In the debate last week, Rep. Woolsey again said, “First of all, we have to know that Social Security did not cause the deficit. It never has and it never will. It must pay for itself.”
She isn’t the only member of Congress running for reelection who holds this belief. In a debate of his own, Rep. Russ Carnahan (D-MO) told the audience, “The Social Security system has been stable for more than 75 years and has one of the most efficient ratings in terms of any agency…” The audience laughed.
Why do some politicians insist that Social Security is secure? They are relying on legislative language that “assures” certain things about Social Security. Click here for bullet points and graph published as a reassuring primer by Strengthen Social Security on these very points. If one read only this, or similar, information, one would indeed think Social Security has to be safe and really does have a growing total surplus that is currently about 2.6 TRILLION and will be about 4 trillion by 2023. One would breathe a sigh of relief because “by law”, among other things, “all of Social Security’s revenue [must] be used for the exclusive purpose of paying benefits and related costs,” and “Social Security has no borrowing authority, and has never had a penny of debt.” What a relief, right? But what about this bullet:
– The law requires Social Security to be invested in interest-bearing government obligations backed by the full faith and credit of the United States. If the general fund of the US Treasury ever refused to pay the interest owed or redeem the bonds, the government would be in default.
So where is the money that people have paid into Social Security? It isn’t “there.” Instead, the money has been “exchanged” for federal “obligations” called “special-issue securities”. What happened to the actual dollars (the FICA taxes contributed by employees and employers)? They were spent on general federal budget items. Don’t take my word for it. Here are the words of an accountant:
The Congressional Budget Office and Democrats make the mistake of believing that Social Security has $2 trillion of assets without examining and realizing that these assets predominately consist of receivables from the general fund. These receivables aren’t collectible unless additional taxes are imposed on the populace.
But isn’t this okay? As Michael Hiltzik wrote here, isn’t “investing” the Social Security funds in “safe treasury securities” just a way
to put the money to work, so it can generate the economic wherewithal to pay it back. And truly, the money borrowed from the Social Security trust fund — from you and me, that is — has gone to work building the U.S. economy.
Well, securities of any type are only as good as the entity that stands behind them. We know from very recent, painful experience, that bond holders can and do go bankrupt. But that won’t happen with the U.S. government, right? Hopefully not, but frankly there is no guarantee, especially given the way the federal government has spent recently. Governments differ from other financial entities because governments possess the power to “create” money. But if a given government abuses that power and creates too much money (too much depends on the circumstances and what other financial entities, both public and private, will accept), it can indeed go into default. Even the U.S. is not immune from such fiscal realities. As Sandy Leeds notes,
Our government needs to borrow the money because we run a deficit most years. (When you’re good at something, stick with it.) This deficit has been financed by Social Security, China and others. Unfortunately, Social Security is going to need to be paid back in the coming years (as baby boomers retire). Hopefully other lenders will not need their money back.
As Social Security redeems their Treasury Securities (because they’ll need their $2.4 trillion back), our government will have to pay this back out of our General Fund….
You have to ask yourself how long lenders will trust a government that is approximately $50 trillion underfunded (when you consider Social Security and Medicare combined). Remember that lenders (outside of Social Security and other parts of are government) have only loaned us $9 trillion (to date).
The Leeds’ piece states unequivocally that there is no Social Security “Lock Box.” We’ve all heard that term. Again, it refers to the idea that Social Security payments made by you and me are separate and available for use to pay benefits. However, as we’ve seen, Social Security has no cash (or gold or silver bars). It has U.S. government IOUs, plain and simple. And those IOUs must be redeemed by real money obtained by further taxes or further borrowing (an unsustainable path over time)
Paul Krugman, like Lynn Woolsey and Russ Carnahan, simply denies this reality and states “…as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.” They believe the IOUs in the trust fund are as solid as cash and they are wrong. Pretend you’re six again. Let’s say you put a quarter in your piggy bank. Along comes your seven-year-old sister and shakes out the quarter and puts in a slip of paper scrawled with IOU 25 cents. You come back a week later and try to get your quarter out so you can buy candy. No quarter. Just the IOU. You go to your sister and demand payment. But she doesn’t have that quarter (she spent it) or any other. You have to wait until she does her chores and gets her allowance (or until she borrows from nine-year-old brother) before you get back money you put away. Likewise, Social Security also can only pay its IOUs from new tax money or new borrowing.
Robert P. Murphy opines in the same article that quoted Paul Krugman above,
Krugman et al. really like the whole idea of the Social Security program, and so they are taking it personally when people say the system is broke. They think that to acknowledge the truth of that statement is to deny that it was a good idea for society to officially take care of widows and orphans.
Lynn Woolsey apparently takes it personally too, and thinks that a realistic assessment of Social Security is tantamount to disloyalty to the idea of what Social Security represents. But economists (Krugman) and politicians (Woolsey and Carnahan) who refuse to see the whole, honest picture are the ones being disloyal to Social Security. Only by accurately identifying its problems and then addressing them can we hope to continue this basic program in any form for the younger generations who are currently paying FICA taxes but who increasingly understand that when they are old enough to retire, Social Security may no longer exist.
I doubt that Lynn Woolsey can be persuaded as to the error of her views on Social Security. But the rest of us must understand that Social Security does affect the deficit and is in need of reform.
For those of you who prefer videos to explain matters such as this, here is Part 1 of a two-part tutorial on “The Social Security Surplus Myth.”
More in-depth information: