Greenspan Finally Tells the Awful Truth about Social Security

During a presentation to the Peter J. Peterson Foundation’s, Fiscal, 2015, Summit last month, former Federal Reserve Chairman, Alan Greenspan, was asked about the status of the Social Security Trust Fund. Here is his response, “The notion that we have a trust fund is nonsense—that trust fund has no meaning whatsoever. The trust fund is a meaningless instrument that has no function. Greenspan’s comments were first reported by Nicholas Brady in the May 30, 2015 issue of PJ Media.

Greenspan’s words come as no surprise to anyone who has followed the history of Social Security after enactment of the Social Security Amendments of 1983. The legislation, which included a hefty payroll tax hike on the baby boomers, was designed to generate large Social Security surpluses for the next 30 years. The surplus revenue was supposed to be saved and invested in marketable Treasury bonds, which could later be sold to raise cash with which to finance Social Benefits for the Baby boomers.

Alan Greenspan played a major role in the debacle that has left the Social Security trust fund without any real assets. He was the “brains” behind the plot to raise Social Security taxes and then use the revenue for non-Social Security purposes. Over a 30-year period, the $2.7 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, was taken from Social Security and spent as general revenue. As the money was spent, it was replaced, dollar for dollar, with non-marketable government IOUs. called special issues of the Treasury. These are government IOUs which are not marketable. They couldn’t be sold to anyone, even for a penny on the dollar.

From the very beginning, President Ronald Reagan and his advisors knew that the government would soon face a severe cash shortage. The big cuts in income tax rates, which was a focal point of the new supply-side economics, were unaffordable. The cuts, which went disproportionally to the very wealthy, reduced federal revenue by so much that there was bound to be a cash crisis, unless a way could be found to replace that lost revenue.

When Reagan’s budget director, David Stockman, first fed the data from Reagan’s economic proposals into the OMB computer, which was programed to serve as a model for the American economy, he was shocked by the results. 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. The Reagan administration desperately needed a new source of revenue to replace the revenue lost from the income tax cuts.

Reagan and Greenspan came up with the novel idea of how to bridge the gap. Why couldn’t they push for an increase in the payroll tax, and then use the money as general revenue. An increase in Social Security taxes would be much easier to enact than a hike in income tax rates, and it would leave Reagan’s income tax cuts undisturbed. They might even receive some praise for their alleged concern about the long-term solvency of Social Security.

Reagan’s first step in implementing the new 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…. Unless we in government are willing to act, a sword of Damocles will soon hang over the welfare of millions of our citizens.” Two month’s later, 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 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. 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.
And 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. There is no way that anyone who knew Reagan’s record would accept his claim that Social Security was his highest priority. He was simply using scare tactics in an effort to get the American people, and members of Congress, to support enactment of his proposed new tax legislation.

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.”

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. 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. The truth is that Social Security cannot pay full benefits for a single year without borrowing money. 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 looted $2.7 trillion from Social Security, or, if the government would make arrangements to repay the money, Social Security would be able to pay full benefits for at least 20 more years without any other action. But there are no plans to repay the looted Social Security money.

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 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.

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.