Social Security: The Phony Crisis

April 26, 1997

Mark Weisbrot
Portland Oregonian, April 26, 1997

Miami Herald,
May 28, 1997

It won’t get much attention outside the Beltway, but the annual report of the Social Security Trustees was released on Thursday. It’s a shame that hardly anyone reads the thing.

One person who ought to read it is Senator Bob Kerrey, Democrat of Nebraska and one of the nation’s most prominent advocates of Social Security “reform.” Just last week he had an article in the Washington Post in which he warned readers of Social Security’s “looming insolvency.”

Please. Social Security’s financial difficulties are about 35 years away, even under fairly pessimistic assumptions about our economy. The baby boomers will all be retired before it even begins to run into trouble. And even after 35 years the program would need only minor adjustments to keep it solvent.

But Kerrey’s gross exaggeration is typical of those who wish to privatize, cut, or otherwise “reform” Social Security. They have a small arsenal of tricks that they use to undermine public confidence in the system.

One of these is to pretend that 2012 is the crisis year– just 15 years away. This misrepresentation has gained a sizeable, if confused following in high places, and has greatly distorted the debate. So it is worth the effort– if you have the patience for a few technical details– to take a closer look at the sleight of hand that is involved here.

Social Security is financed with a payroll tax. The money taken out of your paycheck, as well as the employer’s contribution, goes into the Social Security Trust Fund. This fund is then used to pay current benefits to retirees. When the taxes collected are greater than payouts– as they are now by about $70 billion a year– the surplus accumulates in the Trust Fund.

Since it would be kind of dumb not to get some return on all that money, the Trustees buy bonds from the U.S. government. These bonds are about the safest investment anyone can make anywhere in the world, and are earning about 6.4% a year for the Social Security Trust Fund.

The first baby boomers will begin to retire about 2008. By about 2012 the benefits paid by the system will exceed the money coming in from payroll taxes.

The “reformers” argue on this basis that Social Security will be in trouble in 2012. But this is like saying that Bill Gates would have trouble paying his mortgage if he left his job at Microsoft.

The fund will have more than $1.2 trillion in assets (in today’s dollars) at that point. It will also have another $575 billion dollars coming in from payroll taxes, as well as interest payments. With this income, and by cashing in its bonds in later years, the fund will continue to pay full benefits without interruption until 2030. That will retire the whole baby boom generation.

The alarmists are not so easily turned back. “But,” they object, “when the Trust Fund cashes in its bonds, the government will have to find money somewhere. So Social Security– or some other spending– will have to be cut.” On this basis they dismiss the Trust Fund’s assets as “mere pieces of paper,” or “the government owing money to itself.” With a quick hand motion to divert the unsuspecting audience, the trust fund vanishes. And so does the distinction between Social Security payroll taxes and the rest of government revenue. It’s all just one big pot of money coming in, and one pot of money pouring out.

It’s a clever trick. It is indeed true that the government will have to increasingly borrow from other sources as the Social Security surplus shrinks. But what does that have to do with the solvency of the Social Security system? Answer: nothing.

One way to see this is to imagine that the Social Security trust fund were not invested in government bonds at all, but rather in private stocks and bonds. In this case, when the system’s payouts began to exceed its income, the fund would begin cashing in its portfolio. The proceeds would be used to help pay benefits, right up to 2030. Nobody would be able to raise any doubts about Social Security’s financing.

It is difficult to see why the composition of the Trust Fund’s portfolio should make any difference. The alarmists would have us believe that the Social Security Trust Fund is not a separate entity, simply because its surplus is invested in U.S. government bonds. This contradicts the entire history of the system, as well as the law itself. For 60 years taxpayers have paid specially designated payroll taxes, and received their benefits from these same funds.

What does it mean, then, to say that Social Security must be cut, rather than the government simply meeting its obligations to the Trust Fund? When the government bonds held by Bill Gates or Ross Perot or any other wealthy individual– or pension fund for that matter– mature, nobody proposes that they should not be paid their principal. Yet the reformers insist that the 140 million Americans who loaned money to the U.S. Treasury from their Social Security Trust Fund somehow don’t have the same claim to be paid back.

If this kind of reasoning seems legal or ethical to you, join the club of well-financed Washington lobbyists for “entitlement reform”– the latest euphemism for balancing the budget on the backs of the elderly.

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