It’s Time to Tap the Empty Social Security Trust Fund

AP writer, Stephen Ohlemacher, sent shock waves throughout the nation this week with his story, “Social Security to start cashing Uncle Sam’s IOUs.”  Social Security has been running large surpluses ever since the enactment of the 1983 payroll tax hike, and was projected to continue running surpluses until at least 2016.  Instead, Ohlemacher reports that the cost of Social Security benefits will exceed payroll tax revenue by approximately $29 billion this year, because of the severe recession which has reduced payroll tax revenue at the very time that many unemployed Americans have been forced to retire early.  

What it all boils down to is that, in order to pay full benefits this year, Social Security will have to come up with an extra $29 billion to supplement the inadequate payroll tax revenue.  Where will that money come from?  It will have to come from increased taxes or from borrowed money.  “Wait a minute!” some readers will say.  Hasn’t Social Security been receiving surplus revenue ever since the 1983 payroll tax hike?  Isn’t there supposed to be approximately $2.5 trillion in the Social Security trust fund?  The answer to both questions is yes.  But there is a problem.  Every dollar of that surplus Social Security revenue has already been spent by the government.  Much of it went to fund wars in Afghanistan and Iraq.  The rest has been spent on other government programs.

The American people were not supposed to find out about the great Social Security scam for another six years, and the government was hoping to continue to receive surplus money from the Social Security contributions of working Americans for at least that long.  But the inevitable day of reckoning has come, six years sooner than anybody expected, because of the severe recession.  And the government of the United States has been caught with its hand still in the empty Social Security cookie jar.

For more than a decade, I have been trying to expose the Social Security scam just like Harry Markopolos  was trying to expose the Bernie Madoff scam.  But nobody would listen.  If anyone deserves credit for helping the government to keep its dirty secret for so long, that honor should go to the AARP and the NCPSSM.  I have been members of both organizations for years and I have tried very hard to get their cooperation in exposing the fraud.  But they have refused to have anything to do with me.  Instead, they have continued to bombard their members and the public with misinformation.  They have argued that the trust fund is full of “good-as-gold” U.S. Treasury Bonds that could be used to pay full Social Security benefits until at least 2037 without any changes.  In reaction to Olemacher’s AP story, Barbara Kennelly, president of the NCPSSM, responded with the following words, “Good luck to the politician who reneges on that debt.  Those bonds are protected by the full faith and credit of the United States of America.  They’re as solid as what we owe China and Japan.”

I believe Barbara Kennelly to be among the strongest and most honorable defenders of Social Security.  I think she truly wants to save Social Security, as we now know it, which is the same goal that has motivated me to make so much effort for more than a decade.  I have tried to convince Ms. Kennelly that I was trying to save Social Security by exposing the truth about the trust fund, but she wouldn’t even consider the possibility that the government has been looting the trust fund all these years.  I requested the opportunity to discuss this issue with her, either in a face-to-face meeting, or through telephone conversations, in the hope that we could work together toward a common goal.  She ignored my requests and refused to communicate with me in any way. 

It has been clear for quite some time that the trust fund contained no real assets.  David Walker, Comptroller General of the GAO, stated on January 21, 2005, “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 finally acknowledged the empty trust fund by saying, “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.” 

If there was any doubt remaining, with regard to whether or not the trust fund contains any real assets, that doubt should have been removed by the following words in the 2009 Social Security Trustees Report:

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.

There is nothing ambiguous about the above words.  They make it clear that the government does not receive any cash income from the alleged interest payments on the trust fund IOUs.  The interest payments are made in the form of additional worthless IOUs.  The government cannot sell the IOUs because they are not marketable and have no cash value.  The IOUs simply represent a debt of one branch of the government (the Treasury Department) to another branch of government (Social Security).  They cancel each other out. 

The Social Security surplus revenue should have been saved and invested in public-issue, marketable Treasury bonds.  These bonds are “good as gold” and default-proof.  They are the kind of U.S. Treasury bonds that are owned by China and Japan, Bill Gates, pension funds, and every other serious investor that owns Treasuries.  If the Social Security surplus had been invested in public-issue marketable Treasury bonds, as it could have been, and should have been, Barbara Kennelly would be correct in saying that the Social Security holdings are “as solid as what we owe China and Japan.”  Unfortunately not a single dollar of the surplus Social Security revenue was saved or invested in anything.  It was all spent, and, once money is spent, there is nothing left to invest. 

The government cannot, and will not, ever default on any of its public issue, marketable Treasury bonds because of the panic it would create in world markets and the damage it would do to the nation’s worldwide credibility.  But Congress has the legal authority to default on its debt to Social Security, and, if it should do so, the outside world would probably view it primarily as an internal matter between the United States Government and its citizens. One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so.  

In a 1960 ruling by the United States Supreme Court, the court ruled that nobody has a “contractual earned right“ to Social Security benefits.  Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.”  According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security. 

Early on, some did not take the language seriously because they thought it was probably unconstitutional.  However, in 1960, in the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits   In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.”    As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President.  They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.

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.