| 2017 Changes to Social Security | MR Online 2017 Changes to Social Security

Social Security may bust the Federal budget – but not how you think

Originally published: Who.What.Why. on July 19, 2017 (more by Who.What.Why.)

If you’ve ever questioned what happens to your employment taxes, you’ve probably come across answers like the following:

The Social Security “Trust Fund” is a fiction;

Employment taxes are simply taken by the government and added to the general fund to pay for other federal programs; or

You can’t depend on receiving any promised Social Security benefits when you retire.

For anyone inclined to believe those statements, here is some good news and some bad news.

First, rest assured that none of the above is true. The Social Security system has paid all promised retirement benefits for 75 years, and it is still alive and still fully funded. The future benefits of Americans are secure.

The bad news is that for two decades, politicians of both major parties have been lying about Social Security for their own purposes, sowing confusion and fear among American working people.

Dueling Delusions

It began in 1997, when the Clinton administration decided to claim that the government’s annual revenues and expenses were in balance — that there were even annual budget surpluses. If they could make that case, the political benefits to the Democrats would be significant.

Republicans had produced ever-increasing annual deficits between 1981 and 1993. New borrowing was necessary every year to make up the difference between expanding government expenditures and diminished tax revenues from a lukewarm American economy.

In 12 years of Republican administrations, the total national debt had quadrupled from under $1.1 trillion to $4.4 trillion

Note: Each administration sets a budget for the fiscal year (beginning October 1), but administrations change on January 20 in years following elections. Consequently, in post-election years the incoming administration presides over a budget that was established by — and thus credited to — the outgoing administration.

| President Bill Clinton January 5 2001 | MR Online

President Bill Clinton, January 5, 2001. Photo credit: US Army.

After President Bill Clinton took office in 1993 the economy did improve, and government revenues grew. Unfortunately, government spending grew even faster. Continuing annual deficits pushed the national debt to $5.42 trillion by 1997.

When it looked closely at that debt, however, the administration couldn’t miss seeing that the Social Security Trust Fund had become a major buyer of federal debt over the years. It held $567 billion by 1997 — more than 10% of the total — in the form of special-issue Treasury securities.

Furthermore, Social Security actuaries were forecasting that the system’s tax receipts would continue to outpace benefit payments, so that the trust fund would grow to more than $1 trillion by 2000.

In other words, the fund would be looking to buy an additional half a trillion dollars of new government debt over the next few years.

The Democrats realized that if they could find a rationale for omitting debt owed to the Social Security Trust Fund from total reported federal debt, they could hide $500 billion of future annual deficits and even report a “budget surplus.” The plan they devised had two steps.

First, they claimed that assets in the Social Security fund were like assets in other government programs — the Highway Trust Fund, for example, or the U.C. Civil Service Retirement fund — and that all such assets represented debt that the government owed to itself. Since repayment of such debt meant (so the claim went) simply transferring money from one government pocket to another, it could arguably be separated from Federal debt to entities outside the government.

Second, they created a new format to report the nation’s debt. For 207 years, ever since Alexander Hamilton first announced the total national debt on January 1, 1790, the Treasury Department had reported a single figure for “Total Public Debt Outstanding.” The Clinton administration held to that format for four years — until October 1997.

The “Intragovernmental Holdings” Scam

In that month, for the first time, the website of the Bureau of the Public Debt (as it was called then) posted two additional numbers. One was headed “Intragovernmental Holdings,” a category invented by the administration (inventing the word as well) to contain debt held in various government programs as well as debt owed to the Social Security Trust Fund.

It was also necessary to invent a second category to represent the Total Public Debt minus Intragovernmental Holdings. It was called “Debt Held by the Public,” which sounds like a comprehensive enough number. To this day, Democrats claim their 1997-2000 budget surpluses by citing Debt Held by the Public numbers.

Republicans, for their part, have been happy to go along with this sham, since it offers another argument for their perennial bashing of Social Security. They attacked the original 1935 Act both politically (“The lash of the dictator will be felt”) and financially (“The so-called reserve fund is no reserve at all, because the fund will contain nothing but the government’s promise to pay, while the taxes collected will be wasted in reckless and extravagant political schemes”).

| Social Security exhibit at the Franklin D Roosevelt Library Photo credit <a href=httpswwwflickrcomphotosfdrlibrary9068608823 target= blank rel=noopener>FDR Presidential Library Museum | MR Online

Social Security exhibit at the Franklin D. Roosevelt Library. Photo credit: FDR Presidential Library & Museum / Flickr (CC BY 2.0)

Other groups at the time also questioned how Social Security was to be financed: the Brookings Institution, the American Federation of Labor, the Chamber of Commerce, and The New York Times among them. But although the financing has proven successful, Republican political attacks continued. George W. Bush said on May 2, 2001, “Today, young workers who pay into Social Security might as well be saving their money in their mattresses.”

Given such self-interested collusion between the parties, it’s no wonder that their lies continue to be heard.

What’s Really Going On

The US Treasury Department collects Social Security taxes and disburses retirement or disability benefits. Whenever collections exceed benefits, the surplus is held in a trust fund. The Treasury confirms that trust fund surpluses are “invested” in “Special Issue Certificates of Indebtedness (C of I’s) and Bonds, issued by the Secretary of the Treasury [and] backed by the full faith and credit of the United States Government.”

The Department’s Bureau of Fiscal Services “is responsible for printing and maintaining the physical certificates.” There are two trust funds, one for the original OASI (Old-Age and Survivors Insurance) and another for DI (Disability Insurance, first funded in 1956); “Separate securities are issued to each of the funds.” Social Security’s actuaries, however, base their calculations on the combined funds.

All Special Issue Certificates of Indebtedness and bonds pay interest, at the same rates paid on securities that Treasury sells to the public. They also carry specific maturity dates. When interest is paid to the funds, or when a security matures, there is additional money to be reinvested: “The reinvestment strategy is confirmed with [Social Security Administration’s] Office of the Chief Actuary and approved by the fiscal assistant secretary within Treasury prior to the reinvestment of the maturities and interest each year.” [Per e-mail to the author from the Treasury department on May 3, 2017.]

To sum up, Social Security’s assets are quite real to the Treasury Department, which manages them in conjunction with the Social Security Administration’s actuaries. The combined Old-Age and Survivors Insurance and Disability Insurance Trust Funds currently hold $2.8 trillion worth of Treasury securities.

The actuaries have also been responsible for the extraordinary success of Social Security, a history that is reviewed in each annual report of the trustees. Over more than three quarters of a century, all promised benefits have been paid to everybody who contributed to the system and to their survivors.

Today, some 171 million workers are contributing; all of them receive an annual statement of their individual estimated retirement benefits. About 61 million beneficiaries are receiving the monthly Social Security payments that they had been promised. There are roughly three times as many contributors as beneficiaries, because workers typically spend three times as many years working as they do living as retirees. [2017 Trustees Report]

Social Security, unlike Medicare or Medicaid — indeed unlike any other retirement security program in the industrialized world — is self-financed. Its revenues are the employment taxes paid by working Americans, plus equal contributions paid by their employers. At President Franklin D. Roosevelt’s insistence, the original 1935 law prohibited the federal government from topping up the system. Whenever Social Security needs more money, the law specifies, employment taxes must be raised. [Edward D. Berkowitz, America’s Welfare State: From Roosevelt to Reagan, The Johns Hopkins University Press, 1991, Chapter 2]

Many amendments to the law have been passed over the years (to add disability claims, for example, or expand the definition of “survivors”). But the fundamental prohibition against government support remains intact. When President Jimmy Carter revealed his legislative agenda in 1977, he included a recommendation to lift the prohibition. The Democratic Congress passed all the legislation he asked for, except his bid to allow the government to meddle in Social Security.

| President Franklin D Roosevelt July 14 1938 | MR Online

President Franklin D. Roosevelt, July 14, 1938. Photo credit: FDR Presidential Library & Museum / Flickr (CC BY 2.0)

As President Franklin D. Roosevelt said, “We put those payroll contributions there to give the contributors a legal, moral, and political right to collect their pensions… With those taxes in there, no damn politician can ever scrap my Social Security program.” [William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940, Harper & Row, New York, 1963. pp 132-3]

If the Feds can’t augment Social Security assets, neither can those assets be used for any purpose other than paying retirement benefits to contributors. (The assets do underwrite the costs of the Social Security Administration. But they amount to less than 1% of the assets — less than the costs of any other government agency.) If Social Security taxes are increased, then there will simply be more money in the trust fund; if taxes are lowered, then there will be less money in the fund. In either case, there’s no impact on the federal budget.

Since all the money in the Social Security system comes from working Americans (with equal contributions from their employers), those workers are themselves the collective owners of the money. When they retire and begin to receive benefits, it is their own collective money they are receiving. They can no more be said to be “entitled” to the benefits than a private citizen is “entitled” to withdraw money from his or her bank account. It is their money in the first place.

The actuaries’ efforts to adjust the contribution rate to keep enough money in the system to pay benefits have been simplified by the fact that only workers who are contributing to the system will one day receive retirement benefits. Thus, it’s always known how many prospective retirees are covered. Actuaries can calculate how much current workers’ taxes will contribute before they retire, and how much they will receive in retirement benefits. The average number of years they will collect benefits is a standard actuarial calculation, based on expected lifespan.

The initial tax rate was set in 1937 at a basic 1% of wages, and it turned out that that rate kept the system afloat until 1950. The measure of being afloat — “financial adequacy” is the technical term — is whether at the beginning of each year there is enough money in the trust fund to pay all promised benefits for that year, even assuming no revenues at all during the next 12 months. Having the whole year covered on January 1 is called a trust fund ratio of 100 percent.

After 1950, the contribution rate (tax paid on wages) had to be raised to 1.5 percent, then to 3% by 1960, and to 4.2% in 1970. Those increases succeeded in keeping the trust fund ratio at or near 100 percent.

Something else was happening in those years that the actuaries couldn’t ignore: the baby boomer generation was coming into the world. Actuaries knew in what years that generation would enter the workforce and eventually retire, and they estimated the growth of wages and other economic factors during the boomers’ working years.

They knew that the contribution rate would have to be raised to accumulate enough money for the inevitable rise in retirement payouts. But they tried for two decades to raise the rate in small increments. The result was that, even though assets in the trust fund grew in the 1980s — it topped $100 billion for the first time in 1988 — the trust fund ratio fell below 100 percent.

Finally, in 1990, the contribution rate was raised to 6.2 percent, and that proved sufficient. By 1993, the trust fund ratio was again over 100 percent, and the fund was adding hundreds of billions of dollars every year. The actuaries have been successfully expanding the fund in preparation for the baby boomer retirements. By 2004 the ratio swelled to more than 300 percent, and it remains there today. Assets grew to $2.8 trillion by last year. As for the contribution rate, after 27 years it remains today at 6.2 percent.

This build-up of Social Security assets has been planned by the actuaries. They have also planned that as the retirement and eventual demise of the baby boomer generation progresses, the ratio will fall from over 300% to its normal range around 100 percent. It is a trend, in fact, that has already begun.

The Real Trouble Ahead

Politicians are aware of the trend, but refuse to think about it. The hundreds of billions of dollars added to the fund each year in the late 1990s, on which the Clinton administration built its false claims of a budget surplus, fell to just $69 billion by 2010, and to only $23 billion in 2015.

The fund will actually begin shrinking in a few years, and it will then begin cashing in its maturing bonds and not replacing them by new borrowing. At that point, the government will be forced to borrow from other sources to pay off its maturing debt to Social Security.

The stark reversal is made clear in the 2017 Trustees Report. Whereas the fund will increase by $150 billion over the next five years, it will decrease by $400 billion over the following five years.

The necessary borrowing will have an obvious impact on the government’s reported national debt. Debt now reported as “Intragovernmental” will shrink, with an equal rise in both “Debt Held by the Public” and in “Total Debt Outstanding.”

It will become more difficult to pretend, as both parties did in last year’s presidential campaigns, that federal government debt is 75 percent of Gross Domestic Product. The truth is that as of July 14, federal debt ($19.8 trillion) is 104 percent of GDP ($19.0 trillion). This is a fact that the rest of the world is quite aware of.

When federal debt rises even further to pay off what’s owed to Social Security, the US reputation as a bastion of financial stability will be questioned. So will the role of the US dollar as a reserve currency. In an increasingly competitive world, the nation will find itself in challenging times indeed.

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