Social Security Surplus is Not Invested in Government Bonds

The surplus Social Security revenue, generated by the 1983 payroll tax hike, was supposed to be saved and invested in marketable U.S. Treasury bonds.  If that had been done, the trust fund would today hold $2.8 trillion in “good-as-gold” marketable U.S. Treasury bonds.  But, none of the surplus Social Security revenue was saved or invested in anything. Instead, all of the money was deposited directly into the general fund and used for such things as wars, tax cuts, and other government programs.

The fact that the trust fund has no real marketable bonds has been documented by many high-level government officials.  On January 21, 2005, David Walker, Comptroller General of the GAO, tried to make it absolutely clear that there were no bonds in the trust fund. He said, “There are no stocks or bonds or real estate in the trust fund.  It has nothing of real value to draw down.“  Three months later, on April 5, 2005, President George W. Bush made a similar statement during a speech at West Virginia University at Parkersburg.  The president 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.”  When the top accountant of the U.S. Government, and the President of the United States, both said, in early 2005, that there is no money or marketable bonds in the trust fund, why didn’t the public believe them?   Most members of the public never heard about these incriminating statements because they were not widely publicized.

The official Summary of the 2009 Social Security Trustees Report explained the long-term repercussions of the fact that the government was not saving or investing any of the surplus Social Security revenue as was the intent of the 1983 Social Security legislation.  According to the Social Security Trustees:

Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

These top officials, and many others, have confirmed that the Social Security surplus revenue was all used for non-Social Security purposes and that the trust fund holds no marketable bonds or other real  assets.  So why doesn’t the general public know these facts? The public is being misled to believe that the IOUs in the trust fund are real bonds.  None of the Social Security surplus was invested in anything because it was all spent for non-Social Security purposes.  It is not possible to invest money that has already been spent.

As the Social Security money was spent, it was replaced with government IOUs called “special issues of the Treasury.”  These IOUs are not real bonds like the bonds held by China and our other creditors.  They cannot be sold or used to pay benefits.  They represent an accounting record which shows that the government owes $2.8 trillion to Social Security.  Money can be saved or spent.  If it is saved, it can also be invested.  But if the money is spent, there is nothing left to invest.  Contrary to what the public has been conditioned to believe, none of the Social Security surplus revenue was invested in real government bonds or anything else. and no provisions have been made for the government to repay its debt to Social Security.  Given the current unprecedented political atmosphere, it is not likely that the government will raise taxes in order to repay the debt, and it is questionable that the government will be able to borrow money from the public to repay 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.