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How Will Government Repay Its Debt to Social Security?
By Allen W Smith
Last edited: Monday, June 17, 2013
Posted: Monday, August 06, 2012



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Every penny of the $2.7 trillion in surplus revenue, generated by the 1983 payroll tax hike, was spent on wars and other government programs, as it came in. The government took the money and replaced it with non-marketable government IOUs.

How Will Government Repay Its Debt to Social Security?

by

Allen W. Smith, Ph.D.

Social Security is, today, facing its greatest challenges ever. 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 now 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, instead of saving and investing the surplus money, the government spent every dime of it for non-Social Security purposes, leaving the trust fund without any real assets.


Every penny of the $2.7 trillion in surplus revenue, generated by the 1983 payroll tax hike, was spent on wars and other government programs, as it came in. The government took the money and replaced it with non-marketable government IOUs. These IOUs, called "special issues of the Treasury," are held only by the trust funds, and they have no market value. The only real money that Social Security has is the monthly flow of payroll tax revenue, plus that portion of income taxes paid on Social Security benefits. Even the interest that Social Security is supposed to receive on the money the government has "borrowed," has never been paid in cash. Instead, the government "pays interest" to Social Security by issuing still more of the same non-marketable IOUs.

With 10,000 new baby boomers retiring each and every day, the gap between tax revenue and the cost of paying full benefits will get wider and wider. The 2012 Social Security Trustees Report estimates that the gap between revenue and the cost of full benefits will be $53.2 billion in 2012, $95.0 billion in 2020, and a whopping $318.7 billion in 2030. This means that the government will have to come up with $318.7 billion, in the form of higher taxes, reduced spending on other programs, or by borrowing massive additional amounts of money, in order for full benefits to be paid in 2030.


Contrary to the claims of many, Social Security cannot "pay full benefits until 2033 without any government action." The $2.7 trillion that is thought to be in the trust fund no longer exists. As Senator Tom Coburn (R-OK) said during a senate speech on March 16, 2011, "The money's gone. It's been used for another purpose." Only if the government repays the $2.7 trillion it has "borrowed" from Social Security, can the program pay full benefits for years to come. It is unable to pay full benefits, even for this year, from its current revenue.

 

To make matters worse, America is today going through the greatest tax rebellion since the Boston Tea Party. 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 as to whether or not 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, although the government has a moral obligation to repay the Social Security money, it is not legally required to repay it. Section 1104 of the 1935 Social Security Act, specifically states, "The right to alter, amend,or repeal any provision of this Act is hearby reserved to the Congress." Also, in a 1960 United States Supreme Court ruling (Fleming v. Nestor), the Court ruled that nobody has a "contractual, earned right" to Social Security benefits. Congress could legally do whatever it wanted to do with regard to changing, or even eliminating, Social Security.

Copyright 2012 Allen W. Smith

Dr. Allen W. Smith is Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books, including, "The Looting of Social Security," and he has been researching and writing about Social Security financing for the past twelve years. Allen has appeared on CNN and CNBC, and he has done more that 200 radio interviews.  Visit website at www.thebiglie.net for more information on Social Security funding.

Allen W. Smith, Ph.D.

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Reviewed by m j hollingshead


thought provoking article




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