Greenspan Finally Tells The Awful Truth About Social Security
Allen W. Smith, Ph.D.
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 (blog).
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 extra revenue for non-Social Security purposes. Over a 30-year period, the $2.7 trillion in surplus Social Security revenue was spent for other programs and replaced with non-marketable government IOUs, called special issues of the Treasury. These are government IOUs which are not marketable, and 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. Reagan’s big cuts in income tax rates 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 with a new revenue source.
Reagan and Greenspan came up with a novel idea of how to bridge the gap. They would seek support for a hefty increase in the payroll tax, and then use the revenue from that tax increase as general revenue. An increase in Social Security taxes would be much easier to enact than a hike in income tax rates, and 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 dated July 18, 1981, which included: “The highest priority of my administration is restoring the integrity of the Social Security System.”
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 three decades down the road. So, at the time Reagan told 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 three 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, and he referred to Social Security as a “welfare program.” During the 1976 Republican Presidential Primary, Reagan proposed making Social Security voluntary, which would have essentially destroyed the program. 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 public and Congress to support enactment of his proposed new payroll tax legislation.
Reagan’s scare tactics worked. Congress passed the Social Security Amendments of 1983, which included a sharp 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 as general revenue. His successors, George H.W. Bush, Bill Clinton, and George W. Bush looted and spent all of the Social Security surplus revenue that flowed in during their presidencies. 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.
So the great Social Security heist, which began 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 the government did loot and spend the Social Security surplus and there are no plans to repay the looted money.
Copyright 2015 Allen W. Smith
About the Author : Allen W. Smith is Professor of Economics, Emeritus, Eastern Illinois University. He has devoted much of his professional life to promoting economic education and combating economic malpractice. Since 2000, he has concentrated his efforts on researching and writing about Social Security financing. He is the author of eight books, including Understanding Economics, a high school textbook published by Random House, and The Looting of Social Security, a history of Social Security financing, from the 1983 payroll tax hike, to the present. Smith holds a B.S. degree from Ball State University and a Ph.D. degree, in economics, from Indiana University.