Claims that “Social Security can pay full benefits until 2033, without any government action,” continue to be made by deceptive politicians and uninformed commentators. But that is not true. Social Security was unable to pay full benefits, from its current revenue flow last year, and the same will be true for this year and all future years. In order for full benefits to be paid in 2011, it was necessary for the government to borrow $57 billion (probably from China) to repay a small portion of the money it has looted for the past quarter-century.
Social Security ran annual consecutive surpluses for more than 25 years, as a result of the 1983 payroll tax increase. That money was supposed to be saved and invested in marketable U.S. Treasury bonds in order to build up a large reserve of “good-as-gold” marketable bonds that could be resold when the baby boomers retired. But, instead of saving and investing the surplus Social Security revenue, as was the intent of the 1983 legislation, the government spent all of the money to finance unaffordable tax cuts for the rich, two unplanned wars and other government programs.
The so-called trust fund “bonds” are just IOUs that serve as an accounting record of how much Social Security money was spent for non-Social Security purposes. Prior to 1994, that information was only recorded in government ledgers or stored on government computers. However, in 1994, members of Congress, who worried that someone might actually want to see the IOUs, enacted legislation that required the actual physical printing of documents to serve as certificates of indebtedness. Today, when new IOUs are issued, they are printed on a laser printer, located at the Bureau of the Public Debt office in Parkersburg, West Virginia. Once printed, these certificates are 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, and those IOUs cannot be sold or used to pay Social Security benefits.
Beginning in 2010, the decades of Social Security surpluses came to an end, and a long period of annual deficits began. With Social Security deficits, the only way full benefits can be paid is for the government to raise taxes, cut other programs, or borrow money with which to repay looted Social Security money. If Social Security actually had $2.7 trillion in marketable bonds, it could pay full benefits until 2033. But Social Security does not have a dollar’s worth of any kind of real asset that can be sold to raise cash. Social Security has only its annual revenue, which is insufficient to pay full benefits, even for one year. Even the interest that the government allegedly pays to Social Security is not paid with real money. The government “pays interest” by issuing more of the same non-marketable IOUs that the trust fund already has. All of the $2.7 trillion in Social Security surplus revenue has already been spent. The money is gone. Social Security does not have the money, the government does not have the money, and it is not setting in a bank account somewhere. The money no longer exists.
It is true that the money was supposed to belong to Social Security, and the federal government has a moral obligation to repay the money. But, one of the least known harsh facts about Social Security is that, because of a 1960 U.S. Supreme Court ruling (Fleming v. Nestor), the government does not have a legal obligation to repay the money. The Supreme Court ruled that nobody has a “contractual earned right“ to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security.
It is time for those who stongly support saving Social Security in its present form to wake up to the reality that the Federal government can and may default on its debt to Social Security. If the trust fund held marketable bonds, the government could not default, but the government could default on the IOUs. Social Security supporters should be demanding that the government enact provisions to repay the looted money instead of arguing that there is no missing money.
Most people believe that Social Security has $2.7 trillion, either in cash, or in the form of marketable U.S. Treasury bonds that could be sold in order to raise needed cash. But Social Security has neither. As things stand today, the only money Social Security has, with which to pay benefits, is its annual tax revenue, which is not enough to pay full benefits, and the gap will become larger and larger with each passing year.
None of the Social Security money was invested. Before money can be invested, it must first be saved, and none of the surplus was saved. People tend to get confused when the government tells them that it has invested the Social Security money in government bonds when it has not invested it in anything. The printing of IOUs to replace the spent money does not constitute investment. Instead, it constitutes trickery, designed to make the public think the Social Security money is invested in real marketable bonds when, in truth, the government did not invest a single dollar in bonds or anything else.