The Real Crisis		The Trust Fund Contains No Real Assets  There seems to be a major misunderstanding as to what was supposed to happen as a result of the 1983 Social Security tax increases, and what actually happened.  Below are comparisons of “what was supposed to happen” and “what actually happened.”       What Was Supposed to Happen to the Revenue Generated by 1983 Social Security Tax Increase       Investment The funds were supposed to be invested in already existing government securities in order to pay down the publicly-held debt dollar for dollar with Social Security surpluses.  Since current law required that the money be invested in government securities, the closest thing to putting it in the bank was to use the money to pay down the public debt during the surplus years and then borrow the money back when it was needed beginning in 2018.   Long-term Effect If this practice had been followed, the public debt would now be lower by $1.5 trillion, ($5.6 trillion instead of the current $7.1 trillion) and interest earned on the investment would have been reinvested in additional securities held by the public. The federal government would have spent $1.5 trillion less unless they had raised taxes to fund additional spending.  Asset Value If the money had been invested in marketable government securities, the securities could have been cashed in whenever needed without any additional government action. The fund would be truly capable of paying full benefits until 2042. Interest Received on Investment Actual interest payments would have been made which would have been invested in additional marketable government securities.                What Actually Happened to the Revenue Generated by the 1983 Social Security Tax Increase           Investment The funds were not invested in any existing marketable securities.  Instead, the government treated the revenue from the tax increase as if it were new spending authority.  The government used every dollar to fund other spending programs and tax cuts, and not a dollar was paid down on the public debt. Long-term Effect The government spent $1.5 trillion more than it could have spent without the existence of the Social Security surplus.  The public debt is now $1.5 trillion higher than it would have been if the government had not had access to the Social Security money.  Instead of having received real interest payments, the trust fund has only non-marketable special issue securities which are nothing more than bookkeeping entries telling how much interest the government owes (but has not paid) to Social Security.   Asset Value The $1.5 trillion of government special-issue securities which the trust fund holds are non-marketable and thus are worthless until and unless the government at some point in the future decides to repay the money it has “borrowed.”  They cannot be sold at any price.  Beginning in 2018 when the Social Security trust fund will start running annual deficits, full benefits cannot be paid unless the government chooses to begin paying back the money it owes.  Interest Received on Investment The Social Security trust fund has not received a dime in interest payments.  All it has is the bookkeeping entries that tell how much the government was supposed to have paid in interest.  In the truest sense, the money is not really invested.  It has just been taken by the governments and replaced with non-marketable government securities that are the equivalent of a note that a bank robber might leave in the vault telling how much money he has taken.                We, the American people, have been played for fools and suckers by our government over the past two decades.  Every president, and most members of Congress from both political parties, have knowingly and willingly participated in major fraud against the American public for partisan political reasons.  The large Social Security surpluses generated by the 1983 tax increase allowed politicians to spend massive amounts of additional money without having to suffer the consequences of raising taxes.  The true size of the federal budget deficit has been masked in an effort to fool the public.  For example, the true size of the 2004 on-budget deficit (excluding Social Security) is reported by the OMB as $639 billion.  The Social Security surplus for 2004 is $164 billion.  By subtracting the Social Security surplus from the on-budget deficit (a practice that is prohibited by the 1990 Budget Enforcement Act) they arrive at a deficit number of $475 billion.  This is the number that is reported to the public which is $164 billion less than the real deficit.       The points that I am making are not newly recognized facts.  The government has known what it was doing from the very beginning.  We know this because the Congressional Record records the efforts of a few honest members of Congress who repeatedly battled against the fraudulent practices of their colleagues.  Below are excerpts from a speech made on the Senate floor by South Carolina Senator Ernest “Fritz”Hollings on October 13, 1989:   “We arrive at that fanciful…projection only by indulging in enough fraud and larceny and malfeasance to land an ordinary citizen in the penitentiary.  Of course, the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund in order to mask the true size of the deficit.  As we all know, the Social Security payroll tax has become a money machine for the U.S. Treasury, generating fantastic revenue surpluses in excess of the costs of the Social Security program.  Excess Social Security tax revenues will be $65 billion in 1990 alone—boosted by yet another rise in the Social Security tax rate, slated to kick in January 1.  By 1993, the annual Social Security surplus will soar to $99 billion.   The public fully supported enactment of hefty new Social Security taxes in 1983 to ensure the retirement program’s long-term solvency and credibility.  The promise was that today’s huge surpluses would be set safely aside in a trust fund to provide for baby-boomer retirees in the next century.    Well, look again.  The Treasury is siphoning off every dollar of the Social Security surplus to meet current operating expenses of the Government.  By thus reducing the deficit, we mask the true enormity of the Federal budget crisis while creating the illusion that Congress and the administration are actually doing something about deficits.   Mr. President, our proposed amendment, which we intend to attach to the debt-ceiling bill, would put Social Security surpluses off budget for purposes of calculating the Federal budget deficit beginning October 1, the first day of fiscal 1990.  Those IOU’s are a charming bookkeeping nicety, but the sheriff who tries to collect on them is truly going to have his work cut out for him.    The hard fact is that, in the next century, the Social Security system will find itself paying out vastly more in benefits than it is taking in through payroll taxes.  And the American people will wake up to the reality that those IOU’s in the trust fund vault are a 21st century version of Confederate banknotes.        Of course, the Treasury would have the option of raising taxes to repay the astronomical sums we have borrowed from the trust fund.  But that would be a brazen ripoff of working Americans, many of whom will be retirees obliged to pay a second time for the benefits they have already earned.   On the other hand, if the Treasury wimps out and chooses not to raise taxes to reimburse the trust fund, then there will be no alternative but to slash Social Security benefits.  The most likely scenario is that Social Security payments would be turned into just another means-tested welfare program for the very poor; if you make more than say, $15,000 per year, then forget about collecting any Social Security benefits.    Any way you slice it, it is a lousy public policy to borrow massively from the Social Security trust fund with no credible plan for reimbursement.  Of course, the immediate damage from this approach is that it allows us to mask the true scale of the Federal budget deficit, thus making it easier for us politicians to sit on our hands.   This is a gross breach of faith with the American people.  Social Security is perhaps the most successful social program ever enacted by the Federal Government.  Without question, it is the most effective antipoverty program in history.  Social Security is not charity or welfare.  On the contrary, it is a supplementary retirement fund that workers pay for with their hard-earned money.    I say it is time to stop playing games with Social Security and the government’s finances.  It is time to use honest budget numbers and to make honest budget choices.  By all means, let us begin by putting Social Security truly in trust and totally off budget.”    These words were uttered by Senator Hollings more than 14 years ago during the early days of the looting.  There is no doubt that government officials knew exactly what they were doing to the future of Social Security by looting those funds.  But they just thumbed their noses at the public and continued their illegal looting.  This makes my blood boil, and I think it would anger most Americans if they only knew what was going on.  But for some reason the AARP doesn’t seem bothered by this atrocity.  In order to fix Social Security, it would be necessary to repeal George W. Bush’s unaffordable tax cuts.  Is it possible that the leadership of the AARP would prefer to keep their tax cuts even if it meant letting Social Security go down the drain?  I hope not, but they continue to refuse to take a stand on Social Security restitution.  Perhaps they need to be pressured by their members.       Why the Government Is Unlikely to Repay The Looted Social Security Money                  Many people seem to be missing the primary point as to why the government is likely to default on its debt to Social Security at some point in the future unless action is taken now.  It is not a question of “will” or “will not.”  It is a question of “can” or “cannot.”  The amount of money that the government would have to pay from its general revenue fund to repay its debt to Social Security on an annual basis just to keep Social Security afloat on a year-by-year basis is staggering.  I can’t see future presidents and Congresses being willing to commit political suicide by enacting massive tax increases to correct problems from previous administrations.  It also may not be possible for the government to borrow the money at reasonable interest rates to pay the huge sums.  As the United States becomes increasingly dependent on foreign lenders to fund our huge deficits, our credit rating in the view of the rest of the world declines.                The data below are taken from Table VI.F9 of the 2004 Social Security Trustees Report—the same report that the AARP cites as proof that Social Security has sufficient assets to pay full benefits until 2042.       Receipts, Outlays, and Surplus or Deficit of the Combined OASI and DI Trust Funds, in Current Dollars for Selected Years (In Billions of Dollars)   Calendar Year Payroll Tax Revenue Total Benefit Cost Surplus or Deficit Action Required by Government in Order for Full Social Security Benefits to be Paid. 2015   973.1   926.8   46.3 surplus  No action required.  Social Security fund will still be running a surplus.     2020 1,213.9 1,299.4   85.5 deficit Government must repay $85.5 billion to Social Security.     2025 1,501.1 1,782.2  281.1 deficit Government must repay $281.1 billion to Social Security.     2030 1,852.1 2,364.0  511.9 deficit Government must repay $511.9 billion to Social Security.     2035 2,285.3 3,032.3  747.0 deficit Government must repay $747.0 billion to Social Security.   2040 2,817.9 3,777.7  959.8 deficit Government must repay $959.8 billion to Social Security.     Source: Table VI.F9. 2004 OASDI Trustees Report   Note that in the year 2035 the government would have to spend $747 billion to pay enough back interest and principle on their debt to Social Security so that full benefits could be paid.  That is approximately 1/3 of the entire 2004 budget of $2.27 trillion which does not contain a single dollar for this soon-to-be line item.  In 2040 (still within the time frame that the AARP says the fund will be able to pay full benefits), the government will have to come up with nearly $1 trillion to pay this new line item.  That is more than double what we have budgeted for national defense in 2004!   When we talk about what the government will or will not do at different time periods, we are talking about different groups of people.  Who will be the president in 2035?  What will be the makeup of the Congress in that year?  This will be determined by the voters who may feel very differently then than voters feel today.   Suppose one political party favors big tax increases in order for the government to honor its past commitments but the other major party runs on a platform to default on the debt and spare the people the burden of the tax increases.  Which party do you believe will win?  And if a party is put into power by voters who favor defaulting do you think they will turn their backs on their supporters?    Allen W. Smith, Ph.D. The Looting of Social Security Q&A     Allen, The Looting of Social Security, is an eye-opening account of how the government is draining America's retirement account.  Why aren't more people shocked or outraged?                                                                                                            Most people don’t know about the looting. They actually think that their Social Security contributions are going into a fund from which they will someday draw benefits.  Most of them would probably be shocked and outraged if they knew that Social Security is operated like a giant Ponzi scheme.  Every penny that comes in each year is spent that year.  Once Social Security benefits are paid, the money left over is used by the government just as if it were general revenue.  People who retired 20 years ago receive their benefits from the current year’s revenue because all the money paid into the fund in the past has already been spent.                 How did this happen?  Wasn’t Social Security supposed to be sacred—tucked away in a lock box?      When Al Gore proposed putting Social Security in a “lockbox” during the 2000 presidential campaign, Bush promised to do the same thing.  And in his first State of the Union address, George W. Bush said, …”To make sure the retirement savings of America’s seniors are not diverted in any other program, my budget protects all $2.6 trillion of the Social Security surplus for Social Security and for Social Security alone.”  I don’t think most people know that Bush broke his promise and looted every dollar of Social Security surplus that became available on his watch and used it to fund his huge tax cuts for the rich.          You blame the last four presidents—Reagan, Bush, Sr., Clinton, and George W. for taking money out of the Social Security trust fund, but is it true that our current president plundered the fund like no other president, just so he could finance his multi-trillion-dollar tax cut for the rich?.    Each of the four presidents mentioned did use Social Security revenue for non-Social Security purposes.  However, the amount of surplus resulting from the 1983 tax hike has become larger and larger each year, and thus there has been more available to each successive president. Reagan, Bush Sr., and Clinton used Social Security money to supplement general revenue in paying for government programs.  However, George W. Bush inherited a federal budget that had experienced the first two true surpluses in 40 years and a booming economy. He told the American people that his tax cuts were affordable and would not result in a return to deficits or the use of Social Security funds.  He broke both promises.              Can citizens sue or do something about this theft on an unprecedented scale?   Citizens can’t sue, but they can certainly do something about this terrible  injustice.  The women’s suffrage and civil rights movements are examples of movements that succeeded because the people became so angry that they demanded change.  The American citizens must make the politicians feel the heat of their anger. I would very much like to see protestors with signs that read, “Stop Looting Social Security!” begin showing up at every political rally that Bush and Kerry attends.  If this happened, the message would spread rapidly throughout the country. Young Americans must recognize that they will suffer a great deal more than senior citizens from this injustice.  It is the contributions of currently working Americans that is being looted.            At the rate we’re going, will there really be a Social Security system in place for the next generation to bank on.   That depends on whether Americans allow the politicians to get by with ripping them off on a scale never before imagined.  I certainly intend to do everything in my power to keep this from happening, and other Americans are also rallying against this terrible fraud by our government.  After reading my book in February, two Idaho residents, Jerry Grusell and Dominique Tardif, launched a national grass roots movement, The Citizens’ Coalition for Social Security Restitution, to help save Social Security.  They are doing a terrific job and have an excellent website, www.restoresocialsecurity.org , that I urge everyone to visit.           Allen, you have written numerous books in your crusade against economic illiteracy and against the looting of Social Security.  Do you believe that Baby Boomers have the knowledge, skills, and resources to retire without worry.   Some do and some don’t.  Those who have other retirement programs and/or sizeable savings will be okay.  But those who will depend mostly or exclusively on Social Security will have a tough time even if Social Security continues to pay full benefits.  If Social Security benefits are reduced in the future as Alan Greenspan has recommended, many of the retired will probably have to seek part-time employment just to make ends meet.            Federal Reserve Chairman Alan Greenspan has proposed cutting Social Security to deal with the federal deficit.  Why is this a bad idea?   When they reach retirement age, American workers will have paid sufficient Social Security payroll taxes to fund full benefit payments until at least 2042.  The only reason there is a problem is that the government has spent Social Security on other things, including the financing of large income tax cuts for the wealthy. It would be outrageously unfair for retired workers to be penalized for the misdeeds of politicians.  Furthermore, those who are living exclusively on Social Security are barely subsisting even with full benefits.  To cut their benefits to deal with a deficit that was largely caused by income tax cuts for the rich would be a gross violation of American principles.           Should we push back the retirement age to delay people from collecting their benefits?    The 1983 Social Security amendments provided for a gradual increase in the retirement age from 65 to 66 by the year 2009 and to 67 by 2027.  The rationale for doing this was primarily that people live longer now than they did when the Social Security program was enacted in 1935.  Some are suggesting that the retirement age gradually be raised to 70 at some point in the future.  I oppose raising the retirement age any higher than age 67.  Many people do not live to be 67, and many others have major health problems by that age.  I think it is a part of the American dream to have a few of the so-called “golden years” before we die, so I don’t believe we should shatter that dream.            Are you serious about having Greenspan step down or having Congress call for a vote of no confidence in him?  Why?   Alan Greenspan has overstepped the boundaries of his position as Fed chairman and entered the forbidden land of partisan politics.  When Greenspan publicly voiced his opinion that future Social Security benefits should be cut, that announcement reflected his conservative political views, and he took advantage of his position in the limelight to make those views as widely known as possible. Greenspan has kept his mouth shut while the government looted the Social Security funds, and now he speaks out about cutting Social Security benefits without any reference to the government looting that put Social Security in jeopardy. Yes, I think the country will be better off when Greenspan is no longer Fed chairman.               Can you explain how Bush is deliberately keeping from the public the connection between the deficit, his tax cuts, and the missing Social Security money?   The last thing the American people heard from the lips of George W. Bush about the Social Security surplus was the emphatic promise he made in his first State of the Union message to keep his hands off the Social Security money.  Many Americans probably believe that Bush has kept that promise.  He has not.  He has looted every dollar of the Social Security surplus that became available during his presidency and used the money to fund large income tax cuts for the rich. The news has been so dominated by the war that there has been limited coverage of the huge deficits and no coverage of the missing Social Security money.              Aside from the accounting misdeeds of Bush and other presidents as it relates to Social Security, is the system at risk of insolvency based on the huge number of Baby Boomers who will require a lot of benefits?   The answer is no.  The problem of funding the retirement of the baby boomers was “fixed” in 1983.  The increased Social Security taxes were specifically for building up a reserve in the Social Security trust fund in advance of the retirement of the baby boomers, so that reserve could be used to supplement the inadequate payroll tax revenue that will be coming in after 2018.  If the money had not been looted, there would be no solvency problem until at least 2042, and that problem could be corrected with some minor reforms in the program.             In 1935—almost seventy years ago—Social Security came to be.  By 1983 it was in trouble and the system was amended, allowing for more money to go into the SS system than was being paid out in benefits, providing a $1.5 trillion surplus.  But you’re saying it’s all gone now?   That’s correct.  Every cent of that $1.5 trillion has been “borrowed” by the government and spent on other things.  The government has treated the surplus Social Security money as if it were general revenue with no restrictions on its use.  It has been used to help fund national defense, general operating expenses, pork-barrel legislation, and, under George W. Bush, income tax cuts for the very rich.  “Borrowed” is probably not the right word to use because it implies repayment.  The government has made no provisions for repayment of the money and has no means with which to repay it. A better description of what has happened is that the money has been “embezzled” or “stolen” by the federal government.   What can be done to ward off the impending crisis?   There should be an immediate moratorium on the spending of any additional Social Security money for non-Social Security purposes. Legislation must be enacted to establish a repayment plan for gradually repaying the $1.5 trillion that has already been looted.  Since the Social Security trustees are required to invest surpluses in government securities, all future such investments must be in regular marketable securities that are already in circulation. This will result in temporarily paying down the national debt with surplus Social Security money.  When the money is need the trustees could simply cash in securities.  The trustees should also be given authority to invest a portion of the surplus money in the stock market.                                                                                How dependent is America on Social Security?   Most Americans have come to depend on Social Security as something that is guaranteed.  Some have private pension plans and savings to supplement their Social Security income, but Social Security benefits are the foundation upon which retirement plans are built for all except the very wealthy.  People have become conditioned to think of Social Security as an absolutely sure thing.  Their private pension might go broke, and the return on their investments are very “iffy,” but they feel certain that their Social Security benefit checks will come every month.  If Social Security as we have come to know it were to come to an end, it would have a devastating impact on most Americans.           Is there a hidden agenda for George W. Bush?   Yes.  I believe the primary motivation behind the Bush tax cuts was to “starve to death” the social programs that conservatives hate so much.  I don’t think Bush believed for a minute that we could have big tax cuts, pay down the debt, protect the Social Security surplus and avoid a return to deficits, as he said over and over.  He understood that the tax cuts would result in huge budget deficits that would necessitate major spending cuts. I believe Bush would like to see Social Security and most other government social programs wither on the vine for lack of funds.  That is his hidden agenda.                       As an economist, how do you rank Bush’s economic policy, as it relates to jobs, taxes, Social Security, and other key indicators?   When economist George Akerlof, winner of the 2001 Nobel Prize in Economics, was asked about the economic policies of George W. Bush, he responded, “They’re the worst in over 200 years.”  I agree with Akerlof.  Bush’s economic policies are not economic policies at all.  They are political policies designed to accomplish the goals of conservatives which are to dismantle much of the federal government. A college student who had taken a single economics class could put together a set of economic policies that would be far superior to the Bush policies.                 Bush seems to support Reaganomics, but didn’t that policy prove to be a failure?    Yes.  Reaganomics had catastrophic long-term effects on the economy and the federal budget.  Despite all the rhetoric to the contrary during Reagan’s funeral, the economy performed poorly during his presidency.  Unemployment rates soared to their highest levels since the Great Depression of the 1930s.  The average annual unemployment rate for Reagan’s full 8-year presidency was 7.5 percent. Since the Great Depression, only in 1975 and 1976, under Ford, had the unemployment rate been this high for even a single year, let alone an 8-year average.  In addition, the Reagan tax cuts resulted in record budget deficits and a four-fold increase in the national debt from $1 trillion in 1981 to $4 trillion when Bush left office in 1993.                               We’ve been warned about the national debt for years but it seems like few care about it.  Are we any worse off with the debt being 7.2 trillion dollars right now?                                                                                                  Yes, we are a lot worse off.  The national debt first reached the $1 trillion mark in 1981.  It had taken nearly 200 years and the combined deficits of all the presidents from George Washington through Jimmy Carter to accumulate that first $1 trillion of debt.  Today the national debt is more than seven times as much as it was 23 years ago.  Interest on the national debt is costing American taxpayers approximately $1 billion per day, and the long term effect of large deficits and a growing national debt will be to force interest rate up which will in turn put a drag on the economy.