Social Security Money Is Not Invested In Bonds Like China Holds

by Allen W. Smith, Ph.D. | June 22, 2012

Note: This article previously appeared on FedSmith.com     

Much of the Washington debate over Social Security assumes that the government securities in the trust fund are the same as the bonds owned by the government of China and other U.S. creditors.  But they are not.  The U.S. bonds held by China are marketable Treasury bonds that can be sold in the open market, at any time, in order to raise cash.  The trust fund does not hold any marketable bonds.

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 marketable value.  They could not be sold to anyone, even for a penny on the dollar.

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 this year, $95.0 billion in 2020, and a whopping $318.7 billion in 2030. This means that the government will have to find $318.7 billion in its tight budget, and transfer it to Social Security, in order for full benefits to be paid in 2030. 

The $2.7 trillion that the trust fund allegedly holds does not exist.  Social Security does not have the money, and the government, who spent the money, no longer has it.   The only significance of the number is that it is a measure of how much Social Security money the government spent on other programs.

Although the government does have a moral obligation to repay the looted Social Security money, it does not have a legal obligation to do so.  In 1960, in the case of Fleming v. Nestor, the United States Supreme Court ruled that nobody has a “contractual earned right“ to Social Security benefits. 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.” Thus, Congress could do whatever it wanted to do with regard to changing, or even eliminating, Social Security.

The future of Social Security is in the hands of Congress and the President, who have the legal authority to amend any and all parts of the Social Security Act.  If the surplus Social Security money had been saved and invested in marketable U.S. Treasury bonds, there would be no way that the government could default on the debt.  Marketable U.S. Treasury bonds are traded in financial markets around the world, and, if the government defaulted on a single marketable bond, it would be seen as a default on all marketable bonds, and it would create panic in the financial markets.  We can be absolutely sure that the government will never default on marketable Treasury bonds, but it might default on its debt to Social Security, which is not in the form of marketable bonds.  A government default on its Social Security debt might raise some eyebrows around the world, but it would not have a major adverse effect on holders of default-proof marketable Treasury bonds.

Social Security is at the mercy of the same politicians who took the nation to the brink of bankruptcy by failing to raise the debt ceiling in a timely manner.  Given this political environment, it is hard to see how the government can repay the $2.7 trillion it has “borrowed” from Social Security.  

Ironwood Publications has just released Allen’s explosive new book, The Impending Social Security Crisis: The Government’s Big Dirty Secret.