I have to confess that I’ve never understood the Social Security trust fund, and I suspect that you don’t either. Some people say it’s real and other people say it’s a fairy tale—an accounting trick. This is a big ol’ two-trillion-dollar he said/she said.
But I’ve seen some pieces recently that helped clarify some things.
Michael Hiltzik had a column in the Los Angeles Times the other day that makes a lot of sense to me. He forcefully argues that the trust fund is very real (and in the process takes the Peterson Foundation to task. I should disclose up high that they’re an Audit funder).
The trust fund contains $2.5 billion trillion worth of bonds set aside because of huge surpluses in the program over the last quarter century. They were put aside to sell when Social Security started running deficits. Problem is, those are U.S. government bonds and U.S taxpayers have to pay them. The right says the trust fund is not much more than accounting fraud. Hiltzik says no:
Despite what Social Security’s enemies love to claim, the trust fund is not a myth, it’s not mere paper. It’s real money, and it represents the savings of every worker paying into the system today…
The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget…
Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.
In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.
The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money.
Hiltzik, alas, doesn’t tell us how much income taxes would have to be raised to make Social Security payees whole. But Social Security’s trustees say the trust fund will be empty by 2037, after which payroll taxes will be able to fund only 78 percent of benefits. As Hiltzik says, sometime between now and then, the program will have to be restructured somewhat, as it was in 1983.
But think about it this way, we have to raise income taxes or cut spending $2.5 trillion over the next twenty-seven years to pay for those trust fund IOUs. That’s about $92 billion a year, plus interest.
Iconoclastic conservative Bruce Bartlett says making Social Security whole in perpetuity (meaning, forever) would entail a 13 percent overall increase in income taxes. Of course, that’s too high, because nobody expects Social Security not to be restructured by the time the trust fund runs out in 2037.
And of course, since much of this money has been transferred from lower- and middle-class workers to rich folks (you quit paying payroll taxes on income over $106,000), as we’ll see below, you could also raise or eliminate the cap on the payroll tax. For all the talk about how high taxes are on the rich, I’ll bet you didn’t know the effective income tax rate on those with adjusted-gross incomes of $2,000,000 is just 22 percent, not 35 percent.
Is the Trust Fund real? The answer is yes ... and no.
Think of it as a balloon, of which you can only see the outside. You see contributions going into the balloon according to the rules, and payments coming out of the balloon according to the rules. You see a set of books that say the rules are being followed, and you see a vault with files of papers that say that set of books is right. Our laws and Constitution further specify that that all these rules MUST be followed. So for all practical purposes, the Fund is real. It doesn't matter what is inside the balloon.
In fact however, the inside of the balloon is completely different. The money simply vanishes as it enters, and reappears only as it exits. The outside of the balloon is actually an illusion, but this is not a problem. You see, the exact same thing happens with all monies going into and coming out of the balloon. Money, it turns out, does not even exist within the balloon; only at its edges and beyond. And it has been this way since we adopted our current form of sovereign fiat currency, because that is how this form of currency actually works.
[Source: Modern Monetary Theory]
#1 Posted by Benedict@Large, CJR on Sat 14 Aug 2010 at 03:51 AM
"Ideologies of inequality do not have to be objectively 'true' to persuade those who have less to accept less."
--found in The Meritocracy Myth by Stephen J McNamee (http://www.amazon.com/Meritocracy-Myth-Stephen-J-McNamee/dp/0742510565).
The financial crisis made it clear that Americans are willing to believe almost anything said about money, such as real estate prices only go up not down. If ordinary Americans are convinced that our claims to Social Security have no value (which is not hard to do), than we will shrug our shoulders and blame ourselves for not being clever enough to invest well or disciplined enough to save well. And we will likely accept the default on Social Security as an unfortunate but unavoidable circumstance just as we accepted the TARP bailouts, subsequent bonuses, and resumption of business as usual.
What about payroll deductions such as 401k contributions? It's not an official tax because participation is conditional and voluntary and the money is cycled mostly through the private sector. But once the money goes out from payroll, there is no promise of any specific amount of return; just a clear disclaimer that the account can go up, or can go down. Yet it's possible to voluntarily deduct greater than 12% of income into an account with a financial institution that does not have to demonstrate 75 yrs worth of solvency in the way that Social Security is obligated. So it's entirely possible for an individual to diligently and consistently divert twice as much salary into retirement funds that might not generate retirement income even equal to Social Security which is earned with 1/2 the amount of payroll deduction. And there are absolutely no projections of payout for 401K benefits, even at 75% the rate of SS payments which SS projects and widely publicizes. Instead, quarterly statements are issued with lists of "investment performances" showing rates of return over one month to the last ten years, along with footnotes in teeny tiny print such as, "Please note the simulated performance may not reflect the impact that extraordinary economic or other factors might have had...." What are you supposed to do with that?
#2 Posted by MB, CJR on Sat 14 Aug 2010 at 02:57 PM
"The trust fund contains $2.5 billion worth of bonds set aside because of huge surpluses in the program over the last quarter century."
Ryan,
I believe you, or your source, have made a slight error. The Trust Fund has $2.5 Trillion in assets. Check back to Dean Baker's article.
#3 Posted by Jack, CJR on Mon 16 Aug 2010 at 05:28 PM
Ah, shoot.
Thanks, Jack! All my fault. Fixed
#4 Posted by Ryan Chittum, CJR on Mon 16 Aug 2010 at 06:04 PM
That 13% overall increase in taxes is bogus.
raising the payroll tax a total of 4% combined would pay Social Security benefits forever.
raising the income tax about 2% on incomes over 100k would pay back the money borrowed from Social Security... this would sunset when the Trust Fund is fully repaid the money that has been borrowed from it... about 2040, depending on how the repayment is worked with the rise in payroll taxes. The payroll taxes themselves can be raised at a rate of one half of one tenth of one percent per year (combined.. boss's share plus worker's share).
now maybe Bartltt is saying raising the 18% or so of GDP that currently goes to taxes by 13% of 18% or about 2% of GDP would, as it would, pay for Social Security. But this is a combination of both income taxes needed to repay the money borrowed from SS, and the payroll tax... really a savings rate.. that will be needed for the workers to pay for their own retirements.
medicare is a slightly different issue, but you ought to get used to thinking of it as the cost of medical care. medicare is only the safest way to insure yourself against those costs,
You have to watch out for these guys. They play games with numbers designed to fool you into thinking they mean something they don't.
#5 Posted by coberly, CJR on Mon 16 Aug 2010 at 07:07 PM
What does this have to do with journalism exactly?
#6 Posted by John, CJR on Mon 16 Aug 2010 at 07:24 PM
what does this have to do with journalism? Maybe the 20 years of bad reporting on this issue by everyone not named Hiltzik, Krugman and Baker?
By and large the MSM has been channelling propaganda put out by Concord/AEI/Cato and never bothering to do original reporting on the actual numbers which largely remain invisible to even diligent readers. The worst violative have been Allan Sloan, Lori Montgomery of the WaPo, and the entire editorial and news staff of USA Today. The overall quality of reporting rivals that of Iraqi WMD hysteria in 2002-2003, which to put it charitably was credulous,
Pointing out bad reporting would seem to be what CJR is all about.
#7 Posted by Bruce Webb, CJR on Mon 16 Aug 2010 at 08:52 PM
When the Fourth Estate morphs into a Fifth Column and presents as news only the talking points of the financial elite we have only to worry about the future of our democracy. Fox News is only the most obvious perpetrator of deceit and deception. They are so apparent as to seem to be a distorted caricature of journalism. The Washington Post is, however, far more potentially destructive in its guise as a genuine news journal.
#8 Posted by Jack, CJR on Mon 16 Aug 2010 at 11:44 PM
Your point
Pulitzer winner David Cay Johnston says that the government deciding not to pay these bonds would be a form of default .….. In other words, this money is owed to Social Security as surely as money is owed to the Chinese for the hundreds of billions of dollars they’ve lent us in the form of bonds.
And Hiltzik’s points
Despite what Social Security's enemies love to claim, the trust fund is not a myth, it's not mere paper. It's real money,
Are simply not accurate.
Unlike all the bonds the Fed sells to the Chinese, Insurance companies and pension funds, all bonds issued to the Social Security Administration are non-negotiable and non transferable. “Real money” to use Hiltzik’s phrase, are assets that are transferable to anyone: real estate, stocks, bonds, a case of scotch etcetera. The special issue bonds held by the Social Security Administration are not real assets, no one from the SSA can sell these bonds on the open market or redeem them at the Fed unless congress authorizes it. I am not even sure if they are enforceable if push came to shove … who has the legal authority to force the fed to repay these special bonds? If the Fed defaults on the special bonds only people who expect to get money from Social Security get hurt, it doesn’t affect the wider bond market (long term).
At the end of the day the solutions to repaying the special bonds are always the same. Borrow from the private market to pay back the special bonds, increase taxes to pay for the bonds, restructure Social Security to reduce liabilities or some combination of the three. No amount of head burying erases this. The 1983 restructuring was intended to be paid for by taxing the SS benefits of high income earners. Hiltzik and Baker’s solution is a very one dimensional: tax the rich to repay the bonds regardless of the wider impact on the economy or the feasibility of doing so.
#9 Posted by Mike H, CJR on Tue 17 Aug 2010 at 11:01 AM
You don't pay money to take money from a trust fund. Thats completely fucking backwards.
#10 Posted by anon, CJR on Mon 23 Aug 2010 at 06:03 PM
How you get an effective tax rate of 22% on an adjusted gross income of
$2,000,000 is beyond me! The personal exemptions for a married couple in 2010 are $7,500 and the standard deduction is $11,400 according to the IRS.gov website. A couple would have to have tremendous itemized deductions to reduce the adj. gross income to taxable income low enough to arrive at an effective rate of 22%. The tax rate (on a joint return) is 33% for taxable income above $209,250 and below $373,650. Then all taxable income above $373,650 is taxed at 35%. Look at the government web site and figure the numbers. Do you know that the medicare tax of 1.45% on both the employer and employee has no wage base. An individual with $2million adusted gross income would pay $29,000 just for this one small tax!
#11 Posted by J.B. Faulkner, CJR on Tue 5 Oct 2010 at 07:22 PM
It’s been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.
In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end
Wow...
No agenda in this analysis, is there?
Where to begin?
Well, first of all... The Obama stimulus is by far the greatest expense listed... More than the war spending and far more than the "cost" of the "Bush" tax cuts (as if taxing less is equivalent to spending - which it isn't of course).
But conceding the point for the sake of argument, how does stimulus spending rob from the poor to pay the rich? Or housing spending? Or war spending?
All we are left with are tax cuts which can't be "spent" (by definition) and which amount to the least of these "expenses".
This Hiltzik piece is nothing but a regurgitation of silly liberal nonsense.
More silly nonsense: The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget…
And of course, since much of this money has been transferred from lower- and middle-class workers to rich folks (you quit paying payroll taxes on income over $106,000), as we’ll see below, you could also raise or eliminate the cap on the payroll tax.
padikiller tolls the Reality Bell: Now wait a minute...
Which is it?
Is the trust fund real? Is it funded by a Social Security tax that pays benefits fairly based on a proportional tax and represented by IOU's from Congress that gurarantee that this proportionally collected tax will pay benefits to all? Or is it instead a a scam- a general income tax in disguise- that can be raided by Congress to rob the poor to fund tax cuts (Or to rob the rich to pay for housing, stimulus, unemployment, health care, etc.)?
You can't have it both ways here, Mr. Chittum.
This is poor journalism.
#12 Posted by padikiller, CJR on Wed 6 Oct 2010 at 08:17 AM
I know I"m a little late to the party here, but can't resist.
I've rarely seen such imbecility trying to pass itself off as intelligent analysis. In fairness, you're not alone. Many people who should (and, I believe, actually do) know better make the same preposterous argument.
You don't have to become an evil conservative in order to accept the simple fact that the Social Security taxes collected have been spent. Blame it on George Bush if you like. Doesn't change the fact.
Your silly, nonsensical argument explicit refutes itself when you quote Hiltzik stating the obvious-"money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end." The key word in his statement is SPENT. I understand the argument that our government has been, in effect, a conduit for transferring wealth from the working class to the very rich, and I'm inclined to agree. But, the arguable moral right to reclaim the transferred wealth does not change the fact that the money is gone. Hiltzik himself continues with the inarguable fact that the only way to make good on the trust fund bonds is future taxes. He fantasizes about a brilliant scheme through which the taxes will be extracted from those whose unjustly benefited from the original plunder. Good luck.
Ask yourself this. If the government didn't collect another penny of tax from any source, would there be any money to pay any Social Security benefits? The answer is "no". Do you dispute that fact? If not, tell me again what's in the "trust fund".
#13 Posted by steve450, CJR on Tue 22 Mar 2011 at 09:46 PM
These people are full of crap and I can prove it.
As the Congressional Research Service noted in a report on May 5, 1998:
"When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.
According to the Office of Management and Budget under the Clinton Administration in 1999:
These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures
4.5 trillion of the 14 plus trillion that is subject to the debt limit as above described consists of "intergovernmental obligations" namely bookkeeping entries from Treasury to the Social Security and Medicare "trust funds".
If part or all of the so called intergovernmental debt is forgiven and written off the books of Treasury the national debt would be lowered by that amount TOMORROW MORNING and the entire CRISIS would be resolved subject to supplying approximately 200 billion to these entities in 2011-2012 to make up for the shortfall of premiums and taxes paid relative to required benefits to recipients. This amount will be paid by treasury from the general fund and from borrowings regardless, as was necessary in 2010.
The special obligation Treasury bonds are bought and sold by only Treasury and no one gets hurt by writing them off no banker, no citizen, no market fund...period, for the simple fact that no one owns any of them except the Trust Funds.
Millions of dollars in staff studies, comment, publicity and speeches on this debt limit issue needlessly. No one will fail to pay these benefits because they would risk their entire political position.The tax and premium receipts and any required Treasury funding will insure these payments. By budgeting the required shortfall every year the trust fund scam is not even needed.
In return for lowering the public debt subject to the limit and freeing at least 3 trillion for borrowings, the congress and White House should approve spending cuts and close tax subsidies totaling an additional net 3 trillion toward balancing the budget and reducing the debt in three consecutive annual budgets, the first being 1.5 trillion, the next 1 trillion and then another 1 trillion. Simultaneously in a non-crisis mode SS and MC can be reformed to insure their longevity. These actions will assist in accomplishing the balanced budget issue as well.
This entire shameful episode is a disgrace and has exposed the disingenuous statements of all parties in leadership. It could have been resolved in one day by forgiving this phony, paper debt.
P.S. Every shortfall means that is how much real debt is incurred to the Chinese in the conversion of phoney debt to real debt. Last year it was aabout 50 billion.
--
Keith A. Eaton
#14 Posted by Keith Eaton, CJR on Tue 19 Jul 2011 at 11:02 PM
These people are full of crap and I can prove it.
As the Congressional Research Service noted in a report on May 5, 1998:
"When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.
According to the Office of Management and Budget under the Clinton Administration in 1999:
These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures
4.5 trillion of the 14 plus trillion that is subject to the debt limit as above described consists of "intergovernmental obligations" namely bookkeeping entries from Treasury to the Social Security and Medicare "trust funds".
If part or all of the so called intergovernmental debt is forgiven and written off the books of Treasury the national debt would be lowered by that amount TOMORROW MORNING and the entire CRISIS would be resolved subject to supplying approximately 200 billion to these entities in 2011-2012 to make up for the shortfall of premiums and taxes paid relative to required benefits to recipients. This amount will be paid by treasury from the general fund and from borrowings regardless, as was necessary in 2010.
The special obligation Treasury bonds are bought and sold by only Treasury and no one gets hurt by writing them off no banker, no citizen, no market fund...period, for the simple fact that no one owns any of them except the Trust Funds.
Millions of dollars in staff studies, comment, publicity and speeches on this debt limit issue needlessly. No one will fail to pay these benefits because they would risk their entire political position.The tax and premium receipts and any required Treasury funding will insure these payments. By budgeting the required shortfall every year the trust fund scam is not even needed.
In return for lowering the public debt subject to the limit and freeing at least 3 trillion for borrowings, the congress and White House should approve spending cuts and close tax subsidies totaling an additional net 3 trillion toward balancing the budget and reducing the debt in three consecutive annual budgets, the first being 1.5 trillion, the next 1 trillion and then another 1 trillion. Simultaneously in a non-crisis mode SS and MC can be reformed to insure their longevity. These actions will assist in accomplishing the balanced budget issue as well.
This entire shameful episode is a disgrace and has exposed the disingenuous statements of all parties in leadership. It could have been resolved in one day by forgiving this phony, paper debt.
P.S. Every shortfall means that is how much real debt is incurred to the Chinese in the conversion of phoney debt to real debt. Last year it was aabout 50 billion.
--
Keith A. Eaton
#15 Posted by Keith Eaton, CJR on Tue 19 Jul 2011 at 11:02 PM
These people are full of crap and I can prove it.
As the Congressional Research Service noted in a report on May 5, 1998:
"When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another.
According to the Office of Management and Budget under the Clinton Administration in 1999:
These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures
4.5 trillion of the 14 plus trillion that is subject to the debt limit as above described consists of "intergovernmental obligations" namely bookkeeping entries from Treasury to the Social Security and Medicare "trust funds".
If part or all of the so called intergovernmental debt is forgiven and written off the books of Treasury the national debt would be lowered by that amount TOMORROW MORNING and the entire CRISIS would be resolved subject to supplying approximately 200 billion to these entities in 2011-2012 to make up for the shortfall of premiums and taxes paid relative to required benefits to recipients. This amount will be paid by treasury from the general fund and from borrowings regardless, as was necessary in 2010.
The special obligation Treasury bonds are bought and sold by only Treasury and no one gets hurt by writing them off no banker, no citizen, no market fund...period, for the simple fact that no one owns any of them except the Trust Funds.
Millions of dollars in staff studies, comment, publicity and speeches on this debt limit issue needlessly. No one will fail to pay these benefits because they would risk their entire political position.The tax and premium receipts and any required Treasury funding will insure these payments. By budgeting the required shortfall every year the trust fund scam is not even needed.
In return for lowering the public debt subject to the limit and freeing at least 3 trillion for borrowings, the congress and White House should approve spending cuts and close tax subsidies totaling an additional net 3 trillion toward balancing the budget and reducing the debt in three consecutive annual budgets, the first being 1.5 trillion, the next 1 trillion and then another 1 trillion. Simultaneously in a non-crisis mode SS and MC can be reformed to insure their longevity. These actions will assist in accomplishing the balanced budget issue as well.
This entire shameful episode is a disgrace and has exposed the disingenuous statements of all parties in leadership. It could have been resolved in one day by forgiving this phony, paper debt.
P.S. Every shortfall means that is how much real debt is incurred to the Chinese in the conversion of phoney debt to real debt. Last year it was aabout 50 billion.
--
Keith A. Eaton
#16 Posted by Keith Eaton, CJR on Tue 19 Jul 2011 at 11:03 PM
I personally think that every American should employ the same logic as the federal government does with regard to the Social Security Trust Fund. When you get your next payroll check spend it all and then issue yourself some "special IOU's". File these "assests" in your favorite shoebox and let them sit for say 20 yrs. At the end of the twenty years, when your kid needs a couple of hundred thousand to go to a top tier university, simply give him these valuable IOU's and tell him to pay his tuition and room and board with them. If the university balks when asked to accept them as payment, assure them that you will pay these debts as you do all your other debts.
HMMMM, but then that would mean the IOU's were of no real value all along. No, that can't be right. That would mean that you were deluding yourself---something our government and its supporters would never do---WOULD THEY?? Wake up! Anyone who believes that the social security trust fund has real assets in it is either stupid or purposely lying to you. No intelligent person would fall for this in his personal life--why would you fall for it on a national level?
#17 Posted by Carl Sanders, CJR on Sat 24 Sep 2011 at 01:32 AM