Sunday, November 14, 2010

The Social Security Trust Fund Diversion & Accounting Scam

The Full Faith and Credit of the United States of America.

It has a charming ring, doesn't it?

But the fact is that our parliamentary democracy is only as strong as the economic foundation upon which it rests. The gradual improvement and expansion of the U.S. economy over the first two centuries of its existence, and our geographical separation from most of the rest of the world, insured that our government, given its own power to levy taxes and fund its self-determined policies, never had to face the ultimate barrier to political stability: Total bankruptcy, and the social chaos which results. It's true that a government can simply print money whenever it wants, but the value of that money is based on that "full faith and credit" assumption, something that people inevitably point to when they want us to relax and accept unreasonably high debt. Runaway inflation occurs when the people's "faith" in the government's claim of stability and solidity is no longer accepted. A strong nation, with large economic assets, can always claim that its "strong" economy cannot be bankrupted. But that's simply not true.

There's been a lot of talk recently about how our ballooning Federal Deficit is getting out of hand, and needs to be "addressed." Party movers and shakers on both sides of the aisle have been agreeing, along these lines, that it is high time that we "addressed entitlements" as a part of the process of reigning in the Federal Deficit. They speak of our "Social Security" obligations as if they were simply a part of the regular budget. What is clear, is that most people--our elected representatives in the Congress included--no longer know enough about the history of the Social Security law, to be able to speak rationally about it.

Here are a few disquieting facts about the progress of Social Security law and regulation over the years. Up until 1968, the money which the Federal Government collected was devoted exclusively to building up the Social Security Trust Fund. Excess receipts (revenues) were placed in trust as government interest-bearing bonds. However, in 1968, during the end of the Johnson Administration, the government adopted a unified budget, resulting in a single measure of the fiscal status of the government, based on the sum of all government activity. In other words, the Social Security Trust Fund was allowed to be put into the general fund, or counted in the general accounting report for each fiscal year. Beginning, then, in 1969, there ceased to be any real Trust Fund balance, since that money that had once been earmarked exclusively for the Trust Fund was simply treated as general treasure revenue, and was spent on non-obligatory, "discretionary" expenditures. The "reasoning" was that since the money the government collected was in fact nothing more than an "obligation" to be paid at some point in the future, with the interest and maturity of the bonds backed by the same entity which collected the contributions, it was just an accounting concept change. This confiscation also had the effect of making the government's revenues seem larger than they really were, since the amount theoretically devoted to the Trust Fund, could be counted twice, by being claimed as a deposit into the Trust Fund, and as money "available" for use as General Treasure revenue, helping to create the appearance of a more balanced budget. Also, the surplus in Social Security Trust Funds was treated as an offset against the total debt, making the National Debt appear much smaller than it otherwise would.

Critics of "social engineering" who would like to do away with Social Security, in principle, will often cite the "funding shortfalls" of the Trust Funds, as an argument against its continued existence. It's not sustainable, they claim, and will eventually bankrupt our economy by obliging us to pay more and more benefits to larger and larger numbers of beneficiaries. They will support this "funding shortfall" claim by pointing to the fact that the theoretical obligations of the Trust Fund are in fact a long-term debt obligation, which of course, it is. They will lump this "obligation" together with all other kinds of "entitlements" such as welfare, Supplemental Security Income, Medicaid, AFDC, Food Stamps, etc., as if Social Security were a discretionary general treasury item that could be adjusted up or down whenever convenient to suit the current attitudes about "sustainability" and "long term fiscal health." But in an insurance program, which Social Security is, you can't simply "adjust" expenditures at will. The contract every insurance program makes with its client beneficiaries (in other words, the citizens who contribute to the Social Security system through mandatory tax withholdings and payments), requires that it pay out what its revenues were collected to provide. Unlike disability or old age benefits for the destitute and uninsured, Social Security is an insurance program, and has a legal obligation to pay its entitled beneficiaries. Social Security beneficiaries are entitled to what the law prescribes. These can't be "fixed," under Social Security law, unless there is a real threat to the Social Security Trust Fund's liquidity. In the history of Social Security program, no class of benefits has ever been terminated, once it was established, except for the uniform Lump Sum Death Payment ($255). The trend, over the decades, has always been towards expansion of the beneficiary roles.

The question of the liquidity of the Trust Fund is a complex one, but the first fact to remember is that it isn't a discretionary item, like national defense, or the postal system. It's true that the contents of the Trust Fund have been conceptually non-existent (since 1968), that their existence is a kind of fiction. But the obligation the government has, to honor what the "fictional contents" of the Fund contains, is just as real as it was in 1960, or at any time in its existence. You can't collect the tax contributions, divert them to other purposes, with a promise to "honor" what you claim on paper was a real deposit, and then renege on that contract. It's against the law.

Projections about the health of the Trust Fund rate its viability--that is, its balance versus expected outlays in benefits--as sound, until at least 2035. In other words, the balance of assets including contributions, and what is available in the Trust Fund to "make up the difference," would be exhausted by that year, if nothing were done to adjust the rate of contribution, or the pool of entitled beneficiaries. In actuarial terms, the kinds of adjustments necessary to augment its potential health would not be very great. Certainly, it wouldn't require any sweeping changes of the kinds being bandied about lately, i.e., raising the retirement age to 69.

What's clear is that we can't keep confusing our Trust Fund obligations, which is a non-discretionary obligation, with the annual general treasury budget decision-making process each year. Conservatives will often try to convince people that our present budget problems are linked to our "entitlement" obligations, i.e., Social Security. But this is a lie.

What is true is that how we spend our general treasury revenues does contribute to our growing National Debt. But the National Debt isn't the Social Security Trust Fund. The National Debt grows whenever we spend more in general treasury revenues than we collect in income and corporate taxes. The borrowing we authorize each year to make up that shortfall immediately becomes additional debt, and there's nothing theoretical or fictional about it. You could say that the Social Security system has been treated as a kind of Ponzi Scheme since 1968, and you'd be partly right. But the money we all pay towards that fund has produced a surplus, a surplus that is intended to insure that the benefits we're entitled to can be funded as each successive generation reaches retirement age.

During the Bush II Administration, the Republicans tried to suggest that we "privatize" Social Security, allowing each taxpayer to "invest" his or her own contribution during his or her lifetime, to build up a "retirement" account, administered by the government. The illogicality of this was immediately apparent. Not long after this was suggested, the Stock Market went into one of its periodic tailspins, leaving people to wonder what would have happened to everyone's private Social Security account, had they invested their funds there. Libertarians have traditionally been against social insurance, and like the idea of junking Social Security, throwing the burden of society's obligation to its retired, disabled, dependent and impoverished members to chance or charity. But the Social Security program has been, and remains today, the greatest social legislation in history. It's also understandably one of the most popular, affecting the lives of almost everyone.

But people shouldn't be affected by the big lie that the Social Security "entitlement" is bringing the nation to its knees. There are a number of minor adjustments that could be made, without affecting the basic benefit structure of the program. Means testing, for instance, was in effect for Retirement and Survivors benefits for many years, but then was removed, for those turning 65 or older. That could easily be reinstated, a suggestion that many have already endorsed as one possible solution. This wouldn't solve the problems in the Medicare program, or any of the other discretionary programs designed to help the poor or uninsured disabled and aged.

In the meantime, let's hear no more about dismantling Social Security, as a way of diverting people from the real issues of discretionary spending. If we scale back the SS programs, we've converted all our contributions into free money which Congress can spend on wars and foreign aid and roads to nowhere in Alaska. The immediate problem of the National Debt involves facing our mistaken decisions, to conduct two foreign wars, neither of which will bring any benefits to our economy; to allow banks and brokerage houses and the mortgage industry to fritter away our domestic wealth and place our economy in imminent danger of collapse; to give our richest citizens a huge "tax holiday" which Republicans want to make permanent. Spending money we don't have on expensive indulgences is something we can no longer afford. For two generations, we've been dismantling the middle class, and depending to an increasing degree on borrowing to fund our way. This can't continue, and everyone knows it. But the conflicts between wealth and the populace continue, and the same arguments keep being used again, to tempt us into thinking we can mortgage our future to have what we want right now, free of charge.

Conservatives don't like a society built around the redistribution of wealth, and they can always be counted on to argue against social programs, even those from which they themselves benefit. If I had four houses, ten cars, and off-shore accounts with tens of millions of dollars, I certainly wouldn't want to pay for the school lunch program of some kindergardeners in Alabama. But our society has made a commitment not to abandon its elderly, disabled and dependent members. We all benefit in one way or another from the organized redistribution of the wealth of the whole society. During Bush II's Administrations, conservatives told us debt spending was just fine, as long as we spent the money on weapons and tax breaks. Now that the Democrats have inherited the burden, the debt is suddenly "unsustainable," but that the only way to balance the books is to take away Social Security. Why should anyone be surprised at this old bait-and-switch strategy?


After a decade of Bush tax cuts, there was no appreciable improvement in the job market. In other words, the tax breaks given to the rich didn't "create jobs" the way Republicans always said they would. Those rich people invested their money all right, but not in a way that had any appreciable favorable affect on employment. This gives the lie to the "job creation" argument we're hearing again. Most small businesses, as we've been told over and over, are really sole-proprietorships and individuals who use the "business" structures to avoid paying taxes in the first place, and have no real affect on employment. Why give lawyers and doctors tax breaks, if they don't create jobs with their private hoarded wealth? It's time to put that little myth to rest, once and for all. It's the large employers who can create jobs, and those are the kinds of of jobs America has been exporting abroad. It's time we penalized employers for doing this, instead of rewarding them. It's time the tax loop-holes and tax holidays were stopped. It's time that everyone paid his or her share, instead of gaming the tax system.

1 comment:

George Mattingly said...

Thanks for writing this thorough cogent & just plain sensible explication of Social Security and the federal deficit.

I put this URL onto Facebook, because I think that a lot of the dazed confused populace isn't understanding any of this. At all.

The writing of essays is a specific & special talent. Reading a good one is a pleasure. Thanks for lifting my afternoon a notch!