THE MYTH OF SOCIAL SECURITY/MEDICARE TRUST FUNDS
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A popular myth, circulated by members of Congress and others, seeks to reassure retirees of the solvency of the Social Security Trust Funds, claiming that surplus funds collected in Social Security and Medicare payroll taxes has been set aside as reserves to pay for anticipated retirement needs of the large Baby Boom generations in the coming years. This claim is patently false and misleading as will be explained below.
Pre–funding Social Security?
Prior to being appointed Fed Chairman, in 1983 Alan Greenspan and his Commission documented the need for raising a surplus to meet the anticipated Social Security and Medicare needs of the large Baby-Boom Generation. Congress went along, boosting the payroll tax rate (employer/employee contribution), from 8.1% in 1980 to 15.3% an increase of 88%.
However, Congress completely undermines the whole idea of pre-funding predictable increases in future needs by raiding the surpluses accumulated in the various trust funds to pay for current, non-related, questionable outlays, like “long wars” and tax cuts for the rich. Since payroll taxes weigh most heavily on the lower-tier wage earners, the diversion of trust fund monies to non-related purposes illustrates how the rich and powerful elite set the principle of progressive taxation on its head, shifting the burden of government from the rich to the rest. Billionaire Warren Buffet asks why should his secretary pay a higher rate of tax than he does.
Having emptied the trust funds, Congress engages in the fiction of investing the surpluses in newly minted government bonds. But what’s the point? It’s the national equivalent of you funding your retirement plan with personal IOUs.
It is worth a brief detour to understand this misleading bit of fiscal legerdemain:
It would be acceptable if, instead of spending the surplus each year on non-trust-related expenses, the government saved the money, using it to repurchase existing U.S. Government bonds from the public and holding those bonds in the trust as a reserve against future Trust obligations. In so doing the Government would temporarily reduce the national debt held by the public while holding the repurchased bonds as a reserve within the trust to be re-sold to the public when the money is needed. In effect, the purchase of existing bonds creates unused debt capacity to be tapped later when the need arises. Accordingly, (other things being equal) when the Government eventually re-sold these bonds back to the public to meet the trust fund’s needs, the net effect on the national debt would be a wash; the Government would pay for trust needs without having increased the national debt over what it was before the purchase of existing bonds, as the Greenspan Commission intended.
The problem arises when, instead of using the surplus to buy existing government bonds, the Government spends the surplus on non-related government expenses – wars, defense contracts, tax cuts and routine government bills. Therefore, there is no money left for the purchase of existing government bonds from the public and thereby reduce the national debt temporarily so as to create unused debt capacity. Instead, having spent the surplus, the Government simply inserts un-issued new bonds into the trust funds, creating the illusion of a pre-funded trust surplus. When the Government later sells these newly-issued bonds to meet the trust fund’s obligations, the debt in the hands of the public will rise by the same amount, rather than breaking even as would have been the case if existing bonds were purchased with the surplus. At the end of the day, the net effect on the national debt is the same as if the government simply borrowed the money at the time of need -- money the younger generations will have to come up with. Consequently, the government bonds held in the trust funds are simply an indication of the money the Government intends to borrow when the need arises.
If you are still confused about the difference between the Trust Funds investing the surplus to buy existing bonds, and spending the surplus and inserting new, un-issued bonds into the Trust Funds, perhaps a simplified example will help:
Let’s posit a government with 1 billion in debt (bonds) in the hands of the public, and taxes bringing in $400 million over and above current Social Security needs in a year.
Government saves the surplus, and buys $400 million of the $1 billion of existing (previously issued) bonds in the hands of the public, reducing the national debt in the hands of the public to $600 million, and placing $400 million of existing bonds in the trust funds.
Baby boomers retire the next year creating a Social Security deficit of $400 billion, so to cover the deficit the Social Security Trust Fund sells its $400 of previously issued bonds to fill in the gap. The debt in the hands of the public returns to $1 billion.
Government spends the surplus, leaving the national debt at $1 billion and puts $400 billion of new, un-issued bonds in the Trust Funds.
Baby Boomers retire the next year creating a Social Security deficit of $400 million, so the Social Security Trust Fund sells its $400 billion of new un-issued bonds to the public, raising the national debt in the hands of the public to $1.4 billion.
In the private sector the second type of transaction would be accounted for as “unfunded pension liability.”
Accordingly, the trust fund surpluses funded with new, un-issued debt, therefore, are fictions. In perpetrating this fraud, Washington relies on the public’s inability to distinguish between the purchases of existing government bonds and the insertion of new, unissued bonds in the trust funds. There are bonds in the Trust Funds in both instances, with vastly different consequences for the national debt.
Bottom line: The Social Security and Medicare Trust Funds are not solvent. (One wag quipped: “The Trust Funds are neither funded nor can they be trusted.”) The benefits payable to the retiring Baby Boom generation will soon vastly exceed the current revenues collected, so the ability of the Trust Funds to meet their obligations will depend entirely on the government’s ability to borrow the additional funds needed to make up the difference. At a time when the national debt is soaring, the nation’s credit rating has been downgraded and the Republicans are seeking to reduce “entitlements” and balk at raising the national debt limit, the ability of Social Security and Medicare to fulfill the promises made to retirees is open to question.
In effect, Washington squanders monies set aside by the Baby Boom generation for their government pensions and health care expenses on tax cuts for the rich and pointless ‘long wars,’ among other things, expecting younger generations to make up the shortfall when the Boomers retire. Today’s tax cuts become tomorrow’s tax increases and/or benefit reductions. Such “kick-the-can-down-the-road” policies, fostered by the rich and powerful elite, sets up eventual generational conflict and economic/financial instability.
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