The Ugly Road to Social Security’s Current Problems

The 1983 Social Security amendments included a “fix” for the baby-boomer problem, in the form of a hefty payroll tax hike. Prior to 1983, the obligation of each generation of Americans had been restricted to paying for the Social Security benefits of the generation that preceded it. However, since the baby-boom generation was much larger than any preceding generation, the 1983 tax hike required the boomers to prepay most of the cost of their own benefits, in addition to paying for the benefits of the generation that preceded them. The boomers got hit with a double whammy, and they have paid more into Social Security than any other generation.

The surplus revenue generated by the 1983 tax hike was supposed to be saved and invested to build up a large reserve with which to ultimately fund the retirement of the baby boomers more than 25 years down the road. If the intent of the legislation had been followed, Social Security would now have enough money to pay full benefits until at least 2037, and there would be no talk today about the need to cut Social Security benefits. Unfortunately, the plan was not followed. Unscrupulous politicians have been stealing the surplus Social Security revenue and spending it for non-Social Security purposes for the past 25 years.

The first surpluses came in, almost unnoticed, during the second Reagan term. Instead of being saved and invested, the surplus money was deposited into the general revenue fund and used for other government programs. When George H.W. Bush became President, he followed in Reagan’s footsteps with regard to the mishandling of the surplus Social Security revenue. As the surpluses became larger and larger, criticism against Bush became louder and louder. The first significant Social Security surplus came in 1985 in the amount of $9.4 billion. By 1990, the surplus had shot up to $56.6 billion and was projected to grow larger and larger over the next two decades.

This was Social Security money, generated by the regressive payroll tax, and intended to be used exclusively for the payment of future Social Security benefits. For the Bush administration to blatantly violate the intent of the law, and use the Social Security money for other government programs, was nothing short of embezzlement. The whole issue came to a head in 1990 when Senator Daniel Patrick Moynihan of New York introduced legislation that would rescind the 1983 payroll tax increase and return the Social Security program to a pay-as-you-go system.

Moynihan’s position was that, if the government could not keep its hand out of the Social Security cookie jar, then the jar should be emptied so their would no longer be any Social Security surplus to raid. Moynihan’s proposal was supported by the conservative Heritage Foundation, the liberal Institute of Policy Studies, and the U.S. Chamber of Commerce. But it was not popular with the Bush administration. “It is an effort to get me to raise taxes on the American people by the charade of cutting them, or cut benefits,” Bush told reporters. “And I’m not going to do it to the older people of this country.” The real reason that Bush opposed the legislation was that, had it passed, he would have lost his large secret slush fund

During the debate on the Moynihan bill, senator after senator characterized the ongoing raiding of Social Security as “embezzlement,” “thievery,” and “stealing,” and that is exactly what it was. Money paid by working Americans for the purpose of building up a reserve for the baby boomers was instead going into the general fund and being used to offset the lost revenue that resulted from Reagan’s unaffordable income tax cut that benefited mostly the rich.

The American public, and specifically future Social Security recipients, were the big losers when Senator Moynihan failed to end the raiding of Social Security in 1990. Senator Moynihan had supported the 1983 payroll tax hike, and the only reason he was advocating its repeal was to prevent the Bush administration from continuing to pilfer it. A far better solution, for Senator Reid and the public, would have been some arrangement that legally prevented the government from looting the money. But President Bush wanted no part of any kind of arrangement that would have kept him from using the surplus Social Security revenue. So the 1990 opportunity to end the raiding of Social Security was lost.

President Bill Clinton continued the raiding of the Social Security surplus throughout his eight years, but the opportunity to change policy came up again in the 2000 presidential election campaign. Al Gore acknowledged the ongoing looting of Social Security and promised to end it if elected. Gore’s promise to end the practice of using Social Security revenue for non-Social Security purposes became so popular that candidate George W. Bush felt he had to make a similar promise. So it appeared that, no matter who was elected President in 2000, the Social Security surplus revenue would be saved and invested, from that point on, as was the intent of the 1983 Social Security legislation.

George W. Bush became the new president, but he reneged on his promise to protect Social Security, despite ongoing assurances that he would not touch the surplus. During his State of the Union address on February 27, 2001, Bush said, “My budget protects all $2.6 trillion of the Social Security surplus for Social Security, and Social Security alone.” Yet he spent every dollar of the approximately $1.5 trillion in Social Security surplus that came in during his presidency. During his 2005 campaign to partially privatize Social Security, President George W. Bush openly admitted that all of the Social Security surplus was being spent. In a speech in Pennsylvania, on February 10, 2005 Bush candidly admitted the raiding with the following words: “Every dime that goes in from payroll taxes is spent. It’s spent on retirees, and if there’s excess, it’s spent on government programs. The only thing that Social Security has is a pile of IOUs from one part of government to the next.” On April 5, 2005, during a speech in West Virginia, Bush said: “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.’

President Obama has, so far, not officially changed the practice of his four predecessors. However, this year, for the first time in nearly three decades, there is no Social Security surplus to loot. The severe recession has resulted in a reduction in payroll tax revenue at the very same time that many senior unemployed workers are choosing to retire earlier than they otherwise would have, thus raising the total cost of benefits.

Over the past quarter-century, the United States government has embezzled $2.5 trillion of the Social Security contributions of working Americans and used the money to fund wars and other government programs. Unless that money is fully repaid, with interest, the future of Social Security, as we now know it, is doomed, and some politicians are already making plans to dance at its funeral. The American public must not allow that to happen. They must demand that the first priority of the deficit commission be to make provisions for the orderly repayment of the stolen money. Beginning in 2016, payroll tax revenue will be insufficient to make full Social Security benefit payments. Unless at least some of the money is put back into the fund by then, benefits will have to be cut.

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 Raiding the Trust Fund: Using Social Security Money to Fund Tax Cuts for the Rich. Read other articles by Allen, or visit Allen's website.

5 comments on this article so far ...

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  1. Charlie said on July 24th, 2010 at 1:37pm #

    Thank you for this article. It is clear and concise, when most of what I read about economic issues is nearly incomprehensible to an average reader such as myself. The political fraud surrounding and underlying the imminent crisis in Social Security is one of the greatest outrages of the past few decades. Sadly, however, I fear that the same crooks who orchestrated it will most likely be re-elected or they will be replaced by equally conniving thieves.

  2. joed said on July 25th, 2010 at 6:38am #

    Thank you Dr. Smith for this fine, informative and much needed article.
    “The American public must not allow that to happen. They must demand that the first priority of the deficit commission be to make provisions for the orderly repayment of the stolen money.”
    I think you may be a bit naieve to expect the American people to demand anything from the govt.
    The people are so sheep-like that they can only follow the leader when he/she says that brown people are the cause of the problem, get rid of the brown people and you will have Social Security back. It’s the brown people that are taking the social security money.
    The American people are so dumbed down they are cutting their own throats and enjoying it.

  3. kalidas said on July 25th, 2010 at 4:01pm #

    I believe it was 9-10-01 that Rumsfeld opined that trillion(s) $$$ were missing from the Pentagon coffers which the Israeli-American citizen Dov Zakheim was so vigilantly and faithfully stewarding.

    Golly gee, the day before the day which will live in infamy.

    That’s a good place to start.

  4. PatrickSMcNally said on July 25th, 2010 at 8:50pm #

    > I believe it was 9-10-01 that Rumsfeld opined that trillion(s) $$$ were missing from the Pentagon coffers

    In actuality it was on March 3, 2000, 18 months before 911, that the story was revealed:

    Pentagon’s finances in disarray

    By JOHN M. DONNELLY The Associated Press 03/03/00 5:44 PM Eastern

    WASHINGTON (AP) — The military’s money managers last year made almost $7 trillion in adjustments to their financial ledgers in an attempt to make them add up, the Pentagon’s inspector general said in a report released Friday.

    The Pentagon could not show receipts for $2.3 trillion of those changes, and half a trillion dollars of it was just corrections of mistakes made in earlier adjustments.

    Noye that the money was not lost. It was simply difficult to account for how it had been spent. Subsequent audits accounted for a lot of it:

    Zakheim Seeks To Corral, Reconcile ‘Lost’ Spending
    By Gerry J. Gilmore
    American Forces Press Service

    WASHINGTON, Feb. 20, 2002 — As part of military transformation efforts, DoD Comptroller Dov S. Zakheim and his posse of accountants are riding the Pentagon’s financial paper trail, seeking to corral billions of dollars in so-called “lost” expenditures…

    Billions of dollars of DoD taxpayer-provided money haven’t disappeared, Zakheim said. “Missing” expenditures are often reconciled a bit later in the same way people balance their checkbooks every month. The bank closes out a month and sends its bank statement, he said. In the meanwhile, people write more checks, and so they have to reconcile their checkbook register and the statement.

    DoD financial experts, Zakheim said, are making good progress reconciling the department’s “lost” expenditures, trimming them from a prior estimated total of $2.3 trillion to $700 billion. And, he added, the amount continues to drop.

    The claim that this unaccounted for 2.3 trillion was only suddenly announced the day before 911 and then disappeared down the Memory Hole is a Truther Myth. But it’s not true.

  5. Don Hawkins said on July 26th, 2010 at 7:27am #

    “If Republicans take back Congress they’ll implement a truly dangerous agenda,” Franken told the Netroots Nation gathering in Las Vegas. “Everything is on the table from repealing healthcare reform to privatizing Social Security.” the hill

    Franken forgot to mention get some boot’s and ear plug’s. I guess it doesn’t matter really just faster with the right in power. I see Glenn Beck has boot’s now and told people to get them. The one’s he has are wimpie. Drill baby drill burn that coal.