The Myth Of Spending Social Security On Other Programs

One of the most enduring myths of the Social Security debate suggests that the money collected for the system was spent on other government programs.

Legend holds that Social Security was running well enough on its own until politicians crept in at night to empty the cash register. Congress, those liars and cheats, took the money that we contributed to Social Security and Medicare, and spent it on other things.

The followers of this myth however aren’t just conspiracy theory crack-pots, who routinely accuse every president since Kennedy of stealing money from Social Security for other priorities.  Some of these accusers are people running for the Presidential nomination of major parties. Ironically enough, some of these accusers are the people who served in the Congress that supposedly stole the money.

Today Social Security collects less in payroll taxes than it spends on benefits. The system has not generated a penny of excess cash to spend since 2009.  So there hasn't been anything to spend on other programs in more than five years.

What about the past?  Originally, Social Security was designed to build a reserve of cash. Some members of Congress feared that any such reserve would not be truly “saved”. So the Social Security system was specifically changed over the 1940s to a pay-as-you-go method in which there wouldn’t be a large reserve to spend on other federal initiatives.

The downside of the pay-as-you-go strategy was insolvency.  To deal with this problem, Congress adapted the financing approach to the system such that the system could build-up a reserve.  Since the change, Social Security has built a reserve of $2.8 trillion, most of which was accumulate after the mid-1990s.

So where did the money go?  Not to other programs.

The Social Security Administration provides information on the cashflows of the system dating back to 1937 which shows how the money was collected and spent. Since inception, Social Security has collected about 15.7 trillion dollars. That revenue falls broadly into three categories of revenue: payroll tax revenue ($13.4 trillion), general fund subsidies ($0.6 trillion), and interest on loans ($1.7 trillion).

The vast majority of the resources were spent on benefits for retirees.  Clearly retirees are not “other things”.  In total, benefits have cost $13 trillion or roughly 82% of all revenue ever collected.  It is roughly the same amount as the system collected in payroll taxes.

The next largest use of the Trust Fund resources finances the government’s debt. This is the payment of interest, and interest on the interest. Interest does not pay for one brick in the bridge to no-where.  Interest represents the cost of borrowing money. Interest today accounts for more than 60 percent of the $2.8 trillion dollar trust fund.  All of which has bought nothing but time.
If the money is not repaid, it means that the money was used to pay for the time value of money, not other government programs.  If it is repaid, the money will be used for benefits of retirees.

After benefit expense and the cost of time, there isn’t a lot of money left over to spend on any other programs.  Our payroll tax collections have exceeded benefit expenses by less than half a trillion dollars.  This figure is less than the subsidies from the General Fund. In other words, the government in the net is putting money into Social Security rather than using it out to finance other programs.

We love the storyline because the fabled scheme dovetails into what we want to believe anyway. People like Social Security. People dislike Congress. This story sells like telling a 6 year-old: yes, there is a Santa Claus.

Originally Published On FedSmith.Com ( See more at : http://www.fedsmith.com/2015/12/08/the-myth-of-the-missing-social-security-trust-fund)    

Social Security, the Debt Ceiling and Partisan Politics

Curse You John Boehner!

Late last night, the departing Speaker of the House announced a tentative deal aimed at heading off a government shutdown and debt crisis. While this agreement may be good for the country, the timing is inconvenient for me and my latest article on Social Security and the debt ceiling.

The article says that Social Security is the one function of government that is virtually exempt from the consequences of the debt ceiling. This piece is compelling when politicians are baiting seniors over their benefit checks. It becomes less interesting once seniors cease to worry about whether there is enough money in the coffers to cover the next round of benefit checks.

Where are partisan politics when you need them?

What is the debt ceiling? The debt ceiling limits the amount of debt that the U.S. Treasury can issue. When the level of the government’s debt exceeds the legal limit, government spending is limited to the revenue collected by the government because it cannot borrow money.

Social Security is largely unaffected by this event because the system has layers of dedicated funding. The program has exclusive claims on payroll tax revenue. Beyond that line of funding, Social Security has a trust fund with more than $2.7 trillion in dedicated funding. 

The mechanics of the Social Security program are poorly understood even by experts. Ed Lorenzen, a budget analyst at the Center for a Responsible Federal Budget, says it would be like a homeowner paying the mortgage but not all of his or her utility bills. Actually it would be like the utility expecting to invade the escrow account with the bank that holds the mortgage.

The debt held by the Social Security Trust Fund can be refinanced without increasing the total debt outstanding. The government has to issue bonds which will increase the debt outstanding.  The proceeds are however used to pay down debt.  The net impact on total outstanding debt is zero.

The last person to play the Social Security card in a debt ceiling debate was Treasury Secretary Jacob Lew.  He is of course the last person who should be playing this card because he happens to be managing trustee of the Social Security Trust Funds.

As such, it is his job to manage the resources of the trust fund to anticipate foreseeable events such as the debt ceiling crisis. In fact, he recently signed a letter to Congress assuring the public that the Social Security Trust Fund had sufficient resources to pay benefits for more than three years. So if there were any truth to his claim, he would be pleading the fifth rather than publically admitting to the largest breach of fiduciary responsibility in the history of mankind. 

Let’s assume that the Treasury employees who process payroll taxes are sent home.  No one collects payroll taxes. In that case, Social Security would draw on the resources of the Trust Fund.  Let’s assume that Secretary Lew is completely remiss in his responsibilities, and has failed to build a cash reserve in the Trust Fund. The government can still pay the bills of Social Security because refinancing the debt held by Social Security has no impact on the overall national debt.

Life is stranger than fiction. When Social Security has excess cash, the program is required to invest the money in government securities. Once the debt ceiling limits the government’s ability to borrow money, any excess cash would sit uninvested, while the rest of the government shuts down from lack of funding.

Social Security will plenty of money to pay the check.  The real question is whether the rest of the government will have the money to mail it.

Revisiting GWB's Plan To Save Social Security

Ten years ago, George W. Bush outlined his vision for Social Security reform.  And a lot has been written on the subject since that time. 

My piece looks at issues with his vision that have largely gone uncovered. The foundations of the plan were built on faulty reasoning. Personal accounts do not create investment capital, and they will not earn near the 7% returns that supporters promise.

Whether it is a good idea is a separate question.  The promised results would not have occurred.

Originally published on TheHill.Com, (see the article)