Saturday, November 19, 2011

Social Security or Why I read "conservative" blogs

I read more "conservative" blogs than "liberal" ones. People ask me why and I tell them that I learn so much about so many things because I read them. Notice the wording here. I didn't say "by" reading them. I said "because" I read them.

The thing is, I don't learn from the blogs themselves. The wild assertions often made on these blogs prompt me to actually research the subject and find out the "truth", or at the very least get different perspectives.

This is why I am, relatively speaking, an expert on Social Security in terms of its solvency and its place in the budget deficit discussion. Read the blogs and they'll parrot the talking point that Social Security will be going broke by 2014. Or 2036. Or it's already broke. You pick.

The above is untrue because of the existence of the Social Security Trust Fund. The Trust Fund was established in 1984 under Reagan by slightly increasing the payroll tax to collect more revenue than needed at the time to set it aside for when the Baby Boomers start collecting.

Today payroll taxes fall short of actual benefit payouts. Is SS broke? No. Two trillion dollars in the Trust Fund provides a lot of interest and is making up the difference.

In 2014 (give or take) SS outlays will exceed all SS income. Will it be broke? No. That's when the Trust Fund kicks in and the Social Security Administration will supplement revenues from payroll taxes with money from the Trust Funds to pay full benefits.

In 2036 (give or take) SS withdrawals from the Trust Fund will have depleted the fund. Will it be broke. Well, that's a matter of semantics, I suppose. Under current law, SS will only be able to pay out about 77% of full benefits in 2036 and for the next 75 years. That would hurt but I wouldn't call it broke.

A slight change in current law, like upping the income cap for payroll taxes would guarantee payment of full benefits for the next 75 years.

Many people refer to Social Security as an "entitlement" as if people feel entitled to something that they haven't earned. Are you "entitled" to the money in your savings account? Are you "entitled" to the money in your 401(k)? Are you "entitled" to the cash from your US Treasury Bonds when you cash them in?

You're damned right you are! Because it's YOUR money.

But here's the dark, conspiratorial side of the discussion. Social Security is a self-funding program in that it does not technically require funds from the annual federal budget. Workers and employers pay in; the SS administration pays out with no effect on the deficit. But the solvency discussed above is predicated on the existence of the Social Security Trust Fund. The Trust Fund is the money accumulated since 1984 to create reserves for the Baby Boomers. It is currently over $2 Trillion.

By law the accumulated Trust Fund money is invested in US Treasury Bonds, the safest investment in the world, backed by the full faith and credit of the United States. Of course when you are buying bonds, you are lending money. So the Social Security Trust Fund money was lent to the US Government. The problem is...they spent it. They didn't even set up a reserve account for it. They just dumped it into the general budget.

So even though I'd like to say that providing Social Security benefits to all who are entitled to them has nothing to do with the national debt or budget deficit, that's not exactly true. The 2 Trillion dollars lent to the Federal government is racking up a whole lot of interest payments (affecting the annual budget deficit) and that 2 Trillion dollars is roughly 15% of the national debt.

You will no-doubt have heard that "there is no Trust Fund. It's just a drawer full of IOUs". I worked in the trust department of a bank many years ago, and sometimes I would go down to the vault were there were rows and rows of filing cabinets filled with corporate and government bonds owned by trusts that the bank managed. We would pull out bonds and "clip coupons" to redeem the interest on the bonds. This was before the Internet, so it's mostly done electronically today.

The point is, a bond is an "IOU" and in the colorful terms of yesteryear, the bonds were kept in a drawer. The difference is, an IOU is a promise to pay and a US Treasury bond is a guarantee to pay.

All of the US national debt is Treasury bonds of one type or another. They are backed by the full faith and credit of the United States of America. That's why people buy them. That's why they are the safest investment in the world.

So how does the United States solve the debt/deficit issues posed by the Social Security Trust Fund? Well here are three possible ways:

  1. Grow the economy, cut general budget expenses, raise taxes and fees in order to reduce or eventually pay off the national debt including the 2 Trillion in Trust Fund dollars.
  2. Decide not to honor the US Treasury bonds held by the Trust Fund. Break the full faith and credit promise. This basically makes any US Treasury bond worthless. No one will buy them and therefore the US government will not be able to borrow money. In the meantime, the entire world economy will be reeling from the effect of $15 Trillion going up in smoke. (I can hear some people saying "good. We shouldn't borrow anyway." But a whole lot of the lenders are US citizens, corporations and financial institutions. Good-bye US economy.)
  3. Decide that Social Security is NOT an entitlement and the people who have paid into it are not going to get benefits because, well we just can't afford it and you all are just going to have to take one for the American team. From what I've read, this could be done by act of Congress. So the $2T debt is simply retired because it isn't needed anymore.
Option number one is the preferred method, to say the least. Number two would be the worst thing for the US and world economies. It would make 1929 and 2008 look like a tea party (pun intended).
Number three might be the scariest because it is NOT out of the realm of possibility. You get a Bachmann or a Cain or a Perry for president, 60 Jim DeMints in the Senate, and a majority of Eric Cantors in the House, and I could see them pulling off number three.
Anyway, let's hope our lawmakers can get their acts together sometime soon and do number one.
So, I learned all the above about Social Security facts and funding because I read the blogs and I wanted to be able to answer with facts. The latter half of this post I've basically put together by actually thinking out what those blogs are suggesting about Social Security.
Now go get some sleep. Read the report of the Social Security Trust Fund Trustees at That should do it.

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