02/22/10 New York, New York – Social Security is in trouble. According to the Social Security Trustees Report, the Social Security program was in a $7.7 trillion hole as of January 1, 2009. That means Washington would have needed $7.7 trillion on that date, invested at prevailing rates, to deliver for the next seventy-five-years on the promises that the federal government has made. But we actually need much more than that to keep Social Security healthy, because it will experience larger and larger deficits both in the near future and beyond the seventy-five-year accounting horizon. As of January 1, 2009, that number – the amount we would need to invest to ensure the sustainability of the program for seventy-five years and beyond – was $15.1 trillion. How much of this huge sum do we have invested in real liquid and transferable assets today – that is, how much in actual money? Zero, zip, cero, nada, nothing!
The truth is that the government’s Social Security guarantee is one huge unfunded promise. How can this be? I have mentioned the Social Security “trust funds,” where our payroll taxes go. All this money is transmitted to the federal government and credited to the Social Security trust funds. You would logically assume that these funds would have hard assets that have been saved and invested to cover the program’s future costs. However, rather than saving the money and investing it in a diversified pool of real and readily marketable assets, the government spends it and provides “special-issue” government securities in return.
Just consider what actually goes into those funds. First there are the numbers reported in government financial statements. According to those numbers, Washington had issued approximately $2.4 trillion in special-issue US government securities that had been credited to the Social Security trust fund as of January 1, 2009. The computer records documenting these securities are held in a locked file cabinet in West Virginia. But there is a reason they are called special-issue securities, and it’s not good. Unlike regular government bonds, which people like us and the Chinese government can buy, these special-issue bonds cannot be sold; in other words, they are government IOUs that the government has issued to itself, to be paid back later – with interest. Imagine if you or I could sit around writing IOUs to ourselves that were worth something. Great way to make a living.
Washington says that we can count on these bonds because they are backed by the full faith and credit of the United States government, which guarantees both principal and interest. But – believe it or not – under current federal accounting principles, the government does not consider these bonds to be liabilities – which is another way of saying the government doesn’t really think that it’s our money.
Think about that for a minute. If you or I lend the government money by buying a bond, the government has to pay us back with interest. In other words, that bond is a government liability. But when it comes to the Social Security trust funds, the government is saying the special-issue securities it deposits are not a liability – in other words, they’re basically worth nothing at all. Now get this: The trust funds report these securities as assets on the annual reports that they provide to the public. Does that sound like wanting to have your cake and eat it too? Con artists of the world, I hope you’re taking notes.
In my view, these bonds should be treated as liabilities, and their value should be counted as part of our debt-to-GDP ratio. After all, they are backed by the full faith and credit of the federal government, and I do not believe the federal government will default on them.
Under the current scheme, the Social Security program has been running large surpluses since the reforms of 1983. But in actuality, Washington has spent those surpluses every year on other government activities. That is one way the government can reduce its public borrowing and keep interest rates down.
To say the least, the federal government’s accounting for these funds understates both its total liabilities and its annual operating deficits. That brings us to another clever bit of Washington wordsmithing: the “unified deficit.” In public reporting, the government takes the real operating deficit, $638 billion in fiscal 2008, and subtracts the nonexistent amount credited to the Social Security trust funds, $183 billion in fiscal 2008. This “unified” figure – $455 billion – makes the federal budget deficit seem smaller than it actually is. And they have been doing this for many years.
These accounting tricks would never be allowed in the real world, where trust funds are subject to stringent accounting rules and fiduciary standards. In essence, Washington is playing a massive con game – collecting your Social Security taxes, spending that money for its own purposes, and accounting for it in trust funds that are largely a fiction. A more proper description would be “trust-the-government funds.” Or as my boss, Pete Peterson, would say, “You can’t trust them, and they aren’t funded.” Just another example of how words used in Washington don’t have the same meaning they have in Webster’s dictionary.
Don’t worry, the reforms of the 1980s are still keeping the system above water. Monthly benefits should be paid in full for at least another three decades. However, the Social Security program will begin to pay out more than it takes in much sooner than that. The retirement and survivors income program expects its payments to exceed its revenues in 2010 and 2011. That will happen because revenue has declined during the recession –while at the same time, more people are retiring. When the federal government has to start cashing in the special-issue securities in the trust funds in order to pay benefits, it will have to raise taxes, cut benefits, and/or sell real bonds to the public in order to raise real money for retirees receiving benefits. If the government issues more public debt – in part to attract more foreign investors – that will likely increase our foreign dependency.
Regards,
David Walker
for The Daily Reckoning
David Walker
David Walker served as United States Comptroller General from 1998 through to 2008 and is now the President and CEO of The Peter G. Peterson Foundation. He is also the author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.
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Mr. walker,
Before we begin even talking about how SS is insolvent, why don’t we discuss how the government has been fudging the inflation numbers for the past two decades so they don’t have to pay as much out? You must admit that you are lying in from the start before we are going to believe that you really intend to fix anything! Or how about all of the other payments SS makes other than just to retiree’s? HUH!?!”?!?!?!?!
Gee, Sure hope you didn’t “just” find this out!
It’s official. The Social Security trust fund has no assets. It was declared empty by the Social Security Trustees in the 2009 Social Security Trustees Report, which was signed by Treasury Secretary Timothy Geithner and the other Social Security Trustees. The acknowledgement was in the form of a single sentence, buried deeply in the report. That sentence reads:
“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”
There is nothing ambiguous about that statement. It says that the government does not receive any income from redeeming the bonds or from the interest that the “bonds” allegedly earn. Even worse, it says that the government must finance redemptions and interest payments by increasing taxes, reducing government spending, or going still deeper into debt.
Why is it that most Americans know nothing about this? It is because that, with a few exceptions, the media has not reported it. Instead, the media continues to help spread the misinformation that is dispensed by the AARP, other senior organizations, and many politicians. One exception is Allan Sloan, Senior Editor at Large at Fortune Magazine. He agrees with me that the Social Security trust fund contains no real assets.
The sad fact is that, in just six or seven years, the cost of Social Security benefits will begin to permanently exceed payroll tax revenue, and the government will have to cut benefits or raise taxes. The public just seems to be incapable of accepting the harsh reality that for the past 25 years, our government has spent all of the $2.5 trillion is surplus Social Security revenue that was intended to be used for funding the retirement of the baby boomers.
Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University
Visit his website at http://www.thebiglie.net.
Mr. Walker we all have known this for a long time. It is not a surprise that many in Washington (Republicans mostly) want to cut out SS entirely knowing full well the jig is up and get out before they retire and before they are run out of town on rails. They lie and cheat and lie and cheat. It has always been so. No one in the country wants to pay for anything like taxes and conserving preferring to borrow and spend and all the while trying to save themselves by pushing metal prices up (read gold) hoping and praying that if enough fools jump on to the bozo train things can keep going forever. Some ponzi scheme what?
…apparently “roswell” aliens come from the vicinity of the dog star sirius…so…naturally they resemble close-ups of a dog’s nose…