested in public-issue, marketable Treasury bonds. These bonds are as good as gold and default-proof. They are the kind of U.S. Treasury bonds that are owned by China and Japan, Bill Gates, pension funds, and every other serious investor that owns Treasuries. Barbara Kennelly, president of NCPSSM, who asserts that the Social Security holdings are “as solid as what we owe China and Japan,” would be correct, if the Social Security surplus had been invested in public-issue marketable Treasury bonds, as it could have been, and should have been. Unfortunately, however, not a single dollar of the surplus Social Security revenue was saved or invested in anything. It was all spent. And, once money is spent, there is nothing left to invest.
The government cannot and will not default on any of its public issue, marketable Treasury bonds because of the panic it would create in world markets and the damage it would do to the nation’s worldwide credibility. But Congress has the legal authority to default on its debt to Social Security, and, if it should do so, the outside world would probably view it primarily as an internal matter between the United States Government and its citizens.
One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so. In a 1960 ruling by the United States Supreme Court, 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.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security. In the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.” As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They 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 Social Security benefits.
Allen W. Smith, is Professor of Economics, Emeritus, Eastern Illinois University. The author of seven books, Smith has been researching and writing about Social Security financing for the past ten years. Visit his website at www.thebiglie.net.