Ronald Reagan and the Great Social Security Heist

Ronald Reagan was one of the most popular presidents in modern history. As a former Hollywood actor, he had an uncommon degree of charisma.  The conservatives absolutely loved Reagan for his efforts to reduce the size of government, but most liberals hated him with a passion.  Reagan is still revered by a lot of Americans.  This reverence for Ronald Reagan helps to explain how he was able to fool most of  the American people to a degree unparalleled by any other modern president.  With the help of Alan Greenspan, Reagan pulled off one of the greatest frauds ever perpetrated against the American people.

It is so ironic that many people, today, still believe that Ronald Reagan came galloping up on a great white horse to sound the alarm that Social Security was in deep financial trouble.  He then allegedly figured out a solution to the problem and rammed his legislative proposal through Congress in a three-month period.  On April 20, 1983, the signing ceremony for the new legislation took place with great fanfare.  Below are some of Reagan’s remarks at the signing ceremony.

This bill demonstrates for all time our nation’s ironclad commitment to social security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire…

Today, all of us can look each other square in the eye and say, “We kept our promises.” We promised that we would protect the financial integrity of social security. We have. We promised that we would protect beneficiaries against any loss in current benefits. We have. And we promised to attend to the needs of those still working, not only those Americans nearing retirement but young people just entering the labor force. And we’ve done that, too…

Instead of being a proud day for America, April 20, 1983, has become a day of shame.  The Social Security Amendments of 1983 laid the foundation for 30-years of federal embezzlement of Social Security money in order to use the money to pay for wars, tax cuts and other government programs.  The payroll tax hike of 1983 generated a total of $2.7 trillion in surplus Social Security revenue.  This surplus revenue was supposed to be saved and invested in marketable U.S. Treasury bonds that would be held in the trust fund until the baby boomers began to retire in about 2010.  But not one dime of that money went to Social Security.

The 1983 legislation was sold to the public, and to the Congress, as a long-term fix for Social Security.  The payroll tax hike was designed to generate large Social Security surpluses for 30 years, which would be set aside to cover the increased cost of paying benefits when the boomers retired.

Let’s have a look at the events leading up to this proposal. Reagan and the government had big financial problems.  Supply-side economics was not working like Reagan had promised.  Instead of the lower tax rates generating more revenue as the supply-siders claimed would happen, there was a dramatic drop in revenue.  Something had to be done, so Ronald Reagan set for himself a new mission.  He would have to figure out a way to get the additional revenue he needed from another source.

The mechanism, which allowed the government to transfer $2.7 trillion from the Social Security fund to the general fund over a 30-year period, was the brainchild of President Ronald Reagan and his advisers, especially Alan Greenspan.  Greenspan played a key role in convincing Congress and the public to support a hike in the payroll tax.  A few years later, Reagan appointed Greenspan to become Chairman of the Federal Reserve System.  Since Greenspan’s new job was one of the most coveted positions in Washington, many observers have wondered whether or not this appointment represented, at least in part, payback for the role Greenspan had played in making vast sums of new revenue available to the government.

President Reagan and his advisors knew, from the very beginning, that the government would soon face a severe cash shortage.  Budget Director, David Stockman, had deliberately rigged the computer at the Office of Management and Budget to generate bogus revenue forecasts in an effort to convince Congress to enact Reagan’s unaffordable proposed tax cuts.  When Stockman first fed the data from Reagan’s economic proposals into the computer, he was shocked.  The computer forecast that, if Reagan’s proposals were enacted into law, massive budget deficits would loom ahead for as far as the eye could see.

Reagan needed a new source of revenue to replace the revenue lost as a result of his unaffordable income tax cuts.  He wasn’t about to rescind any of his income-tax cuts, but he had another idea.  What about raising the payroll tax, and then channeling the new revenue to the general fund, from where it could be spent for other purposes?  An increase in Social Security taxes would be easier to enact than a hike in income tax rates, and it would leave his income tax cuts undisturbed.  Reagan’s first step in implementing his strategy was to write to Congressional leaders.  His first letter, dated May 21, 1981 included the following:

As you know, the Social Security System is teetering on the edge of bankruptcy…in the decades ahead its unfunded obligations could run well into the trillions. Unless we in government are willing to act, a sword of Damocles will soon hang over the welfare of millions of our citizens.

Reagan wrote a follow-up letter to Congressional leaders dated July 18, 1981, which included:

The highest priority of my Administration is restoring the integrity of the Social Security System. Those 35 million Americans who depend on Social Security expect and are entitled to prompt bipartisan action to resolve the current financial problem.

Social Security was definitely not “teetering on the edge of bankruptcy” in 1981 as Reagan claimed in his letter to Congressional leaders. The 1983 National Commission on Social Security Reform, headed by Alan Greenspan, issued its “findings and recommendations” in January 1983.  The Commission accurately foresaw major problems for Social Security when the baby boomers began to retire in about 2010.  But that was nearly two decades down the road.  In addition to the long-term problem of the baby boomers, the Commission found a possible short-term problem for the years 1983-89.  But the outlook improved and became favorable for the 1900s and early 2000s.  The possible minor problem for the years 1983-1989 was based on very pessimistic economic assumptions.  So, at the time Reagan informed Congressional leaders that Social Security was teetering on the edge of bankruptcy, the actual condition of Social Security funding was fairly sound for the next two decades.

Furthermore, Social Security was certainly not Reagan’s “highest priority.” Reagan had never been a friend of Social Security.  He was a hardliner when it came to all government social programs.  He called unemployment insurance “a prepaid vacation plan for freeloaders.” He said the progressive income tax was “a brainchild of Karl Marx.”  And he called welfare recipients “a faceless mass waiting for handouts.”  Reagan referred to Social Security as a “welfare program” and, during the 1976 Republican Presidential Primary, Reagan proposed making Social Security voluntary, which would have essentially destroyed the program.  There is no way that anyone who knew Reagan’s record would accept his claim that Social Security was his highest priority. He had always wanted the program eliminated, or at least privatized.

Reagan’s scare tactics worked. Congress passed the Social Security Amendments of 1983, which included a hefty increase in the payroll tax rate.  The tax increase was designed to generate large Social Security surpluses for the next 30 years.  The public was led to believe that the surplus money would be saved and invested in marketable U.S. Treasury Bonds, which could later be resold to raise cash with which to pay benefits to the boomers.  But that didn’t happen.  The money was all deposited directly into the general fund and used for non-Social Security purposes.   Reagan spent every dime of the surplus Social Security revenue, which came in during his presidency, on general government operations. His successor, George H.W. Bush, used the surplus money as a giant slush fund, and both Bill Clinton and George W. Bush looted and spent all of the Social Security surplus revenue that flowed in during their presidencies. So we can’t blame the whole problem on Reagan.  Reagan was the one who figured out a way to use Social Security money as general revenue, and his successors just followed his example.

The $2.7 trillion, which is alleged to be in the trust fund, was all spent for wars, tax cuts for the rich, and other government programs.  If the money is repaid at some point in the future, we could say is was just “borrowed.”  But no arrangements have been made to repay the money, and nobody in government is suggesting that the money should be repaid.  So, if it is never repaid, the money will definitely have been stolen.

This would not be such a serious problem if Social Security was still running annual surpluses.  But Social Security ran it last annual surplus in 2009, and began running permanent annual deficits in 2010.  The cost of paying full Social Security benefits for 2010 exceeded Social Security’s total tax revenue by $49 billion.  So how did the government pay full Social Security benefits in 2010?  They borrowed $49 billion from China, or one of our other creditors.   And the amount that will have to be borrowed in future years will become larger and larger.  If the trust fund had not been looted, there would be $2.7 trillion of marketable U.S. Treasury bonds in the fund that could be sold in the open market for cash.  But the trust fund doesn’t hold a dime’s worth of marketable real assets of any kind.

That’s why President Obama warned during the debt-ceiling crisis of 2011 that Social Security checks could not go out on time unless the dispute was settled, because “their might not be enough money in the coffers.”  The grandiose lie that the Social Security Administration, the AARP, and the NCPSSM, repeatedly tells the public is outrageous.  They continue to say that Social Security has enough money to pay full benefits for another 20 years without any government action, when Social Security cannot pay full benefits for a single year without borrowing money.  The IOUs in the trust fund are not marketable, and they have no monetary value.  They are worthless!

We can easily understand why the SSA continues to repeat the big lie.  That is what they are told to do by top government officials, who are trying to keep the Social Security theft a secret from the public.  But why do the senior organizations continue to repeat the lie?  They are supposed to be representing the best interests of their members, but, in my opinion, they are betraying their members.

So the great Social Security fraud, which began under Ronald Reagan in 1981, is still alive and well 32 years after it began.  Republican and Democrat presidents and Republican and Democrat members of Congress, all share in the blame.  There is nothing broken about Social Security.  If the government had not stolen $2.7 trillion from Social Security, or, if the government would make arrangements to repay the stolen money, Social Security would be able to pay full benefits for at least 20 more years without any other action.  But crooked politicians, who do not want to repay the money, are trying to convince the public that Social Security is a flawed system, which needs to be replaced with private accounts.

Social Security is a sound program that has worked well for more than 75 years.  It ain’t broke, so why try to fix it?  The government—not Social Security—is what is broken and needs to be fixed.  It is time for the American people to stand their ground and fire the crooked politicians.  President Obama, and every member of Congress know that everything in this article is true.  But they have succeeded in fooling the people for three decades and seem to think they can continue to do so. Don’t let them get by with it!

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.