Government Paralysis and the Social Security Trust Fund

Social Security is, today, facing its greatest challenges ever, and it is not at all certain what the future holds for the program. If the surplus revenue, generated by the 1983 payroll tax increase, had been saved and invested in marketable U.S. Treasury bonds, as was the intent of the legislation, the Social Security trust fund would today hold 2.7 trillion in “good-as-gold” marketable U.S. Treasury bonds. These bonds could have been sold in the open market, as needed, and full benefits could have been paid until 2033. But the intent of the Social Security Amendments of 1983 was not followed. Instead of saving and investing the surplus money, as it was supposed to do, the government spent every dime of it on wars and other government programs.

As a result, the trust fund today holds no real assets that can be converted to cash. The $2.7 trillion of Social Security money has been misused. The money was spent for non-Social Security purposes, and it no longer exists. The government “borrowed” the money and replaced it with IOUs, called “special issues of the Treasury.” These IOUs represent an accounting record of how much Social Security money was misspent, but they cannot be converted into cash, or used to pay benefits.

Unless the government repays that $2.7 trillion, Social Security will face some hard times in the years ahead, and there is no certainty that the government will repay the money. No provisions have been made for repaying the money, and, given the political environment that currently exists, it may not be politically feasible to repay the money.

Many people have a very naïve notion of how the United States government operates.  They picture Uncle Sam as a benevolent dictator, with unlimited power, who always does whatever is right and fair. They blindly trust the government to honor all of its commitments and to look out for the best interests of the public. But that characterization of the United States government is not even remotely accurate. The government is made up of professional politicians, most of whom look out primarily for themselves and their constituents.

America is, today, travelling through uncharted political waters. Our political system has broken down, and we are going through the greatest tax rebellion since the Boston Tea Party. The organization, Americans for Tax Reform, led by Grover Norquist, has managed to get hundreds of members of Congress to sign a pledge that they will not vote for any tax increase of any kind or amount. This anti-tax movement has become very powerful, and it is a major roadblock to any tax increase, including one that might be exclusively earmarked for repaying the Social Security money.

In the summer of 2011, irresponsible politicians took the nation to the brink of national bankruptcy over what should have been a routine vote to raise the debt ceiling, and there are indications that the same thing might happen again. It is very questionable that today’s, or tomorrow’s, politicians will risk their political careers by voting for a tax increase to pay back the Social Security money that was “borrowed” and spent by yesterday’s politicians.

Finally, the government is not legally obligated to repay the Social Security money. 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,” and, in a 1960 U.S. Supreme Court ruling (Fleming v. Nestor), the Court ruled that nobody has a “contractual earned right” to Social Security benefits. Thus, Congress could legally do whatever it wanted to do with regard to changing, or even eliminating, Social Security.

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.