The Social Security Fraud Has Finally Been Exposed

On December 13, 2010, the highly respected Kansas City Star, winner of eight Pulitzer Prizes, published an editorial entitled, “The myth of the Social Security trust fund,” which included the following statement:

A lot of people speak of those IOUs as if they can be pulled out and exchanged for money to pay benefit checks.  They can’t. As the Clinton administration budget of 2000 explained, the securities in the Trust Fund ‘do not consist of real economic assets that can be drawn down in the future to fund  benefits.  Those special-issue bonds can only be redeemed by raising taxes, cutting spending elsewhere, or borrowing — exactly what the government would have to do if the Trust Fund didn’t exist.  The Trust Fund, said the Clinton budget message, ‘does not, by itself, have any impact on the Government’s ability to pay benefits.

On December 20, distinguished business columnist, Allan Sloan, seven-time winner of the prestigious Loeb award, business journalism’s highest honor, called the trust fund “a mirage” in his Washington Post column.  In the column, titled, “New tax law reveals the mirage of the Social Security trust fund,” Sloan wrote:

My problem with the trust fund is that it’s a snare and a delusion for people who think that it makes Social Security financially sound.  It doesn’t do that, because having government IOUs in a government trust fund doesn’t make it any easier for the government to cover Social Security’s cash shortfalls than it would be if there were no trust fund.

These are not new revelations.  I have spent the past decade relentlessly trying to expose the Social Security fraud, and prominent government officials were screaming out the warnings two decades ago.

On October 13, 1989, Senator Ernest Hollings of SC stood on the Senate floor and  warned, “…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of  the Social Security trust fund…in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”

The Kansas City Star editorial and Allan Sloan’s Washington Post column seem to have stunned the AARP and the NCPSSM into silence.  These organization have repeatedly claimed that the Social Security surplus is invested in U.S. Treasury bonds just like those held by the Chinese government.  They have battled my efforts to get this same message out for a decade, but they seem to have had the wind knocked out of them by the Star and Allan Sloan.  So far, they have made no attempt to rebut either of the two articles.  The AARP and the NCPSSM have been claiming for years that the trust fund holds enough assets to pay full Social Security benefits until at least 2037, when, in fact, in the words of the Kansas City Star, it has no “real economic assets that can be drawn down in the future to fund benefits.”

The Kansas City Star and Allan Sloan have exposed the trust fund myth so clearly that I think the national debate will now turn to how and why the United States government violated both the public trust and federal law for a quarter-century in a way that caused a major transfer of income from the lower and middle class to the richest of all Americans.  By imposing a hefty increase in the regressive payroll tax in 1983, and then using a large portion of the new revenue to offset the lost revenue resulting from the unaffordable income tax cuts that went primarily to the richest Americans, the United States government engineered a major transfer of income from the lower and middle classes to the richest of all Americans.

So where does that leave Social Security?  The approximately $2.5 trillion in surplus revenue, generated by the 1983 payroll tax hike, rightly belongs to the Social Security trust fund and to American workers who paid the extra taxes.  But the money is all gone — “borrowed” or “stolen” by the federal government and spent for general government operations.  None of the money was saved or invested in anything, so the trust fund contains no real economic assets with which to supplement the payroll tax which will become inadequate to pay full benefits after 2015.

I believe it is time for the public to demand, in a very strong way, that the government make arrangements to repay its debt to Social Security.  It is futile for the AARP and the NCPSSM to continue to insist that Social Security is in fine shape and has enough assets to pay full benefits until 2037.  This just isn’t true.  What the organizations need to do now is put political pressure on the government to move quickly to enact legislation that would require the repayment of the looted money, as it is needed, over the next 27 years.  There is no way that the government could possibly come up with the $2.5 trillion in the near future, given the budget crisis.  But it can make a legal commitment to repay the money in installments.  Will that happen?  Not without major political pressure from the majority of Americans. The AARP and the NCPSSM have frittered away the past ten years when the problem could have been resolved. If the looting could have been stopped when I first began actively urging such action in 2000, the trust fund would today hold approximately $1.5 trillion (the amount looted during the past 10 years) in “good-as-gold” real assets.  Instead, it holds no real economic assets.

The reason I don’t believe the government will honor its debt to Social Security without major political pressure is that it does not legally have to repay the money.  The government certainly has a moral obligation to do so, but, because of a 1960 U.S. Supreme Court ruling, it has an out.  In the case of Fleming v. Nestor, the Court ruled that nobody has a “contractual earned right” to Social Security benefits.  This ruling was based on Section 1104 of the 1935 Social Security Act which specifically states, “The right to alter, amend, or repeal any provision of this ACT is hereby reserved to the Congress.” Based on this strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security.

Many people argue that the government could not default on its debt to Social Security because of the effect such action would have on financial markets and the nation’s public image.  If the government held the same kind of real bonds that are traded on world markets, this would be true.  Public-issue, marketable U.S. Treasury bonds are default-proof, and that is the kind of bonds that the Social Security surplus revenue was supposed to be invested in.  If this had been done, Social Security would be in fine shape today.  But, instead of using the surplus Social Security revenue to buy such bonds in the open market, the government chose to spend the money and issue IOUs to replace the spent money.  These IOUs are non-marketable and could not be sold to anyone, even for a penny on the dollar.  The government has the legal authority to declare these IOUs null and void.  Since these IOUs are not traded, such action would have little effect on financial markets, and foreign governments would probably consider such action as an internal matter between the American government and its citizens.

The Social Security trust fund does not hold any real economic assets that can be drawn down to pay future benefits.  That is an indisputable fact today, and it has been true ever since the 1983 payroll tax hike was enacted.  Every dollar of the $2.5 trillion in surplus revenue, generated by the payroll tax hike, has been spent on programs unrelated to Social Security, leaving nothing to save or invest.

A few United States Senators tried to sound the alarm two decades ago, and I have dedicated the past ten years of my life to trying to alert the public to the awful truth about the Social Security trust fund.  For more than a quarter of a century, the United States government, under five presidents, has hoodwinked the American public into believing their Social Security contributions would be used for future Social Security benefits when, in fact, all of the surplus Social Security revenue was used to fund such things as tax cuts for the rich, two wars, and other government programs.

Today, thanks to the efforts of the editorial board of the Kansas City Star, and thanks to the courage and competence of Allan Sloan and a few other journalists, the big bad secret is finally out, and I think it is too late to get this cat back in the bag.

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. Franklin said on December 24th, 2010 at 1:13pm #

    It is not likely that the government will actually default on the bonds in the Social Security trust fund. – Instead, expect smoke and mirrors trickery to avoid having to pay them back and to continue the looting. This would be true even if the bonds in the trust fund could be traded on the open market. Some things we can expect:

    - A claim (without good evidence) that life expectancies will be much longer in the future – and that therefore benefits must be cut and the retirement aged raised so that a bigger surplus can be built up for the rest of the government to borrow, with no plan in place to pay it back.

    - A claim that the retirement of the baby boom generation requires cuts. (The 1983 reforms already took into consideration the existence of the baby boom generation and longer life expectancies.)

    - A claim that Social Security will go broke in 2037. (Actually the financial health in of Social Security in 2037, if no changes are made in the program is not at all clear, because it depends on the rate of the growth of the economy, interest rates, immigration patterns, birth rates and future life expectancies.) More importantly, at worst at some time in the future, the surplus will be gone, and Social Security will have to go back to the old pay as you go system that was in effect prior to 1983 – By 2037, much of the baby boom generation will be dead, and there will be little need for a surplus.

    -A claim that the trust fund is a complete illusion – While it is true that the bonds in the trust fund don’t have economic value, they have moral and legal value, because their source was FICA taxes on worker’s wages, that were justified only because the money was to be used to pay benefits.

  2. Mulga Mumblebrain said on December 24th, 2010 at 2:42pm #

    And it all started under the crook and homicidal imbecile Reagan-who’d of thought it? He was such a hero! As for ‘.marketable US Treasury bonds are default-proof..’ – I wouldn’t be so sure. If the US dollar ceases being de facto global reserve currency the US will default. The threat from the Euro is being ameliorated by the ‘markets’ and the ratings agency gangsters, but more and more countries, led by China, are seeking to trade in their own currencies, rather than pile up mountains of US dollars. They cannot see the point of allowing the US the unique privilege of running one gargantuan deficit after another to feed the insatiable greed of its ruling parasite class and pay for a gigantic military machine that might be unleashed on their people at any time.

  3. Deadbeat said on December 24th, 2010 at 10:09pm #

    LOOK, LOOK, LOOK. This topic has been debated to DEATH. Please follow the thread from this article published here back in September 2010 …

    Obama and the Social Security Time Bomb

    It is rather unfortunate that Dr. Smith continue with is MISLEADING hyperbole that the trust fund in a myth. The SS Administration even address the question and you can find the link to it in the September thread.

    There IS a SS trust fund. Franklin is correct. The idea is to confuse people that there is no fund. Why Dr. Smith continues on this track only he can answer.

    Dr. Smith writes …

    On December 13, 2010, the highly respected Kansas City Star, winner of eight Pulitzer Prizes, published an editorial entitled, “The myth of the Social Security trust fund,” which included the following statement …

    A lot of people speak of those IOUs as if they can be pulled out and exchanged for money to pay benefit checks. They can’t. As the Clinton administration budget of 2000 explained, the securities in the Trust Fund ‘do not consist of real economic assets that can be drawn down in the future to fund benefits. Those special-issue bonds can only be redeemed by raising taxes, cutting spending elsewhere, or borrowing — exactly what the government would have to do if the Trust Fund didn’t exist. The Trust Fund, said the Clinton budget message, ‘does not, by itself, have any impact on the Government’s ability to pay benefits.

    This is extremely misleading

    [1] Just because the KC Star won Pulitzer means NOTHING. So did the New York Times and they published Judith Miller’s LIES. The KC Star is printing MISLEADING information (which technically are not lies but they might as well be) .

    [2] The IOU’s are REDEEMABLE. This money has been LENT to the Federal Government and they are due to SS just like any government debt.

    [3] KC Star says … Those special-issue bonds can only be redeemed by raising taxes, cutting spending elsewhere, or borrowing — exactly what the government would have to do if the Trust Fund didn’t exist.

    The KC Star is essentially making it seem like the government cannot raise taxes to raise the money to redeem the bonds. They spin it is if this is a bad thing. But guess what this is EXACTLY what the government does to pay its Treasury bonds and any DEBT instrument. These debts are owed to the Social Security Administration. Mugla is correct that prior to Reaganomics the shift tax burden onto SS was done to pay for the tax cuts for the rich THEREFORE it makes sense to restore the 70% top tax rate and the 14 tax brackets. Neither Dr. Smith and the KC Star are not advocating a restoration of the pre Kemp/Roth tax rates.

    [4] The quote from the KC Star is contradictory its incorrectly says that the trust funds ‘do not consist of real economic assets that can be drawn down in the future to fund benefits” that is not what the SS administration says …

    From Social Security Administration …

    Trust Fund FAQs

    Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs? What is SSA’s reaction to this criticism? As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.

    Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

    Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 25 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds’ securities will need to be redeemed on a large scale prior to maturity.

    [5] I don’t have time to re-debate every point herein but I recommend everyone check out the link from the September discussion here on DV and read all of the arguments presented.

  4. commoner3 said on December 25th, 2010 at 6:51am #

    Allen Smith,

    I second Deadbeat and say we discussed that the subject to death.
    The Trust Fund is safe and sound and is guaranteed by the Faith and Credit of the US government. If you do not have faith in that then the SS is the least of your potential problems.
    You don’t give up, don’t you!!?? Is that all fear mongering is just to market you f**king book?? Or are you shilling for Wall St. who want to lay its thieving hand on the Trust Fund.??!! Enough is Enough! Give it a rest, man and go away.!!??

  5. Mulga Mumblebrain said on December 26th, 2010 at 3:17pm #

    Why does the phrase, ‘..the Faith and Credit of the US Government’, fill me with dread?

  6. commoner3 said on December 27th, 2010 at 2:26pm #

    Mulga Mumblebrain said on December 26th, 2010 at 3:17pm :

    “Why dos the phrase, ‘..the Faith and Credit of the US Government’, fill me with dread? ”
    —————————————————————————–

    Mulga,
    I know what are you implying. Of course the US government lies up to its teeth and misiforms and disinforms everyone!
    But in this case, it is different. If the US government reneges on its obligations to its bond holders , that will imply the collapse of the financial syetem of the world as we know it, with unpredictable wars and internal upheavals every where.
    In that situation, the short fall of the SS Trust Fund will be the least problem anyone will be worrying about with all the upheavals everywhere where everybody is anxious abot what the next day will bring.

  7. Franklin said on December 27th, 2010 at 4:00pm #

    Mulga and commoner3:

    The U.S. government will not repudiate or default on the bonds in the Social Security trust fund. Doing so would not look good – but watch out for trickery to avoid paying them back. – The problem is that Congress controls the eligibility and amount of benefits as well as the repayment of the bonds. – The recent proposal from Alan Simspon and Erskine Bowles, who are members of the president’s deficit reduction commission, recommended a plan to increase the retirement age and reduce benefits, while continuing to build up a bigger trust fund surplus that the rest of the government can borrow, with no plan in place to pay it back. Such proposals are based on guesswork about life expectancies, interest rates, immigration patterns, birth rates and the growth of the economy far into the future. If congress is willing to be pessimistic enough, it can make the figures come out any way it wants . Be particularly suspicious of plans that are designed to keep the system solvent (on paper) for 75 years- Members of congress really don’t think much beyond the next election. – But they will use any argument that is available to claim that a benefit cut or an increase in the retirement age is necessary.

  8. Max Shields said on December 28th, 2010 at 7:54am #

    Franklin said:

    “-A claim that the trust fund is a complete illusion – While it is true that the bonds in the trust fund don’t have economic value, they have moral and legal value, because their source was FICA taxes on worker’s wages, that were justified only because the money was to be used to pay benefits.”

    But isn’t this the crux? I said this in another Smith article on the subject, we are putting all this faith in a trust fund by a government that has yet to demonstrate the kind of fortitude and “moral” conviction that you seem to assume is the rock upon which SS is laid.

    It is this lack of moral grounding that would raise concern regarding the long term viability of this contract with the American people. And now with the year long holiday Obama signed into law with the Republican “compromise” we have a blatant view of the next shoe to fall.

    Franklin than says with the same unfailing faith in our Government: ” The U.S. government will not repudiate or default on the bonds in the Social Security trust fund. Doing so would not look good..”

    One can only swallow this with a blind article of faith (unjustified, I might add). I see government technocrats nodding in agreement as their job is to become ever lost in the details that fill their days, with a paycheck to compensate, children to feed, bills, etc. But I don’t know what Mr. Franklin’s excuse is.

  9. Deadbeat said on January 11th, 2011 at 1:54am #

    Max Shields writes …

    One can only swallow this with a blind article of faith (unjustified, I might add). I see government technocrats nodding in agreement as their job is to become ever lost in the details that fill their days, with a paycheck to compensate, children to feed, bills, etc. But I don’t know what Mr. Franklin’s excuse is.

    Max your argument is fallacious. Please refer to Dean Baker on this topic. The U.S. government CANNOT default on the bonds otherwise it will harm the countries credit rating for ALL debt including the debt payments that the rich bondholders want which is why many of them support the Keynesian DEFICITS.

    The politicians has to create a PSYCHOLOGY in order to convince workers to accept benefit cuts. Franklin carefully constructs those scenarios of some the step the politicians will take in order to craft that psychology.

    Franklin arguments as well as mine and commoner3 is exactly in opposition to Dr. Smith. Smith incorrectly asserts that there is NO trust fund when in fact there IS a trust fund and it is intact. His argument paints a picture that there is no money available when in fact the U.S. OWES the debt just like any other debt. What is special about the SS bonds is that they are NON-TRADABLE. This was a deliberate plan, and you can read about it from Bill Archer who was a member of the Greenspan panel and has a modicum of integrity, in order to prevent any kind of bubble from emerging out of the Social Security trust fund had the bonds been tradable.

    Smith misuses this information to create FUD and is doing a disservice. Please DO YOUR RESEARCH MAX before you make bogus arguments like Dr. Smith.

  10. Max Shields said on January 11th, 2011 at 10:08am #

    Since when is Keynsian Baker the new found reference for Deadbeat…do tell?

  11. Deadbeat said on January 12th, 2011 at 1:12am #

    Max Shields writes …

    Since when is Keynsian Baker the new found reference for Deadbeat…do tell?

    Baker provided excellent research and analysis regarding Social Security. The fact that Baker is an Keynesian has nothing to do with his research and arguments regarding Social Security. If you have information where Baker is incorrect then please present it with a rational argument for discussion.

  12. Deadbeat said on January 12th, 2011 at 1:14am #

    Also Max you may have not noticed that I also sited the Republican Bill Archer as well in my original rebuttal to you.