Remembrance of Those Past
Ronni's Godfathers Lew and Henry

Social Security – Part 3: The Trust Fund

A widely quoted 1994 survey reported that only 28 percent of adults under age 34 believed Social Security would still be around when they retire. 46 percent, in the same survey, said they believed in UFOs. Ever since then, that survey has been trotted out as proof, by those who support some kind of privatization program, that Social Security is bankrupt - as though public opinion were fact.

Among the arguments you will hear, in the coming months, for the need to divert some Social Security taxes into individual Wall Street accounts is that the Trust Fund, where the payroll taxes are deposited and from which benefits are paid, is a sham, nothing more than a shell game, an accounting trick, and that it is empty of funds.

Today, Crabby Old Lady will explain the Trust Fund.

History
The Trust Fund did not exist in the original, 1935 legislation creating Social Security. When President Roosevelt added the provision for it in 1939, he saw it as a guarantee:

“…so as to give the contributors a legal, moral and political right to collect their pensions…With those taxes in there, no damn politician can ever scrap my social security program.”

Well, not so fast, Mr. Roosevelt. They may not have scrapped Social Security (yet), but our “damn politicians” in Washington have been dipping their fingers into the Trust Fund for years, to the tune of more than a trillion dollars.

What IS the Trust Fund Then?
For any privatization advocates of the wonky type reading this, Crabby is aware that the Social Security Trust Fund is not anything like private sector trust funds which hold varieties of financial assets. But it’s called the Trust Fund by convention anyway and Crabby will do the same.

Contributions to Social Security in excess of what are required to pay benefits are converted into Treasury bonds. These are IOUs from the Treasury Department which accumulate interest for which the Treasury issues more IOUs – the same bonds – to the Trust Fund. It is estimated there will be an excess accumulation of $1.7 trillion by the end of 2004.

In reality, no money changes hands between the Trust Fund and the Treasury. The government just goes ahead and spends the amount of the excess each year like any other money in the general revenue accounts. Think of it as borrowing from your kid’s piggy bank and leaving him a paper IOU.

So that means the privatization guys are right, doesn’t it? The Trust Fund piggy bank is empty.

Well, not really.

Those Treasury Bonds
Bonds are the government’s way of borrowing money – from individuals, from institutional investors, from foreign investors – private and governmental. And, in the case of the Trust Fund, from itself.

When Crabby Old Lady was an infant and toddler during War War II, in addition to pretty dresses and toys, she was given $25 U.S. bonds on her birthdays and at Christmas. They were special issues, called Victory Bonds then, to help finance the War, and movie stars toured America appearing at bond rallies to help increase sales.

Today, Treasury bonds with a face value of $1,000 are usually issued in 30-year maturities and pay interest twice a year.

Treasury bonds in various forms have been around for more than 200 years, and from the start, their credit ratings have been the highest of all debt instruments worldwide, the standard against which all other investments are judged. U.S. Treasuries are the ultimate safe investment and the U.S. government has never defaulted on a loan.

So when you hear from the privatization proponents that the Trust Fund is running on fumes, don’t believe it. The Social Security excess, currently at $1.7 trillion, is invested in the safest security on earth. Treasury bonds are the U.S. government’s solemn promise to repay its debt. And you trust the government, don’t you?

Here’s the Catch
What the president and his privatization supporters really mean when they say the Trust Fund is empty is that President Roosevelt’s “damn politicians” – the presidents, senators and representatives voters have sent to Washington - have spent the money needed to repay the loans which the Treasury bonds in the Trust Fund represent.

Let Crabby state that another way: the people elected to safeguard the future of all Americans through the brilliantly conceived, crown jewel of the New Deal, have stolen their old age fund and ignored the need to refill the piggy bank.

And guess who will be stuck with the bill? That’s right - one way or another, it will be you and Crabby Old Lady who will prevent the United States from defaulting on its Treasury bond debt to the Trust Fund.

Remember from previous installments of this series, that Social Security is a pay-as-you-go system, and ongoing contributions will meet benefits requirements until about 2018 when the Social Security Administration will begin dipping into the Trust Fund. That will continue until about 2042 when, without changes, the Trust Fund will be depleted and then-current contributions from workers will be enough to meet only about 75 percent of benefits payments.

So the president and his supporters are correct: Social Security needs fixing to fulfill its promise to provide a financial floor for all workers below which they cannot fall in retirement, and the sooner adjustments are made, the better.

It can be done without undue pain to taxpayers. Crabby just doesn’t believe gambling on the stock market (which is the definition of privatization) is the way to go. She will tell you why and what other proposals there are in future postings.


Privatization: Recent Developments
On Wednesday and Thursday this week, President Bush held an economic summit in Washington wherein Social Security was the major agenda item. The administration officials, congress people and economists in attendance are already on board with the president's plan and nothing of substance was discussed.

Until the president is inaugurated for his second term in January, opposing sides in the privatization battle will be jockeying for position, each placing their own spin in the issue. Here is The Hill's take on privatization from its daily email today:

Do not expect the Bush administration to be able to push its Social Security reform through Congress next year. Public opinion is not in favor of privatizing parts of the program and, unlike in its efforts to reform Medicare, the GOP will not be able to convince AARP to join its effort.

Democrats will vehemently oppose any changes to Social Security that they perceive as privatizing the program, hoping to gain some much-needed political capital from standing up to Bush on an issue on which public opinion is on their side.

The growing deficit and Bush’s pledge to cut it in half will also contribute to the administration not be being able to revamp the program.

…to be continued…

Social Security Privatization Series Index

Comments

"Let Crabby state that another way: the people elected to safeguard the future of all Americans through the brilliantly conceived, crown jewel of the New Deal, have stolen their old age fund and ignored the need to refill the piggy bank."

I just wanted to repeat this gem for anyone who failed to read it the first time through. This statement should be sent to every newspaper in the land. (And published!)

I keep wondering what slight of hand will suddenly make us all astute, wise investors when/should Social Security be revised to include privatization of a portion.

Most states require car owners to present proof of financial responsibility when applying for a car tag. Most of us buy car insurance. Social Security is the insurance that each of us will have SOMEthing for retirement, regardless of the vagaries of the stock market and/or cruel fortune.

"Special issue" Social Security "Trust Fund" bonds do NOT have the same status as the Savings bonds you and I bought as kids back in the good old days. See David Frum on Social Security

As of March 31 or April 30,2005,what is the APY earned by the "special issue" Treasury Bonds held by the Social Security Trustees?

At what time in the past history did goverment allow it's self to take the SURPLUS SOCIAL SECURITY FUNDS and place them in the general funds??

Who Allowed this to happen?
Was it susposed to go to general funds or did some one in some way find a way to divert the funds to the General Funds?? NO ONE HAS ANSWERED THESE QUESTIONS.

1. Under which President did the Government borrowing from the Social
Security fund begin?

2. In the begining, was Social Tax
voluntary or mandatory payroll
deductions?

3. Under which President was the taxing of Social Security Benefits initiatad? I thought I had a handle on those questions, but now am very much confused, I sure would like to get all this straight for once, Will I be able to get a definate answer?

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