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)

How Did The Social Security Prospects Improve?

This article originally appeared on AmericanThinker.Com.

The 2015 Trustees Report for the Social Security Trust Fund showed a surprising improvement.  The combined Trust Funds are projected to be exhausted in early 2034.  It is surprising in part because CBO's projections showed continued deterioration.

Where did the improvement come from.  In large part the Trustees now forecast substantially lower costs.  This is the number of checks issued, and their size.  That savings, along with the interest on the savings, largely explains the entire improvement, about $500 billion in Trust Fund balances.

What is not well reported is that the Trustees turned more negative on the next 10 years, particularly on the revenue side.  The 10 year forecast is basically the same as last year.  So the improvement that is forecast are in jobs that don't exist, and pay raises that will not be considered in the coming decade.  Let's hope that the Trustees are right.
 Read : (more)

What Happened to the $2.6 Trillion Social Security Trust Fund?”

This is part of a series of articles in which I look at other articles on the internet that are forwarded as reasoned thought.  Just because you read it on the internet, does not make it true.

Many want to believe that Social Security Trust Fund is a scam.  No matter how reasoned the counter-argument, they eventually cite a piece from Forbes blog, “What Happened to the $2.6 Trillion Social Security Trust Fund?”

Readers tend to think that the article says that the Social Security Trust Fund is a scam.  That isn’t what the article actually says though.

The article contains some fact problems. The author states that the Social Security Trust Fund is the source of benefit checks.  This is factually wrong.  The primary resource of revenue for the system is payroll taxes.  So it is factually wrong to suggest that the only way for Social Security to get cash is from the general fund or incremental borrowing. The Trust Fund is little more than a parking lot for excess cash.

The article has reasoning problems. This statement is a false dichotomy. 

·        “Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades.  It must be one or the other.”

It is unlikely to be either. 

Anytime you deal with politics you are dealing with words that have many meanings.  Here is the quote, "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

The writer has chosen to read that sentence as social security checks might not go out because there may not be money in the Social Security Trust Fund."  If that is what the President meant, then the answer is simple: the President doesn't understand how Social Security works. The benefits of Social Security are funded by the payroll tax.  If checks didn't go out, it would mean that payroll tax collection had entirely ceased.  The Trust Fund serves as a buffer for Social Security rather than a primary source of cash.

Moreover, the Social Security Trust Fund is exempt from the discussion of the debt ceiling.  The government has the power to refinance any bond held by the Trust Fund because refinancing debt does not increase overall debt levels.  The government issues a bond and uses the proceeds to retire a bond.  The impact is a wash on the level of Federal debt.

One fact that Matthews fails to mention is that Secretary Geithner is the managing trustee of the Social Security Trust Fund.  It is his responsibility to build cash reserves necessary to pay bills in the face of foreseeable events.  If Geithner is telling the truth, he is effectively pleading guilty to the largest breach of fiduciary responsibility in the history of mankind. 

It is highly unlikely that the asset structure of the Social Security Trust Fund would be the cause the government's inability to deliver checks – nearly zero.  The primary source of revenue is payroll taxes.  It is virtually impossible to believe that the Trustee would have failed to build the necessary cash reserves if the Trust Fund was going to be needed.

The problem here is that no one in Congress or the media took the statement seriously enough to drive out the meaning of the President's words. The writer attributes meanings to the words that the President cannot mean. I have seen a number of other interpretations about the statement. 

There are two things that we know for sure: Coffers clearly can't mean the Social Security Trust Fund. If checks didn’t go out on that August 3rd, it would have been a matter of priority rather than financial resources.

At best for Matthews’ argument, the President is woefully uninformed about the mechanics of the system.  The idea that ‘real assets’ would have changed the President’s statement is simply false.

Jeb Bush Projections On Social Security Off By 30 Years

This statement is off by roughly 30 years.  Can we expect candidates to know the finances of the government's largest expense?

“We need to look over the horizon and begin to phase in, over an extended period of time, going from 65 to 68 or 70,” he added. “And that, by itself, will help sustain the retirement system for anybody under the age of 40.”

Jeb Bush’s statements from CBS’s “Face the Nation” about Social Security expose a distance from the issue that is unhealthy for Americans who depend upon the system. In his interview, he states the wrong retirement age, and delivers promises which are off by decades.

A number of his critics have already pointed out that Bush misstated the normal retirement age (“NRA”).  The NRA of Social Security is 66, not 65.  It hasn’t been 65 in more than a decade. Yes, some enjoy poking a wealthy politician unacquainted with his own retirement age about the suggestion to increase the NRA of others.

For me, it is a forgivable slip given that Bush was speaking on a Sunday morning news program, rather than in a more formal setting.  He has spoken in the past of increasing the retirement age.  In this interview, he was only providing additional clarity to a past position. 

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

This chart shows the life prospects of a retiree.  The change to gradually increase the retirement age that started in 2000, basically accounts for all of the increase in a retiree's life expectancy until 2050.

Life Expectations At Retirement By Year For Social Security
Year	Survivor	Male	Females
2000 (Life Expectancy At 65)	87%	20.42	22.97
2050 (Life Expectancy At 67)	89%	21.06	23.41
Source: Social Security Administration Actuarial Study 120 (A survivor is the likelihood of a 21 year-old reaching retirement)

 

Politicians See Social Security Fix As 'Easy'

Over and over again, the media and experts tell us that financing shortfall in Social Security is relatively easy to address.  Conventional wisdom presents options for Social Security as though the problem with system is one of political will rather than one of economic resources. Basically if politicians could just get along, all of Social Security’s troubles would evaporate.

The latest to make this claim is Lindsey Graham, who reportedly said “you could [design a plan to fix Social Security] on the back of a napkin.” There is no way to be polite about this statement.  If you believe that Social Security can be solved in 15 minutes or on the back of a napkin, it is because you have an inner struggle with the meaning of commas and zeros in very large numbers.

The problem isn’t politics.  It is economics..... (See More At FedSmith.Com)