The Looting of Social Security: The So-Called Trust Fund “Bonds”

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By • October 14, 2011 Comments

The Social Security Amendments of 1983 included a hefty payroll tax hike that was designed to generate large Social Security surpluses for about 30 years.  These surpluses were supposed to be saved and invested in marketable U.S. Treasury bonds, which could later be resold to finance benefits for the baby boomers.  The plan was to build up a large reserve in the trust fund, during the surplus years, and then draw down the trust fund, during the deficit years, which began in 2010.

If the plan had been followed, the trust fund would now hold $2.6 trillion in good-as-gold marketable assets, which would be enough money to enable Social Security to pay full benefits until 2036.  But the plan was not followed.  Instead of saving and investing the surplus Social Security revenue, the money was put into the general fund and spent on wars and other government programs.  The spent money was replaced with government IOUs called “special issues of the Treasury.”  These IOUs are not marketable and cannot be sold or used to pay Social Security benefits.  They are nothing more than an accounting device to keep track of how much Social Security money has been spent for other purposes.

Prior to 1994, the IOUs consisted only of accounting entries recorded in government ledgers or stored on computers. However, some members of Congress began to worry that someone might actually demand to see the IOUs, so legislation was passed that required the physical printing of documents to serve as certificates of indebtedness.  Today, when a new IOU is issued, it is printed on a laser printer located at the Bureau of the Public Debt office in Parkersburg, West Virginia.  Once printed, the document is carried across the room and placed in a fireproof filing cabinet.  That filing cabinet is the closest thing to the mythical Social Security trust fund that exists.

Every dollar of the $2.6 trillion in surplus Social Security revenue went into the general fund and was spent on general government operations. None of it was saved or invested in anything.   Anyone can verify that none of the money was saved, or invested, by simply examining the federal budgets of the past 25 years.   If you add up the total federal revenue, including the payroll tax revenue, and compare the total with the total federal expenditures, including the payment of Social Security benefits, you will find that the federal government spent all of its general revenue, plus all of the Social Security surplus revenue, and still had to borrow massive additional amounts of money just to pay its bills.

For the past 25 years, the government has led the public to believe that the surplus Social Security money was actually being invested in government bonds, as it was supposed to be, when, in actuality, the money was spent as general revenue and was, therefore, not invested in anything.

The official Social Security website, which used to boldly state that all surplus Social Security revenue was invested in government securities, has been softening its language to more accurately reflect the truth.  However, their words continue to be misleading.  The current statement on the official website, with regard to what happens to Social Security taxes, states the following:

“Tax income is deposited on a daily basis and is invested in ‘special-issue’ securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”

The Social Security Administration has come a long way from their earlier statements, which were extremely misleading. In the second part of the above statement, they admit that, the Social Security cash, “goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”  This part of the statement is true. It describes what has happened to every dollar of the $2.6 trillion in Social Security surplus.

The first part of the statement, “Tax income…is invested in ‘special-issue’ securities” is not true.  If the money all goes into “the general fund of the Treasury,” it is all spent for general government operations. Thus, none of the money was saved or invested in anything.  The government “borrowed” the surplus money and issued “special issue” IOUs to account for the spent money.  The only ways that the government can redeem these IOUs are by 1) raising taxes, 2) decreasing other spending, or 3)  borrowing the money.

In the Summary of the 2009 Social Security Trustees Report, a single sentence, buried deeply within the report, spills the truth about the so-called “trust fund bonds.”  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.”

The above official declaration by the Social Security Trustees, that the IOUs provide no income to the Treasury, should make it clear that Social Security does not have any surplus money with which to pay benefits.  The government had to borrow $41 billion in 2010 so that full benefits could be paid, and it will have to borrow again this year, and in all future years.  Social Security continues to have the incoming flow of payroll tax revenue, but it is insufficient to pay full benefits.  All of the talk about Social Security being able to pay full benefits until 2036 is based on the myth that the Social Security surpluses were saved and invested as was the intent of the 1983 legislation.

Ironwood Publications has just released Allen’s explosive new book, The Impending Social Security Crisis: The Government’s Big Dirty Secret.

© 2014 Allen W. Smith. This article may not be reproduced without express written consent from Allen W. Smith.

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About the Author (  |   )

Allen W. Smith has devoted much of his adult life to battling economicilliteracy and promoting economic education. For the past decade, Smithhas focused his research and writing on government finance and SocialSecurity. You can read more about his work and publications on his Website, thebiglie.net.

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