Santa Claus, the Trust Fund and the Tooth Fairy

What do Santa Claus, the Social Security Trust Fund and the Tooth Fairy have in common? According to the author, they are all myths. He explains why the Social Security trust fund does not exist.

What do Santa Claus, the Social Security Trust Fund and the Tooth Fairy have in common? They are all myths, which people want so much to believe that they try to convince themselves they’re real, despite the evidence to the contrary. Belief in Santa Claus and the Tooth Fairy are harmless sources of joy for young children who will eventually face reality as they grow up. But adults, who continue to believe in the Social Security trust fund, when it doesn’t exist, are fooling themselves and contributing to the government’s effort to cover up the Social Security theft.

The origin of the trust fund myth was the Social Security Amendments of 1983, which included a hefty payroll tax hike that was designed to create large surpluses for the next 30 years. The intent of the legislation was that a real trust fund would be created, and all of the Social Security surplus revenue would be deposited into that trust fund in order to build up a large reserve fund which would be saved until the baby boomers retired and needed it.

From its enactment, in 1983, to the last surplus year, in 2010, the payroll tax hike generated a total of $2.7 trillion in surplus Social Security revenue. The surplus revenue was supposed to be used to buy marketable U.S. Treasury bonds and deposit them into the trust fund. These “good-as-gold“ marketable Treasury bonds could then be resold when the baby boomers retired to raise cash with which to pay benefits.

The American people were told that the surplus revenue would be put into the trust fund in order to build up a large reserve, which would be available for paying full benefits to the baby boomers. And, 30 years later, the public still believes that the government did what it was supposed to do, and thus there must be $2.7 trillion in real assets in the trust fund today. Here is where the story gets ugly.

Not one dime of that $2.7 trillion in surplus Social Security revenue was saved or invested in anything. Instead, it was all deposited into the general fund and used to finance wars, tax cuts for the rich, and other programs. The government embezzled all of the surplus Social Security revenue and used it for general government operations in the same way that income tax revenue is used.

How did the government pull off such a scam? It did so by creating an elaborate mirror image of what was supposed to be happening. This cover up has successfully convinced most people that all was right with Social Security for the past three decades.

A clever scheme was developed, and that scheme has successfully fooled most of the American people for the past 30 years. As the Social Security money was spent, it was replaced, dollar for dollar, with government IOUs. But the government didn’t call them IOUs. They cooked up a fancy name, and called the IOUs “Special issues of the Treasury.” The key characteristic of the IOUs is that they are non-marketable. They can’t be sold, traded, or used to make benefit payments. They are not real bonds in the sense that bonds are usually defined. Allan Sloan of Fortune Magazine called them “funny money” in his Washington Post article on August 10, 2010.

After 30 consecutive years of annual surpluses, Social Security began running permanent deficits in 2010. The cost of paying full benefits in 2010 was $49 billion more than the Social Security tax revenue for the year. Social Security needed to sell $49 billion of the “marketable Treasury bonds” that Social Security allegedly had in the trust fund. But there was no money in the trust fund or anything else of value that could be sold in order to raise cash. So the government had to borrow $49 billion (probably from China) to make up for the shortfall. The same was true for 2011 and 2012, and the annual deficits will become larger and larger in the years ahead.

The harsh reality is that, during that 30-year period of annual surpluses, the surplus money was all spent for general government operations. None of it was saved and invested in real assets in order to build up a reserve that could be drawn down to pay benefits for the baby boomers. But the government, who has misled the public for three decades, continues to insist that the trust fund contains $2.7 trillion in reserves which could be used to pay full benefits for two more decades.

The cat was officially let out of the bag at the time of the 2011 Congressional deadlock on raising the debt ceiling. President Obama was asked by a CBS reporter whether he could guarantee that Social Security checks would go out on August 3rd, as scheduled, if a deal was not reached on raising the debt limit.

Obama’s response shocked a lot of people who think Social Security has $2.7 trillion in reserves stashed away. The President said, “I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

If Social Security had even a small amount of money, stashed away for emergencies, that money could have been used to pay for the August, 2011 benefits, in case the dispute was not settled in time for the benefits to be paid through the usual channels. But there is no cash, or anything else that could be converted to cash. Social Security has its annual tax revenue, which is not enough to pay even one year’s benefits. If not for the fraudulent actions of the federal government, Social Security would have $2.7 trillion in marketable U. S. Treasury bonds, which could be sold. But that money was all stolen and spent. The money is gone!

The facts are indisputable. Social Security is now running annual deficits each and every year. Social Security has no real assets, which can be used to pay benefits, or converted into anything else of value. Social Security does not have enough money to pay even one year’s benefits, let alone 20 year’s worth of benefits as the government claims. The government knows all these facts. So why do politicians and government officials continue to lie to the American people about the true financial status of Social Security?

About the Author

Allen W. Smith was a professor of economics at Eastern Illinois University for 30 years.