Social Security: The Hidden Problem

by

Allen W. Smith, Ph.D.

            There is much debate today about how solvent Social Security is, but most of the debate is over when the trust fund will run out of money, not about whether or not the trust fund actually holds real assets.  The conventional wisdom, prior to the economic downturn, was that the trust fund had enough money to pay full Social Security benefits until about 2041.  That date has now been revised to about 2037.  

            In order to understand the true status of the trust fund we need to go back to 1982, and then examine the events that have taken place since that date.  In 1982, the Presidential Commission on Social Security, chaired by Alan Greenspan, warned that Social Security would face serious problems when the baby boomers began to retire about 2010, unless Congress took immediate action to begin building up a reserve in the trust fund that could later be drawn down in order to pay full benefits to the baby-boom generation.

            In 1983, Congress enacted the legislation recommended by the Greenspan Commission, which included a hefty hike in payroll taxes.  In essence, the legislation required the baby-boom generation to pay enough taxes to fund the benefits of the previous generation, as was customary, plus enough additional taxes to prepay most of the cost of their own benefits, which was not customary. 

            That payroll tax hike has generated about $2.5 trillion of surplus Social Security revenue to date.  If the money had been saved and invested, as it was supposed to be, Social Security would be in good shape today.   But the money was neither saved nor invested in anything.  Instead, it has been used as a giant slush fund to pay for tax cuts, wars, and other government programs for the past 25 years.  The government has “borrowed,” or “stolen” every dime of the surplus Social Security revenue.  If the government eventually repays the looted money, we can say that the government “borrowed” it, but, unfortunately, no provisions have been made for repaying the money.  Furthermore, it may not be politically feasible to raise taxes for the purpose of replacing tax revenue that was misspent in the first place.  If the looted money is never repaid, it will have clearly been “stolen” from American workers who paid the extra Social Security taxes.

            This is the hidden Social Security problem.  The trust fund holds no real assets. This was made clear by David Walker, Comptroller General of the GAO, in a speech given January 21, 2005.  Walker said, “There are no stocks or bonds or real estate in the trust fund.  It has nothing of real value to draw down.”   On April 5, 2005, President George W. Bush shocked many Americans, during a speech at West Virginia University at Parkersburg, when he openly admitted, “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.”  

            The government was successful in keeping this dirty secret from the American people for a long time, but, little by little, the secret is slipping out.  Even the 2009 Social Security Trustees Report acknowledges the problem with the following words.  “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.”  Because of the empty trust fund, in just seven years, when the cost of Social Security benefits begin to exceed payroll tax revenue for the first time in a quarter-century, either benefits will have to be decreased, or taxes will have to be increased.

Dr. Allen W. Smith, is Professor of Economics, Emeritus, Eastern Illinois University.  The author of seven books, Smith has been researching and writing about Social Security financing for the past ten years.  Visit his website at Click here.