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As a general rule, I tend to avoid political arguments. To me, political beliefs are similar to religious beliefs, both are based largely on faith, upbringing and a very personal view of the world. With all that emotional baggage, political arguments tend to become shouting matches where facts mean very little.
But, today, I’m breaking my own rule — somewhat. I’m going to enter a highly charged political debate. But rather than taking a particular side, my goal is simply to help people understand an important fact that could help make their decision on the issue.
I’d like to bring to light one simple, but rarely related, fact concerning the debate over reforming Social Security. It’s about the much-discussed Social Security “Trust Fund,” which is to be used to finance the program when the Baby Boom generation begins retiring and the system needs more money than is generated through payroll taxes.
With the help of the Trust Fund, Social Security should be solvent until 2054, according to the government.
Well, here’s the thing: the Trust Fund doesn’t exist in any real-world sense. It’s a vault — really there’s a vault for the Trust Fund — filled with a bunch of IOUs from one branch of the government to the other. There’s no pile of money or stocks or gold. The Trust Fund is an accounting trick, with no real assets behind it.
Now, before people start screaming that I’m just trying to scare people into supporting privitizing part of Social Security, let me just say that I’m not. I’ve got a number of concerns and questions about that plan, enough that I honestly don’t know if it’s good or bad.
So, now that we’ve established that I’m pretty neutral on the privitizing plan, let’s get back to the facts. To understand why the Trust Fund really doesn’t exist, we need to go back to the beginning, to its creation.
In the early 1980s, Congress — seeing the demographic writing on the wall in the form the huge baby boom generation — decided to “rescue” Social Security by raising the payroll tax. The idea was that the tax would bring in a lot more money than would be paid out in Social Security checks for the next few decades. That surplus would be socked away in a trust fund for the boomers’ retirement.
Nice plan. The problem came in the method used to sock the surplus away. It’s in U.S. Treasury bonds.
The moment a dime hits the trust fund, Uncle Sam borrows it and spends it on current government operations. He replaces the dime with a Treasury IOU.
Four years from now, the boomers will start claiming their Social Security checks. As they do, the Social Security tax surplus will get smaller and smaller. Since the government no longer can siphon much money from it, our already-gigantic federal budget deficit will grow and grow.
Then around 2019, Social Security taxes coming in no longer will equal checks going out. (Medicare should reach this point earlier.) Social Security’s administrators will ask Uncle Sam to make good on his IOUs in the trust fund. If Uncle Sam does so, then Social Security remains solvent.
But he doesn’t really have to. He’s the government, and Social Security works for him. Uncle Sam has made clear to Social Security that he has the right to change the rules any time he wants. (For any doubters out there, you might have noticed that Uncle Sam raised the retirement age from 65 to 67. He didn’t ask the permission of the Social Security Administration, did he?)
Honoring those IOUs would mean raising taxes to “levels that are unprecedented in the United States,” according to the Congressional Budget Office. Instead, the government might just decide to cut Social Security benefits and raise the retirement age. The smaller the Social Security checks, the fewer IOUs must be cashed.
A third alternative — perhaps the most likely — would be for government to simply borrow the money from the public. Such gigantic government debt “will have a corrosive and potentially contractionary effect on the economy,” notes the CBO. In other words, we might borrow ourselves into economic stagnation.
A fast-growing economy might ease the crunch by raising tax collections. But the Social Security hole — and it’s a baby compared to the Medicare problem — is so deep that growing our way out is highly unlikely.
So there you have it. Social Security is a major problem facing this country, and there are many different opinions on solving it. We should debate the problem and come to a consensus on the best solution.
But that debate should be based on the facts, not on the belief that a magical trust fund will take care of the problem. This attitude amounts to hoping Santa will pay your mortgage for the next few months.
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