Social Security's Day of Reckoning Has Come

It all started in 1985 when government officials decided to deposit the first surplus Social Security revenue into the general fund, instead of setting it aside for the baby boomers as they were supposed to do.  This improper use of Social Security funds angered some members of Congress, and efforts were made to end the raiding.  Senator Daniel Patrick Moynihan of New York had been a strong supporter of the 1983 legislation, and he was outraged that the surplus revenue, that was supposed to be set aside to build up a fund for the baby boomers, was instead being used to finance current government spending programs.  Senator Moynihan introduced legislation that would have repealed the 1983 payroll tax hike so there would no longer be any Social Security surplus to raid.  Although the legislation failed to pass, Moynihan had made his point. 

The purpose of the 1983 payroll tax hike was to generate Social Security surpluses for the next 30 years.  These surpluses were to be saved and invested in marketable U.S. Treasury bonds, in order to build up a large reserve fund with which to finance the retirement of the baby boomers.  If the plan had been followed, the trust fund would today hold $2.7 trillion of marketable Treasury bonds, which could be sold as needed to fund the retirement of the baby boomers. 

But the plan was not followed.  Instead, the surplus Social Security revenue was deposited into the general fund, where it would become indistinguishable from other federal tax revenue.  The raiding of Social Security, which began in Reagan’s second term, would have been bad enough if Reagan had been the only president to misuse Social Security funds.  But Reagan’s actions set a precedent that lasted for the next 25 years. During all those years, a portion of the Social Security contributions, paid by working Americans, went into the general fund and was used to pay for wars and other government programs. The one government program that did not get a dime out of the surplus was Social Security itself. 

In 2010, Social Security ran it first deficit in more than 25 years. The cash flow had turned negative, and the day of reckoning was upon us. For 2010, the government had to borrow $49 billion in order to be able to pay full benefits, and an additional $45 billion was borrowed in 2011.  From that point forward, the annual Social Security tax revenue would always be less than the cost of paying full benefits.  The Congressional Budget Office projects that, during the years 2012-2021, Social Security will run cumulative deficits totaling $547 billion.  The CBO further projects that, in 2033, Social Security will run a deficit of $623 billion, and that the deficit for 2045 will be an astonishing $1 trillion. Obviously, something has to give.  There is no way that the government can borrow $623 billion dollars to meet the 2033 shortfall, let alone the $1 trillion that would be needed in 2045.  

The only true measure of Social Security’s ability to pay benefits is its annual cash flow.  Those who argue that Social Security has never contributed a dime to the national debt are no longer correct.  In the period 1985 to 2009, Social Security ran surpluses every year and thus contributed nothing to the debt.  But, in 2010, and all the years to follow, Social Security would be an active contributor to the national debt because the government would be borrowing the money to pay a substantial portion of Social Security benefit payments each and every year. All that surplus revenue that flowed in over the years was supposed to be saved, but none of it was saved.  The money is all gone, and those who are looking to the trust fund for relief will be sorely disappointed.  The government spent that money and should repay the looted money, but it doesn’t have the money and is unwilling to raise taxes to get the money.  The trust fund holds nothing but worthless IOUs.  As a farm boy growing up, I was taught that “you can’t get blood out of a turnip.”  Just think of that trust fund as a giant turnip, and you will see why Social Security is in trouble, and why so many politicians are calling for cuts in Social Security benefits.

© 2016 Allen W. Smith, Ph.D.. All rights reserved. This article may not be reproduced without express written consent from Allen W. Smith, Ph.D..

About the Author

Top