Has Social Security (Ever) Been Raided?

Social Security is always being raided. And some brave person – typically an elected official or someone aspiring to be – is always vowing to stop this outrage before our retirement system is drained to the dregs. That’s just how it is in mad-as-hell America, where righteous indignation comes slickly packaged and accurately defining one’s terms is an unnecessary formality.

“Don’t raid Social Security to reduce nation’s deficit,” pleads the AARP. Meanwhile, right-wing gold bugs are warning us that a “huge pot of U.S. Social Security money” is “vulnerable to being tapped by illegal alien workers.” And over on Capitol Hill, intrepid Sen. Jim DeMint promotes a “Stop the Raid” amendment, protesting that “It’s time for politicians to stop stealing from our seniors to secretly finance trillions in wasteful Washington spending.”

The Great Social Security Raid has become the Sasquatch of American politics: the creature that’s always out there but never clearly seen, the monster just under our noses or just beyond our field of vision. We think we know it’s there. But everyone uses the same word to describe something different.

Let’s see if we can chase this thing down. First of all, no one talked about a “raid” until the trust funds began to grow into a substantial amount pool of assets following the 1983 Amendments to the Social Security Act. Critics then began to complain that the trust funds had been “raided” because after using most of our payroll taxes to pay benefits to the current crop of retirees, survivors, and disabled, the Treasury Department borrows the remainder to use for whatever else it damn well pleases, sticking workers with a fistful – actually, a file cabinet-ful – of IOUs.

Another way to look at the transaction, however, is that the Social Security trust funds use the money left over after benefits are paid to buy Treasury bonds. Either the “assets” in the trust funds are worthless chits, or they are the safest investment in the world. But the excess tax revenues have to be invested in something.

Critics of Social Security like to point out that the Treasuries in the Social Security trust funds aren’t like the ones individuals or the Bank of Japan buy, because they’re not negotiable. The trustees can’t turn around and sell them to some other investor. Effectively, one part of the federal government – the Social Security system – has made a loan to another part – the Treasury. That’s not “real” investment, that’s a shell game. Or, stretching the definition, a raid.

The problem is that the commitments behind those Treasury bonds are legally just as enforceable as the ones that trade on the open market. Social Security receives interest on them. As soon as Social Security needs the money back to pay some of the benefits it owes, the Treasury is obliged to redeem them at full value (it’s been doing so this year, in fact, since the recession pushed payroll tax collections below the level needed to pay all current benefits). To not do so would be just as serious a legal breach as to change the terms of the deal on the bonds in the Bank of Japan’s vaults. Until that happens, there’s been no raid.

Often, what the critics really mean when they talk about a Social Security “raid” isn’t that something’s been stolen, but that they don’t like how those payroll taxes receipts have been invested. Safe and sound as they may be, Treasuries aren’t “real” investments, which would be in private-sector instruments like stocks and corporate bonds. But according to the critics, if the assets are to be invested in private-company securities, this shouldn’t be done through the trust funds, which are ultimately controlled by the presidential appointees on the Social Security’s board of trustees. As Alan Greenspan once put it, “even with Herculean efforts, I doubt it would be feasible to insulate, over the long run, the trust funds from political pressures.”

So here we have yet another form of “raid”: a culture of corruption growing up around the trust fund’s investments. The only way to prevent it, according to free market fans, is to give individual workers the right to investment some portion of their payroll taxes in the form of private accounts. The raid can only be stopped, in other words, if the money is given back to the people who paid it in.

But wouldn’t that lead to yet another kind of raid? Most privatization proposals wouldn’t actually give the people their money back. They’d be given a the choice of allocating their payroll tax dollars between a select group of investment vehicles, all run by prominent financial services firms. Is the purpose here to help working people earn a higher return on their investments? Or is it to prop up an overvalued stock market – and provide Wall Street with the steady, fee-based incomes it needs to cushion its high-stakes gambling – er, trading – desks? If the latter, who’s doing the raiding?

OK, let’s get realistic. If by “raid” we simply mean that Washington has been able to “use” our payroll taxes for something other than supporting Social Security, then there might be a case to be made. The Reagan administration famously used the hike in payroll tax receipts in the 1980s – which was already scheduled in the 1977 Amendments, Reagan and Congress just moved the dates up – to compensate for the tax cuts he’d pushed through in 1981, and which had ballooned the deficit. Since then, ordinary workers’ payroll taxes have essentially be used to pay for tax cuts for the affluent.

But even this stretches the definition of a “raid.” Those payroll taxes are still used to purchase Treasury bonds. It’s the proceeds from these that cushion the federal budget from the impact of income tax cuts for the upscale. They could be used for something else – education, green energy initiatives, anti-poverty programs, etc. – and the Treasuries in the trust funds still have to be redeemed. If the trust funds are going to invest in Treasuries, Congress is going to do something with that money. It’s not going to sit on it.

The real discussion, then, needs to be about whether Congress is using the proceeds from those Treasury in ways actually help the economy to grow. But this is never really addressed in the Discourse of the Raid, which most often obscures the fact that the assets in the trust funds have been invested, not stolen. Social Security – and the pool of assets that supports it – are the property of the working Americans who pay into it. Do we want our money to be invested in tax cuts for the holders of capital? wars in the Mideast? charter schools? health care?

As long as the Treasuries in the trust funds are redeemed – as long as the federal government honors the covenants behind the bonds – there’s no raid. Except, perhaps, for one thing:

Suppose Congress decides to cut Social Security benefits. Cutting benefits, absent a corresponding cut in payroll tax rates, would mean that less of the trust fund assets are needed to pay benefits. That would lower the required rate of redemption on those Treasury bonds. And that would mean more of the money from those bonds stays in the hands of Congress for a longer period of time to spend as it pleases.

That would be playing fast-and-loose with the social compact represented by the Social Security trust funds. Workers who had paid into the system for years under one set of expectations could now look forward to getting much less for their money. And that, in a sense, would be a raid.

COMMENT:

I would like to respectfully disagree. The Social Security trust fund has indeed been raided.

I apologize for the length of my response; here is the evidence:

When the Social Security system was set up in 1935, the Trust Fund was supposed to be held “in trust” — literally – by the government for America’s citizens, because FDR was concerned about American citizens actually holding their savings until retirement (Source: David Gergen article entitled “How Much Government?”, 2010). Government was going to hold it for them.

Mr Gergen continues,

“FDR, ever the master, came up with an ingenious solution: create a program in which Americans would be asked to contribute to a social savings account that government would manage on their behalf and would be there for retirement. Instead of big government, it was to be a partnership that would encourage individual thrift and responsibility.”

Over the past 65 years, American taxpayers have paid FICA taxes. A large amount of that FICA revenue has gone to pay monthly Social Security benefits (in real-time), but a fair amount of the revenue has been above the immediate needs to pay benefits, and has accumulated as a Social Security surplus. By law, the surplus must be invested in special U.S. Treasury securities.

That Social Security surplus totals $2.5 trillion.

In 1969, in an agreement between Lyndon Johnson, Richard Nixon, and the 1969 Congress, the Social Security trust fund was brought “on budget” for the first time, allowing it to be spent for other government programs (Source: the Social Security Administration website; see Agency History). The reason was to turn an $8 billion deficit into a balanced budget.

The surplus has been spent since 1969 on non-Social Security programs, in its entirety. In its place are $2.5 trillion in Treasury Securities – IOUs, essentially. This is the raiding of the Social Security trust fund.

Here’s the rub: those IOUs can only be paid back from future borrowing or with future taxes.

Translation: America’s taxpayers will pay $5 trillion to provide $2.5 trillion in benefits.

The first $2.5 trillion were the original FICA taxes that generated the Social Security surplus; the second $2.5 trillion will be the future taxes to redeem the U.S. Treasury Securities.

Try to imagine what $2.5 trillion over the next 40 years would look like, as taxes not enacted. That’s $100 billion a year in the hands of households – for consumption and college savings and personal debt reduction and retirement savings – and in the hands of businesses, for plant expansion, new hires, pay raises and promotions, bonuses, marketing campaigns, sales promotions, research, product development, and capital projects.

That’s the competitiveness of the U.S. economy relative to other countries.

In a private retirement account, any account manager who used someone’s retirement fund for other than its intended purpose would be violating fiduciary responsibility, and his actions would be legally actionable by regulators.

Had the $2.5 trillion surplus indeed been held in trust, much of the current discussion about lowering benefits and raising the retirement age would be unnecessary, and there would be little discussion about pending insolvency of the Social Security system.

In late 2010, Mr Schwarzenegger tried to borrow $2 billion from CalPERS, California’s massive, $220 billion public employee retirement fund, to help address California’s perennial budget shortfall, with a promise that it would be a one-time event, and that government would gradually pay it back.

I’m not sure whom he was trying to kid. The state of California does not have any money – only the taxpayers do. “Government will pay it back” really means “future taxpayers will pay it back”.

In this sense, his attempt to “borrow” from the CalPERS trust fund was no different from the federal government “borrowing” from the Social Security trust fund, and leaving IOUs that can only be redeemed by future taxpayers.

By the way, CalPERS management told him “no”.

CalPERS does invest in the U.S. stock market, to generate some of the earnings that are used to pay benefits. The return they use to calculate growth of the CalPERS fund recently has been reduced from 8% to around 7.75%, to reflect the realities of the current market.

As an aside, the average return on the U.S. stock market over the past 40 years is 8.11%, and over the past 100 years it is 6.29%. I’ll let someone else do the math on what $2.5 trillion might look like had it been invested with those returns.

One could make the argument that investing in the market would put government in the position of picking winners and losers. However, CalPERS currently does so, and I suspect other states’ public employee pension funds do so as well.

There have been two articles within the past year suggesting that government be allowed to borrow from citizens’ private retirement accounts. Fortunately, the proposals have not gone anywhere, at least not yet.

I submit – the Social Security Trust Fund has indeed been raided, and as a result, America’s taxpayers will pay $5 trillion to provide $2.5 trillion in Social Security benefits.

There will never, ever be enough tax revenue to satisfy the political appetite. And Al Gore was right about the Lock-box.

Thanks for the opportunity to respond.

Respectfully,

James Schaefer

I totally agree with James Schaefer……the politicians have been illegally and criminally raiding the Social Security Trust Fund for many, many years.

I would also add that all along this was all part of a Republican party scheme to prevent raising taxes on the rich and the big corporations (hence big companies like GE pay not only pay zero taxes but they also get back billions in tax credits) while at the same time funding their pork spending projects.

And now here we are in 2011 and instead of finally doing the right thing to put back the money they stole from the Trust Fund, they are instead trying to slowly but surely destroy Social Security. First they’ll start with cutting benefits and extending the retirement age and later on they’ll come up with other ways until seniors will be left with almost nothing.

Yet I am amazed at the lack of widespread outrage and condemnation over the entire theft of our own SS Trust Fund. I recall about 25 years ago when I first realized the raid was starting and some watchdogs sounded the alarms, there was very little public interest. What a huge mistake that was.

And worse, none of our political leaders, from either party has the ethics, morals, and character to do the right thing.

It’s time for an American Revolution II. Washington is owned, run, and controlled by the special interests…….the rich, the big corporations, banks, insurance companies, and the big oil companies. They are destroying the middle class for their own financial gain and their GREED. Wake up America, they’re stealing our country. We are allowing 3% of the population to get away with the destruction of our country.

The SS Trust Fund Raid, the Bank Bailout Raid……..what’s next?

by Frank Gonzalez

I have a couple of items of clarification.

The Social Security website states that the government actually pays interest on the trust fund. It is currently around 4.62%, and I believe it does fluctuate somewhat. Of course, that interest is paid by taxpayers (you and me, and small mom-and-pop businesses, and medium and large companies).

Second item is a major correction of my original interpretation, but not of the underlying facts: the Treasuries that make up the Social Security trust fund have always been available to the rest of government for spending on other programs, since the inception of Social Security in 1935. They’re Treasuries, after all.

What changed in 1969 was how the Social Security surplus was recorded: starting in 1969, FICA revenue was included with general tax revenue as part of the overall federal budget (called the “Unified Budget”); as stated above, it turned a budget deficit into an apparent surplus. This information is public domain, available on the Social Security website, under Agency History.

The 1960s, of course, was at a time when the U.S. was much more fiscally conservative; every American citizen had parents who grew up during the depression, and grandparents who were born at the turn of the century (i.e., the last century, 1900). We were told constantly, Live below your means.

Our parents and grandparents knew what it meant to go hungry, and they had heard first-hand stories from their grandparents, who remembered the 1800s – in general, life before any of the creature comforts we have today.

We in this country have much to be thankful for – a Constitution that guarantees rights that cannot be taken away by a vote of the people; and freedoms that people around the world yearn for. We should remember that over 90% of the world would trade places with any of us, in a heartbeat.

Letter in the Wall Street Journal last year: “In the end, the fiscally prudent will own the fiscally profligate.” This is a lesson for all of us.

It applies equally to households, businesses, and governments, and all three groups need to clearly understand the difference between what we need and what we want.

Kind regards,

James Schaefer

References:

Has Social Security (Ever) Been Raided?

Social Security Online - HISTORY: Budget Treatment of Social ...

Is Social Security A Ponzi Scheme?

Social Security History FAQs Internet Myths II