Social Security: The Hidden Problem

There is much debate today about how solvent Social Security is, but most of the debate is over when the trust fund will run out of money, not about whether or not the trust fund actually holds real assets. The conventional wisdom, prior to the economic downturn, was that the trust fund had enough money to pay full Social Security benefits until about 2041. That date has now been revised to about 2037.

In order to understand the true status of the trust fund we need to go back to 1982, and then chronicle the events that have taken place since that date. In 1982, the Presidential Commission on Social Security, chaired by Alan Greenspan, warned that Social Security would face serious problems when the baby boomers began to retire about 2010, unless Congress took immediate action to begin building up a reserve in the trust fund that could be drawn down in order to pay full benefits to the baby-boom generation.

In 1983, Congress enacted the legislation recommended by the Greenspan Commission, which included a hefty hike in payroll taxes. In essence, the legislation required the baby-boom generation to pay enough taxes to fund the benefits of the previous generation, as was customary, plus enough additional taxes to prepay most of the cost of their own benefits, which was not customary.

That payroll tax hike has generated about $2.5 trillion of surplus Social Security revenue to date. If the money had been saved and invested, as it was supposed to be, Social Security would be in good shape today. But the money was neither saved nor invested in anything. Instead, it has been used as a giant slush fund to pay for tax cuts, wars, and other government programs for the past 25 years. The government has “borrowed,” or “stolen” every dime of the surplus Social Security revenue. If the government eventually repays the looted money, we can say that the government “borrowed” the money. Unfortunately, no provisions have been made for repaying the money. Furthermore, it may not be politically feasible to raise taxes for the purpose of replacing tax revenue that was misspent in the first place. If the looted money is never be repaid, it will have clearly been “stolen” from American workers who paid the extra Social Security taxes.

This is the hidden Social Security problem. The trust fund holds no real assets. This was made clear by David Walker, Comptroller General of the GAO, in a speech given January 21, 2005. Walker said, “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 shocked many Americans, during a speech at West Virginia University at Parkersburg, when he openly admitted, “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.”

The government was successful in keeping this big dirty secret from the American people for a long time, but, little by little, the secret is slipping out. Even the 2009 Social Security Trustees Report acknowledges the problem with the following words. “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.” Because of the empty trust fund, in just seven years, when the cost of Social Security benefits begin to exceed payroll tax revenue for the first time in a quarter-century, either benefits will have to be decreased, or taxes will have to be increased.

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. His latest book is The Impending Social Security Crisis: The Government’s Big Dirty Secret. Read other articles by Allen, or visit Allen's website.

12 comments on this article so far ...

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  1. balkas b b said on November 23rd, 2009 at 9:52am #

    Ruling classes in non socialist-nonfascist lands seek to expand their power and control also of own people.
    Once the ruling class [whether 000001, 00001,0001,001, or 2% of pop] fears their power is no longer expanding or that it is diminishing, we can expect what?
    Well, poor people have to dish out more money to the ruling class.

    To maintain or expand one’s supremacism, the ruling classs must pay protection money. In US that means paying well cia, private agents, fbi, reg. and private army.
    In other words, one has to have hired guns in order to control own people. One controls, aliens by other means: warfare, threat of warfare, cia terror, sanctions, blockades, etc.

    And US constitution had been written so that it can justify all of that. So, root of all evil that US does, from slavery, to civil war, extirpation of indians, nuking japan, some 180 wars/battles,are constitutional commands.
    And if one leaves just this fact [as ?all journalists do] one just proffers the usual propaganda.

    So nearly all of them patch and patch an old pants. Each hoping that his/her patch turn the old pants into new and stronger pants.
    Yes, the ruling classes’ pants but not for the rest of the pop. tnx

  2. balkas b b said on November 23rd, 2009 at 9:57am #

    Correction, it shldn’t be in “nonsocialsist-nonfascist lands”. It shld be in nonsocialist or fascist lands. tnx

  3. balkas b b said on November 23rd, 2009 at 10:11am #

    The simplicity posited two posts above cannot be rendered simpler; one reaches rock bottom.
    That doesn’t mean that the defenders of an extremely evil constitution wld not engage in personal atacks and try desperately to complexify the simplicity.

    The people who wrote the constiution are of one mind with people who now interpret it. Jefferson, hamilton, adams still haunt people from the grave. And, instead terrorising mns, they now terrorize bns.
    Well, folks, that’s what “greatness of america” means!

  4. rosemarie jackowski said on November 23rd, 2009 at 12:28pm #

    The fix is easy – tax ALL income above $25,000. Eliminate the cap. The very wealthy have been getting a break for too long.
    Also, all future and present wars should be paid for on a cash basis with a war tax. If the tax is high enough, it will end war.

  5. Deadbeat said on November 23rd, 2009 at 3:22pm #

    Ms. Jackowski is absolutely correct and the author buys into a false premise. The Greenspan commission was formed and supported by both the Democrats and Republicans to plug in the tax gap created by the Kemp-Roth tax cut that lowered the top rate from 70% to 50%. One way to resolve the tax problem is to restore the top rate back to 70% and make the income tax system progressive.

    In addition eliminating the salary cap will resolve the funding issue. Also the Treasury has to make good on the bonds. To imply there is no money is false since China holds the same bonds as the SS trutees and the U.S. had to make good on the bonds.

    In addition PRODUCTIVITY of workers has increase during the past 390 years and therefore it is THIEF to raise the retirement age. In fact the retirement age should be LOWER due to all of the increased productivity.

    Also David Walker is a HACK. He now works for Peter G. Peterson who was a former Nixon head of the Department of Commerse and an INVESTMENT BANKER. Peterson wants just like all investment bankers at his level — CLASS WAR — to get rich by screwing workers.

    Also ending wars and bank bailouts will also provide fund to Social Security and SS receipiants has been getting screwed on their cost of living adjustments (COLA) because the government has been UNDERSTATING inflation for decades.

    The biggest threat to Social Security is JOBLESSNESS since workers are needed to pay the payroll taxes that fund Social Security. This is perhaps one big reason why Obama is NOT funding a jobs program. With fewer workers, Obama can claim that the SS system is facing a crisis and divert SS money into the pockets of Wall Street.

  6. balkas b b said on November 23rd, 2009 at 4:05pm #

    Rosemarie,
    I feel like slapping u around. US has no right under any known circumstance to invade a country or commit any aggression against a land or empire. It only has the right to self defence when attacked by any land.
    U shld be aware that US wld wage many wars to come. It also seems, in spite of your wishes, that it wld be poor people who will also pay for US future wars.
    They always had since at least 7k yrs and will keep paying more than their share for all aggressions.
    And u are running for office!? tnx

  7. B99 said on November 23rd, 2009 at 5:11pm #

    balkas – How do you know that Rosemarie was NOT referring to defensive wars? What she is saying is that if the mouth-frothing bozos of this country want to go to war – they should be willing to pay up front. I think it would be GREAT idea to tell poor people that not only are you going to sacrifice your sons (and daughters) but you must pay up front. Maybe dock their paychex. I think poor people would quickly come to their senses.

    Of course – this will not happen. The wealthy know to defer payment of war bills until the next administration, the next generation.

  8. bozh said on November 23rd, 2009 at 6:01pm #

    B99,
    U’re right. In rereading marie’s post, i too, think that she may have included in wars also defensive wars.
    In case of a defensive war, all people shld pay.

    I also think there is a much better way for americans, canadians, germans, et al to come to their senses: stop disinforming them; tell them the truth. I do not think they wld have ok’d aggressions against afgh’n or iraq had they known the facts.

    That does not mean that 001% + who are masters of america wld ever allow a rule from streets or homes unless there wld be massive protests, passive resistance by at least 50 mn people.

    It can be educed that american plutocrats want to stay wealthy. Wealth can only be obtained from the planet. The world plutos are united like never before.
    World plutos have heard american plutos: you are with us or against us. That was meant for working classes as well for all world plutocrats.
    In other words, US is saying that if u want to share in the goodies we obtain, there is no neutrality; u have to contribute, too.
    That means many more wars while the likelyhood of US being attacked appears very close to nil; thus, no defensive wars for US.
    So marie shld have explicitly stated which wars are OK. tnx

  9. Don Hawkins said on November 23rd, 2009 at 7:59pm #

    no defensive wars for US. When you say that it’s like we are doing so well here far from it. I sent this to media today.

    Hay,

    ”I think meters of sea-level rise are virtually inevitable, unless we can stop this. But I’m not such an optimist,” he told journalists on a fellowship program with the Honolulu-based East-West Center. ”The main message is we’re in risk management. We do not know the science well enough to know exactly what the temperature is at when a tipping point will occur.”

    http://www.nytimes.com/aponline/2009/11/23/us/AP-Climate-09-CO2-Off-The-Charts.html

    The report on the Nightly New’s the other night in Greenland did you hear about that and we are now putting back at a faster rate to say the least what the Earth took about 300 million years to do for what reason? I see James Inhofe wants to sue the IPCC over the e-mails, foolishness and the main reason is why? The easy way out in very simple terms. “We do not know the science well enough to know exactly what the temperature is at when a tipping point will occur.” We will in a blink of an eye.

    However, there seems little doubt that this bombshell will go a long way to derailing, or at least delaying the agenda for a global carbon tax that will be collected by the very same elitists aggressively pushing the fraud of global warming. Prison planet

    Oh well in about 20 million years that star ship will look down on Earth gray in color and think a lot of good money did them. Remember it takes one year at the speed of light to go about 6 trillion miles unless you can bend space. Can we bend space no but we have golf and football and big TV’s oh and cell phones, wow and let’s not forget fossil fuels did we make that no the Earth did. We will know more in a few years.

    Don

    When I watch the Senate or the House on c-span it’s like a comedy show a joke a big joke. Next of course is what more war and Copenhagen the climate bill more comedy hour made to seem important knowledge sorry no cigar. A joke and how many people really see it. The President of the United States is going to have a black tie dinner for the Indian Prime Minster in a tent heated tent outside the white House and I might add serve vegetables from the garden and the media people today were talking about who was on the list to go.

    It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way.

    This time going direct the other way will be measured in hundreds of thousands of years and that’s no joke. It is strangeness with what we now know and how many people see it. Oops there I go again house arrest ignorance is strength I keep forgetting in between that laughter I keep hearing off in the distance.

  10. Ohio said on November 23rd, 2009 at 8:58pm #

    Social Security: The Hidden Problem?

    Wrong. The general fund is the problem.

    The elimination of the cap will only increase the surplus amount that is, by law, invested in Government Account Series securities. The surplus funds used to be invested in US Treasury bonds which is another story, another time.

    Increasing the surplus funds which are housed in the general fund only provides additional money for Congress to spend.

    We have to invest any/all surplus funds into something better for the common good. JOBS would be my choice.

  11. Deadbeat said on November 23rd, 2009 at 9:38pm #

    Increasing the surplus funds which are housed in the general fund only provides additional money for Congress to spend.

    Then it is obvious that the solution is to UNDO the Greenspan commission changes to Social Security and restore the system back as a pay-as-you-go. Also then it would be correct to restore the orginal budget whereby Social Security was handled as a trust fund and removed from the general budget. Social Security was added to the U.S. budget in 1969 to coverup WAR spending by understating how much the U.S. budget is devoted to war.

  12. Don Hawkins said on November 24th, 2009 at 3:57am #

    Sent this to media this morning,
    Morning,

    Despite the rhetoric about a planet in peril, the reality is that fossil fuel companies are still
    calling the tune. We, the taxpayers, are still subsidizing fossil fuels. And fossil fuel companies are
    not made to pay for the damage that they do to human health or the planet’s health.
    The present situation is analogous to that faced by Lincoln with slavery and Churchill with
    Nazism—the time for compromises and appeasement is over.
    But today we have no great leader with the intestinal fortitude to stand up to the special
    interests.

    Most cultures believe that we have a fiduciary responsibility to turn over to future
    generations a planet in as good a condition as we received from our parents.
    If Larry King’s impression of the public is right, young people and the planet may have
    little hope.
    Our present governments are certainly not going to be the answer. The public, young
    people especially, must become involved and demand more. James Hansen

    But several days later, the story is still unfolding in several ways:

    – Sen. James Inhofe (R-Okla.) announced that he would probe whether the UN’s Intergovernmental Panel on Climate Change (IPCC) “cooked the science to make this thing look as if the science was settled, when all the time of course we knew it was not.”

    – In Britain, former chancellor Lord Lawson, a global warming skeptic, called for an inquiry into data “manipulation” about global warming, as a result of the e-mails.

    – Security experts say the hack could lead to future attacks, reports ChannelWeb, which adds that there could be “… more malicious attacks down the road, as hackers use cybercrime to further political agenda.” Also, the individuals whose e-mails were exposed now have some of their private information in the public domain and could be subject to phishing or worse.

    – The University of East Anglia. which had been criticized for its tepid response to the extensive e-mail theft, announced that plans to launch a review of the incident.

    – In an analysis of the impact the e-mails might have on the upcoming UN Climate Change Conference in Copenhagen and on a possible US climate bill, Reuters says they aren’t the game-changer that skeptics hope CSM

    Security experts say the hack could lead to future attacks, reports ChannelWeb, which adds that there could be “… more malicious attacks down the road, as hackers use cybercrime to further political agenda.”

    Getting ugly isn’t it? The amazing part is in about ten years when the sea ice is gone and a few more minor changes then what probably to late go shopping. The ice will not be gone in the summer in ten years well being brainwashed by fossil fuel companies and a few more who like to call the tune is not one of my favorite things. I feel a song coming on. Calm at peace as the people who lie like dog’s are anything but calm at peace very difficult to do as to lie first you must know the truth and never tuck in a Hawaiian shirt. Free like the wind.

    Don