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(This article originally appeared in The Wanderer and is reprinted with permission. To subscribe call 651-224-5733.)
The American bishops understand this. In their pastoral letter Economic Justice for All, they wrote that when the Church teaches on matters of economic justice “it does not embrace any particular theory of how the economy works, nor does it attempt to resolve the disputes between different schools of economic thought.” Pope John Paul II has repeatedly made the same point in his encyclicals on social justice.
Still, truth matters. If a deception of the voters is taking place, a spotlight should be thrown on the scam. The Social Security trust fund is a scam. There is a need to express in simple language how the average person is being fooled on this question. Thomas Bray, a staff columnist at the Detroit News, takes a stab at the task in a recent column in the Wall Street Journal (July 16th). He pulls no punches. He calls the Social Security system a “no-account system.”
Bray observes that the “Democrats are already cutting ads warning voters of Republican schemes” to privatize part of the Social Security system, hoping that voter anxiety over the current stock market slide will make them wary of the “Wall Street crapshoot.” Bray quotes Senate Majority Leader Tom Daschle: “After what’s happened to the stock market in the last few weeks, we think it’s a terrible idea” to consider privatization. Bray adds that “the media are providing a steady backdrop of scary stories about the riskiness of markets. ‘Stock Slide is Playing Havoc with Older Americans’ Dreams,’ headlined The New York Times.”
The problem with the Times’ logic is that the Social Security system is on track to play even greater havoc. Bray: “When you think about it, though, what is there to count on with Social Security? If you thought WorldCom accounting was outrageous, you have to be panic-stricken by the way the federal government accounts for your ‘guaranteed’ benefits under Social Security.” The money we have paid in Social Security taxes “for decades was used for general fund purposes, leaving the trust fund with a mountain of nonnegotiable IOUs from the U.S. Treasury – to be repaid from higher taxes down the road. Talk about phony accounting.”
As a result, says Bray, “By 2017, the Social Security system is scheduled to begin running a deficit. By 2041, the deficit could accumulate to $25 trillion. To avoid that would require either a 25% reduction in benefits” for those receiving Social Security at the time, “or an increase in Social Security taxes to 17%” from the current rate of 12.4%.
In case there is someone who does not get what Bray is saying, let’s say it loud and clear: There is no money in the Social Security trust fund. The politicians have created an illusion that the “trust fund” will somehow provide for the large numbers of baby boomers when they retire. They tell us that that they have been making us pay more in Social Security taxes than is needed to pay the benefits of the current generation of Social Security recipients to provide for the baby boomers. But they do not let those excess funds sit there as if they were in a bank account. They use them to buy Treasury securities, and then spend the money. Those Treasury securities are all that is in the trust fund.
Treasury securities might be a good investment for you or me. We loan the government our money; they promise to repay it, plus interest at a future date. The government takes our money and uses it for general government expenses; taxpayers in the future have to come up with the bucks to pay us back. A nice, safe investment.
But, whatever you think of Treasury securities as personal investment, the one thing that cannot be denied is that they create an obligation for taxpayers of the future to come up with tax dollars to pay back those who loaned the money to the government in the first place. That’s the deal.
So think about what would happen if there were no Social Security trust fund. In that case, when all the baby boomers retire, the taxpayers at that time would have to come up with enormous amounts of money to pay for their Social Security benefits.
With the trust fund in existence, the same thing happens. All those government bonds are sitting in the trust fund. The taxpayers of the future will have to come up with enormous amounts of money to redeem the bonds as they reach maturity. That is where the cash will come from to pay the Social Security benefits of the baby boomers. Which means that nothing has been gained, unless you think it an advantage for the current generation of politicians to posture as if they are doing something to “save” Social Security by placing this obligation on the taxpayers of the future, who will not be casting any votes in any of these politicians’ re-election campaigns. “Social Security,” observes Bray, “is the classic example of how the view of a congressman seldom extends beyond his or her two-year election cycle.”
So, am I saying the politicians are lying to us about the Social Security trust fund? No. They don’t have to lie. This seems to be a case where large numbers of voters simply lack the understanding of Treasury securities required grasp what is happening. The politicians can rely on the voters’ confusion over what it means when funds are allocated to the Social Security trust fund. They can issue press releases and make speeches about the risky nature of the stock market, contrasting it to the “safety” of the guaranteed reserves — the “surplus” funds — they have allocated to “save” Social Security.
But, lie or not, it is a scam. One of the best ever devised by politicians, if you ask me. Think about what happens. The politicians collect billions of dollars more than they need to pay the benefits of current Social Security recipients. They then take that money and spend it, issuing government securities to the Social Security trust fund to balance the books. You may like the way they spend that money, or you may not. But the point is that they can spend it without raising income taxes to cover the costs.
Let me be more precise. They don’t have to raise taxes on the current generation of voters. They raise them on the generation of taxpayers who will be paying taxes when all the Treasury securities in the trust fund reach maturity. That money will pay for the Social Security benefits of the baby boomers. The current generation of taxpayers get the government spending; the politicians get their votes of gratitude; future generations of taxpayers get the bill. Those future taxpayers gain nothing by the sleight of hand. Neat. Sad.
