LBJ And The Social Security Trust Fund

Urban legend continues to play a larger and larger role in the Social Security debate. The reason is simple.  Facts in this debate are complex, and do not lend themselves well to the pithy soundbytes which guide most modern political discourse.  Without facts, any debate degenerates into myth shouted ever louder in cliché and hyperbole.

One of the most pervasive myths in the Social Security debate suggests that President Lyndon Johnson (LBJ) stole the trust fund in order to pay for Vietnam.  So wide spread is this belief that the Social Security Administration has added it to its internet myths page.  And the audience isn’t just an out of mainstream conspiracy cult.  Former Senator Jim DeMint wrote in one of his books, “Raiding the Social Security Trust Fund was a precedent set in 1968 by another progressive president, Lyndon B. Johnson, to help pay for the Vietnam War.” 

The Social Security Administration responds directly to this claim.  The Social Security Trust Fund has never been "put into the general fund of the government."  For this myth to be fact, it would require a 50 year conspiracy that crosses administrations, political parties, and ideologies.  The only word in the English language to describe this suspicion is crazy.

The myth seems connected to LBJ’s proposal to move Social Security into the Federal budget.  In short, yes LBJ recommended that the budget process should include the revenue and expense of Social Security.  No, his recommendation did not actually move any money from Social Security.   You might consider this distinction like filing a 1040 jointly with a spouse.  While the 1040 form reports income and expense of both spouses, it does not move any money between accounts.

“A Presidential commission composed of distinguished congressional fiscal leaders and other prominent Americans recommended this year that we adopt a new budget approach. I am carrying out their recommendations in this year's budget. This budget, therefore, for the first time accurately covers all Federal expenditures and all Federal receipts, including for the first time in one budget $47 billion from the social security, Medicare, highway, and other trust funds.” 

~ State Of The Union 1968

This mythos unravels over multiple layers.  LBJ’s term as president expired before Social Security was moved into the Unified Budget process.  There is no historical record of any money moving improperly out of the Social Security Trust Fund.  And even there were a paper trail of money moving, the sums in the Trust Fund during the time of LBJ were relatively very small. 

There is a more basic problem with the idea that LBJ stole the Trust Fund: there wasn’t much money to take in 1968.  At the time, Social Security was a pay-as-you-go system, leaving almost nothing for LBJ to steal.  Prior to 1983, the excess cash collected by the system in any year peaked at 5.5 billion in 1969 which is roughly $37.5 billion in today’s money.  At the time, the entire balance of the Trust Fund was less than $29 billion, roughly 190 billion in 2014 dollars.  In contrast, the Trust Fund today is worth roughly $2.8 trillion and throws off more than $100 billion in interest alone each year.

Beyond the denial of the Social Security Administration, Snopes dismisses the possibility.  FactCheck rejects the possibility.  All of these sources reach basically the same conclusion: the process which governs the movement of money hasn’t changed since 1939.  When payroll taxes exceed the cost of benefits, the excess cash is invested in government securities.  This is no different from a private pension buying government securities, only the government gives Social Security a slightly better terms.

Social Security serves millions of people, and conducting a debate on reform based on myths and clichés is dangerous.  Today the debate is hinges more on volume than on fact which has degenerated into a collective shouting match in which the more you type the righter you are.

Social Security Crisis: The Object In The Mirror Is Larger Than It Appears

Every car sold since I was born carries a warning on the passenger side view mirror: "Objects in the mirror are closer than they appear." Car manufacturers provide this warning because the same mirror produces different views of the same traffic: one accurate and one dangerous.

 

The Social Security debate has its own set of mirrors, which creates the illusion to make the problem appear look smaller than it is. The difference here, of course, is that car manufacturers see the danger of misreading traffic, whereas those in our government want the public to misread the size of the underfunding of Social Security.

 

The problem in Social Security is that the system has made more promises than it has money. This problem is expressed as the "shortfall." The figure represents the amount of promises left over after the trust fund has been exhausted. It is total amount of promises in excess of what Social Security can pay.

 

The Trustees provide information on the "shortfall" in two different forms. One is the 75-year shortfall, and the other is the infinite shortfall. In 2013, the Trustees determined that Social Security has a shortfall of 23.1 trillion dollars over the infinite horizon, whereas the 75-year shortfall is roughly $9.6 trillion. So to believe that the 75-year "shortfall" is meaningful, you have to believe that the vast majority of Social Security's problems lie 76 years or more away. 

 

No one does, of course. Washington uses this view because it makes the problem appear smaller -- about 12 trillion dollars smaller. So it is important for readers to understand how the illusion works.

 

The illusion works by stating that costs aren't costs. Social Security is financed by making promises to current workers of future benefits. The payroll tax is recognized as revenue today. The cost of the promise isn't booked until the check is paid. The 75-year figure captures all of the revenue but only a fraction of the actual cost because it ignores the financing cost -- future benefits.

 

The calculation for the 75-year solvency number captures all of the projected revenue that falls within the 75-year window. The calculation captures only a fraction of the cost because the majority of the cost for collecting the revenue falls outside of the 75-year window. The "infinite" figure captures all revenue and the full cost to accept the revenue.

 

•  For someone who is 50 years old, it captures the next 17 years of revenue and all of the projected costs for that person, because the formulas assume that that retiree will die within the 75-year window.
• For someone who doesn't die within the 75-year window, the formula includes only the cost of benefits which should fall in the 75-year window. For the person born today, the formula will capture roughly 49 years of taxes and 8 years of projected benefits. While that retiree might collect longer than 8 years, the remaining cost is outside of the 75-year window.
• The problem is more visible for the person who is born in 8 years. The formula will capture all 49 years of revenue for that worker but will not accrue any cost for the promises made in taking the money.

While I am not 75, the government has declared Social Security solvent for 75 years three different times in my life. So it is important to understand the difference between fixed and solvent. "Fixed" means that you have no problem.  "Solvent" means that you have made your problem a problem for your children.