The Trust Fund Money Has Already Been Spent

The money in the Social Security trust fund is gone. The author offers some details about why this is the case and says that Social Security can still be a good program if the money were to be replaced.

The money’s gone,” Senator Tom Coburn said in a senate speech on March 16, 2011. “There are no stocks, bonds, or real estate in the trust fund. It has nothing of real value to draw down,” said David Walker, Comptroller General of the GAO, on January 21, 2005. Even House Speaker, John Boehner, unintentionally let the cat out of the bag on October 6, 2013 when he said, on ABC’S This Week, “It’s not like there’s money in Social Security or Medicare. The government, over the past 30 years, has spent it all.”

The money is gone! Social Security doesn’t have $2.7 trillion stashed away for paying benefits, as so many people believe. Social Security doesn’t even have enough money to pay full benefits for 2014, without borrowing from China, or one of our other creditors. This basic truth has been stated over and over by public officials who are in a position to know. Even President George W. Bush acknowledged the awful truth on April 5, 2005, during a speech at West Virginia University at Parkersburg. Bush said, “There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs…”

The trust fund holds no real assets. The government IOUs in the trust fund are nothing more than an accounting record of how much Social Security money has been spent for other things. They are not real bonds, like those held by China and our other creditors. They cannot be used to pay benefits, and they cannot be converted into cash. None of the $2.7 trillion of surplus Social Security revenue, generated by the 1983 payroll tax hike, was saved or invested in anything. It was all spent, by the government, for non-Social Security programs. This is an indisputable statement of fact. The fact that the government spent all of the surplus Social Security revenue on non-Social Security programs, and failed to save, or invest, any of the money for paying benefits to the baby boomers, is an awful, almost unbelievable, fact. But still, it is a fact, proven by the federal budget numbers.

It is a simple matter for anyone to prove that none of the surplus Social Security revenue, generated by the 1983 payroll tax hike, was saved, as was the intent of the 1983 legislation. Let me show you how to verify this for yourself. Go to the statistical tables in Appendix B of the 2013 Economic Report of the President. Table B-78 displays data for total government receipts and outlays for each year from 1946 through 2013. The third column of the table presents the actual surplus or deficit for each year.

Revenue from the 1983 payroll tax hike began flowing into the Treasury in 1984, and it generated annual surpluses in the Social Security budget for approximately 30 years. The last year that Social Security had a surplus was fiscal year 2009. In fiscal 2010, the Social Security budget began running permanent annual deficits. So the years, 1984 to 2009, were the years of annual Social Security surpluses that were supposed to be saved and invested in order to build up a large reserve fund to help pay benefits when the baby boomers began retiring in 2010.

If the government had saved $2.7 trillion of its revenue for Social Security, during this period, it would be clearly visible in the budget numbers. We would see $2.7 trillion more in government receipts than what the government spent for the period. So let’s add up the total receipts and the total outlays for the period 1984-2009. The total receipts in the table include all government income. They include the Social Security payroll tax, the federal income tax and all other sources of revenue the government receives. The total outlays include all expenditures by the government, including the payment of Social Security benefits.

When we add up all of the receipts and outlays we find that the total income of the government for the period was $39.7 trillion. The total expenditures of the government, for the period, was $45.3 trillion. The unavoidable conclusion is that the government spent $5.6 trillion more than its receipts for the years 1984-2009. How could the government spend more than its income? By borrowing money from whomever is willing to lend the money to it. What the results tell us is that the government clearly did not save any money during the period, for Social Security, or anything else. Even worse, the government engaged in deficit spending for the period to the tune of $5.6 trillion, adding that much to the national debt.

So by looking at the federal budget numbers, for the period, we find that the government did not save any of the surplus Social Security revenue. The government spent all of its own revenue, plus the $2.7 trillion in surplus Social Security revenue, plus $2.9 trillion of additional money borrowed from the public.

Every member of Congress knows that the trust fund holds nothing but worthless IOUs, because they were a party to the spending of the people’s Social Security money. They also know that we have reached the point where full benefits can no longer be paid from tax revenue alone. What needs to be done is for the government to repay the $2.7 trillion it owes Social Security. But many members of Congress have no intention of repaying the looted money, now, or ever. Doing so would require increased taxes. And keeping taxes low has become almost a religion with the Republican party. They are hoping to cut benefits by enough so the looted money will not have to be repaid.

Despite the fact that Congress, the president, and other government officials know that the trust fund money has already been spent, leaving no real assets in the fund, most members of the public are unaware that the trust fund money is gone. That belief is reinforced every time a journalist argues that the trust fund was never looted and there is enough money in it to pay full benefits for two more decades. This theme is repeated so often, in major publications, that it is no wonder that most people continue to believe that the trust fund holds $2.7 trillion in real bonds. But it is not true. The Social Security trust fund money was all spent, year by year, as it flowed in. The trust fund holds no real assets that can be converted into cash. It is empty. The receipts and outlays numbers in the federal budgets do not lie. The government clearly spent all of the Social Security surplus revenue, plus all of its own revenue, and then had to borrow still more money.

The American people have been hoodwinked, by their government, for the past 30 years. The government spent the Social Security surplus for financing big, unaffordable tax cuts for the wealthy and for wars and other programs. At the same time, the government led the public to believe that the IOUs in the trust fund were real bonds, just like those held by China and our other creditors. But the IOUs are essentially worthless. The harsh reality is that the trust fund does not hold anything of real value which can be used to pay benefits. The only money that Social Security has access to is its annual tax revenue, which is not nearly enough to pay full annual benefits.

The public bought into the idea that their Social Security money had been saved and invested in real government bonds just like it was supposed to be. And these bonds were being held by the trust fund. They rejected the argument that the government IOUs were not real bonds. They said over and over that the trust fund bunds were just like the bonds held by China and other government creditors. They said the trust fund held enough bonds to pay full benefits for another 20 years without any government action.

The real government bonds that the Social Security surplus was supposed to be invested in are marketable U.S. Treasury Bonds. These are the kind of bonds that are “as good as gold,” because they are traded in financial markets around the globe, and nobody dares default on them. If the United States were to try to default on these bonds, it would throw financial markets into chaos and badly damage the credit standing of the United States. For these reasons, the United States government cannot, and will not, ever default on the marketable Treasury bonds. That is why the Social Security surplus was supposed to have been invested in these bonds.

The government IOUs in the trust fund are a very different story. They cannot be sold or converted into cash, and the government has the legal authority to default on them if it should choose to do so. A United States Supreme Court ruling (Fleming v. Nestor) in 1960, gave the Congress the legal authority to alter, or even terminate, Social Security. The Court ruled that nobody has an earned, legal right to Social Security benefits.

So the IOUs are nothing more than a claim against future revenue of the government. If the government has the money, and chooses to do so, it can repay the $2.7 trillion debt to Social Security, as the money is needed in the future. But the government is not legally required to do so. Given the radical change in the nature of the Republican party, and its goal to keep tax rates low, it is possible that the money will never be repaid, unless the public organizes, demonstrates, makes a lot of noise, and demands the unconditional repayment of the looted money. Such activities might put enough political pressure on politicians to do the right thing instead of just what they want to do.

If the surplus Social Security revenue had been saved and invested in marketable U.S. Treasury bonds, as was the intent of the 1983 legislation, Social Security would be able to pay full benefits for two more decades. The short-term cure for what ails Social Security today is to replace the $2.7 trillion of looted money. It doesn’t have to be repaid in one large lump sum. It could be repaid in installments, as the money is needed. But there would have to be legislation, which absolutely guarantees that the money will be repaid on time.

Social Security is a good program, which is very popular with the American public. It worked well before the government started misusing the program’s money. Despite all the claims to the contrary, by the enemies of the program, Social Security is sustainable for the long run in its present form. It will need additional adjustments in the future, just as it has needed adjustments in the past. But Social Security is not broken. If the looted money is replaced, Social Security could remain fully solvent for another 20 years, without any other government action.

About the Author

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