- For the third time in my life, the Social Security System
will go belly-up.
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- The first time was in 1977 well, almost. To head
off the bust, Jimmy Carter got Congress to pass a major FICA tax increase
sorry, "contribution" increase in order to save Social
Security. The rate would be hiked in phases from 2% to 6.15% (times two:
employee and employer). He promised: "Now this legislation will guarantee
that from 1980 to the year 2030, the Social Security funds will be sound."
(<http://tinyurl.com/ybksxs4>http://tinyurl.com/ybksxs4)
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- Carter's projection was off by a Georgia country mile.
In 1983, the SSA program technically went bankrupt. Reagan signed a law
that speeded up Carter's rate increases, added Congressional employees
to Social Security, and delayed the age of eligibility. (<http://tinyurl.com/ybksxs4>http://tinyurl.com/ybksxs4)
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- Unless there is another Social Security tax increase
in 2010, the system will go into red ink mode and stay there.
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- The public has not been informed of this, which comes
as no surprise. There have been a few scattered stories on the Web, but
nothing sustained. The media do not want to admit that the jointly operated
Social Security program and Medicare program are going to bankrupt the
Federal government if they are not cut back drastically.
-
- They are never cut back. They always expand.
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- Medicare's Hospital Insurance program has been in red
ink mode for two years. The public does not know this, either. To cover
the program's insolvency, the government is quietly funding the Hospital
Insurance Trust Fund with bailouts from the general fund.
-
- Politically, this creates a problem. When the Treasury
taps the general fund, the expenditure appears on the budget the
on-budget budget as an expenditure. This immediately adds to the
deficit, meaning the visible deficit, the one that gets recorded on those
wonderful U.S. debt clocks.
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- When revenues flow into the four Social Security and
Medicare trust funds, the money is instantly handed over to the Treasury,
which issues non-marketable long-term IOU's to the trust funds. These IOU's
are listed as assets by the funds. But, through the wonders of government
accounting, they are not listed as liabilities on the government's on-budget
budget. They are liabilities only on the off-budget budget, which most
Americans are unaware of. This chicanery has been going on ever since the
Johnson Administration (Lyndon's, not Andrew's).
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- The problem facing the politicians is this: when a trust
fund is no longer showing a surplus of revenues over expenditures, it has
to sell its assets back to the Treasury. The Treasury's non-listed liabilities
must be converted into money to send to the legal recipients. This is a
red alert of hidden red ink. The public finds out. The debt clocks speed
up.
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- The Treasury has no money in reserve. Every dollar that
it takes in immediately flows out. So, it must get Congress to provide
the money for the deficit-running trust funds, either by taxing or by borrowing
(increasing the legal debt ceiling).
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- What's a Congress to do?
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- HIDING THE BUST
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- The Congressional Budget Office released a report in
July on the condition of the Social Security trust finds. There are two
funds: Old Age Insurance and Disability Insurance. Think of them as "geezers
and gimps." Combined, they are called OASDI. The report offered a
table of numbers showing inflow and outflow. <http://www.cbo.gov/budget/factsheets/2009c/oasdiTrustfund.pdf>It
is here.
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- The table is tricky to interpret. This is deliberate.
The political strategy has always been concealment. But if we think through
what is being reported in this table, we can spot the ringer.
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- The ringer is interest payments to the trust funds. The
Treasury issued the IOU's, so it must pay the trust funds interest.
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- Think: "Where does the Treasury get the money?"
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- Answer: "The general fund." Up go the debt
clocks.
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- Look at the figures projected for 2009. Income from revenues
(FICA) is $653 billion. Total income is $808 billion. Where did the extra
income come from? Three sources.
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- Taxes on benefits: $21 billion
- Federal employer share: $14 billion
- Interest: $120 billion
-
-
- This means that the U.S. government has to pony up an
extra $134 billion to pay to itself: $14 billion in taxes paid on behalf
of Federal workers plus $120 billion in interest. This is counted as revenue
for the OASDI Trust Fund, but it is red ink for the government.
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- Neat!
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- Now let's do a reality check. Subtract $134 billion from
the $808 billion reported as total income to the OASDI Trust Fund. Why
subtract it? Because this is not income coming from outside the government.
We get $674 billion.
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- What is the expected outgo? $670 billion. The official
budget surplus for the OASDI Trust Fund: $138 billion ($808b minus $670b).
This is reported by the CBO under "Surplus." This looks pretty
good. For the Trust Fund, it is pretty good.
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- For the government, the real figure is barely in the
black. The official on-budget, count-the-subsidy-as-a-subsidy OASDI surplus
for the U.S. government: $4 billion ($674b minus $670b).
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- This is never mentioned by the CBO. We are expected to
figure this out. No one does. It took me several minutes to spot the ringer.
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- Now let us look at the projections for 2010. Income for
the trust funds: $811 billion.
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- Taxes on benefits: $20 billion
- Federal employer share: $15 billion
- Interest: $118 billion
-
-
- Let us remove the U.S. government's payments into the
fund: $133 billion ($15b + $118b). This must be covered by the general
fund. Subtract this from total income to the OASDI fund: $811b minus $133b
= $678b.
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- The expected outgo is $703 billion.
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- The deficit for the OASDI program in 2010 will be $25
billion ($703b minus $678b).
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- Some people will regard the "Federal employer share"
as non-subsidy: $15 billion. I'll concede this in practice, although I
still think this is money extracted by taxes paid into the general fund.
Even with this money removed, Social Security will run a $10 billion deficit
in 2010.
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- Social Security will go bust in 2010, if CBO projections
are correct.
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- What do I mean by "bust"? I mean technically
insolvent you know, like the nation's biggest banks in September
2008, before the government's bailout and the Federal Reserve's swap at
face value of T-bills for toxic debt held by the banks.
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- I mean by "bust" the inability of the Social
Security System to pay its bills by means of money extracted from the public
by way of FICA "contributions."
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- Think of the Social Security System as Oliver Twist in
the workhouse, gruel bowl in hand. "Please, sir, may I have some more?"
Unlike Bumble, the Treasury dips its ladle into the gruel and then fills
up the bowl. For how long? Tomorrow and tomorrow and tomorrow.
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- THE ACCOUNTING DECEPTION WORKS
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- The accounting scam of the Social Security Trust Fund
has worked politically for a generation. It is not just the voters who
are fooled. The best and the brightest in the media have been taken in.
Here is an exchange that took place <http://www.pbs.org/nbr/site/onair/transcripts/obama-capitol-hill-budget-090325/>on
the PBS show, Nightly Business Report, on March 25, 2009.
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- GERSH: A negative cash flow does not mean Social Security
is in crisis. The program has built up an enormous trust fund over two
decades. Barbara Kennelly is president of the Committee to Preserve Social
Security and Medicare. She says the trust fund is more than enough to cover
any short-term financial hit.
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- BARBARA KENNELLY, PRES., NATIONAL COMMITTEE TO PRESERVE
SOCIAL SECURITY & MEDICARE: The trustees look at it every single year,
the report is going to come out at the end of this month. And you're going
to still see that we can pay those benefits way out. Say it's not 2041,
it's 2040 or 2039. But we have that money. There is $2.5 trillion in the
trust fund for Social Security.
-
- No problem! There is a $2.5 trillion asset base. The
OASDI Trust Fund need only sell a few of these assets each year.
-
- The interviewer with PBS never batted an eye. He did
not say, "Don't try to pull the wool over my eyes, sister. I wasn't
born yesterday." Yes, he was, and the scam worked just as well yesterday
as it does today.
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- She said: "We can pay those benefits way out."
How? By selling trust fund assets.
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- You know the old line from the financial world. "Sell!"
"To whom?"
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- To sell an asset, there must be a market. Here is the
punch line, taken directly from the <http://www.ssa.gov/OACT/TRSUM/index.html>2009
Report of the Trustees: "Status of the Social Security and Medicare
Programs." (In a printout, this appears on page 4.)
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- The Department of the Treasury invests program revenues
in special non-marketable securities of the U.S. Government on which a
market rate of interest is credited. The trust funds represent the accumulated
value, including interest, of all prior program annual surpluses and deficits,
and provide automatic authority to pay benefits.
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- What, exactly, are "non-marketable securities"?
They are IOU's issued by the Treasury on behalf of the U.S. government.
As I mentioned, these IOU's are not recorded in the government's on-budget
account. The revenues that purchase these IOU's are.
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- But wait! There's more! Pay attention to these words:
"on which a market rate of interest is credited." The Treasury
applies a market rate of interest to a non-marketable security. There is
no such rate. The Treasury can make it up as it goes along.
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- So, the trust funds are filled with assets: non-marketable
IOU's from the government, issued to a government agency. The trust funds
are treated as marketable assets. They are indeed marketable: to the Treasury.
The bill is passed along to Congress whenever the trust fund sells any
of these assets.
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- There are lots and lots of these IOU's in the Social
Security OASDI Trust Fund. No problem!
-
- This is a scam. It is an accounting trick to deceive
the public. Does it work? Better than Congress could have dreamed back
in late 1968, when the change in accounting took place. (<http://tinyurl.com/yeh5sm5>http://tinyurl.com/yeh5sm5)
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- According to the lady representing the special interest
group promoting Social Security and Medicare, Judgment Day is a depleted
trust fund. That will take place is 2040, give or take a couple of years.
Politically, a date this far out is irrelevant. Congress has been playing
kick the can on this issue for a generation. There is no sense of urgency
by the public, so there is no sense of urgency in Congress.
-
- Judgment Day is 2010, when the general fund must start
paying for those cashed-in non-marketable assets.
-
- Let's see if Congress will kick the can some more. Let's
see if Congress passes hikes in the FICA tax rates in 2010, or extends
the wage base that pays the tax beyond today's $106,800 limit. My guess:
Congress will kick the can. The deficit will grow.
-
- "HOW BAD IS IT?"
-
- Those were Ed McMahon's four words to Johnny Carson,
decade after decade, setting up Carson's punch line.
-
- Here is the punch line lines, actually as
delivered by the notoriously humorless trustees of the Social Security
and Medicare Trust Funds.
-
- The 2009 report begins: "The financial condition
of the Social Security and Medicare programs remains challenging."
I worked on Capitol Hill as Ron Paul's first research assistant back in
1976. The code word "challenging" means "politically unsolvable
at the present time, so Congress will kick the can."
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- To this assessment, add the first sentence in the Conclusion:
"The financial difficulties facing Social Security and Medicare pose
serious challenges." What does "serious challenge" mean?
Think of December 7, 1941, on board the U.S.S. Arizona. Imagine this sound:
"Aye-oo-ga! Aye-oo-ga! Abandon ship! Abandon ship!"
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- We are assured that Social Security's problem is merely
difficult. ("Yellow alert! Yellow alert!")
-
- For Social Security, the reform options are relatively
well understood but the choices are difficult.
-
-
- The Social Security options are very well understood
by Congress, but not the public. These options have been understood by
Congress ever since 1983, when Reagan hiked FICA taxes.
-
- The political choice was difficult in 1983, back when
Reagan still thought he could balance the budget without vetoing spending
bills sent up by Congress, which he usually signed into law. That was the
year that the on-budget deficit hit $200 billion, a year before my 1977
prediction that it would hit $200 billion in 1984.
-
- Reagan knew that red ink from the sale of Social Security
Trust Fund assets back to the Treasury would push his on-budget budget
even deeper into the red. He hiked FICA taxes to keep this from happening.
Ever since then, Congress has played kick the can.
-
- We ain't seen nothin' yet! The Conclusion concludes:
-
- Medicare is a bigger challenge. Its cost growth can be
contained without sacrificing quality of care only if health care cost
growth more generally is contained. But despite the difficulties
indeed, because of the difficulties it is essential that action be
taken soon, particularly to control health care costs.
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- CONCLUSION
-
- We are on board a replica of a 19th-century Mississippi
paddle wheel steamboat. Nostalgia is always popular. The illusion of the
good old days still sells. The engine is chugging faster and faster. The
captain and crew decided long ago never to put the engine into reverse.
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- We are floating down the fiscal river of no return.
We are moving faster and faster. Some of us can hear the falls ahead. The
sound gets louder and louder. But our companions on board say, "Let's
party!" They head for the dining room. After that, they will head
for the slot machines.
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- Americans respond favorably to these words: "Free"
and "all you can eat." That is what politicians promise.
-
- Either the falls will get us (deflationary depression)
or else an explosion of the overheated engine will (hyperinflation).
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- Our companions are still in the dining room or heading
toward the slot machines. You and I should begin to move toward the lifeboats.
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