Social Security “Trust Fund” – No Fund, No Trust

By | April 14, 2016 | 0 Comments



How many times have you heard politicians proclaim that the Social Security “trust fund” is safe and secure, or that the money is in a “lock box”? How many times have you read similar claims in prestigious newspapers? But before we can determine whether the “trust fund” is safe, we first must discover whether it even exists. Something that is imaginary is neither safe nor unsafe − it is merely imaginary.

President George W. Bush proposed reforms that would have strengthened Social Security. But nothing was done, and he was severely criticized by Democrats and by the mainstream media, who insisted that the system was sound. Liberals, and many conservatives, ignored Bush’s warning in his State of the Union address:

Some in our country think that Social Security is a trust fund − in other words, there’s a pile of money being accumulated. That’s just simply not true. The money − payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.

Bush was ridiculed as an idiot for not understanding the obvious fact that the “trust fund” is made up of U.S. government bonds, among the safest investments on earth. Learned professors of economics explained this “fact” in newspaper opinion pieces, as if they were lecturing to dull students in danger of flunking their classes.

But who are the real fools? Who are really in danger of flunking economics?

When Social Security began in 1935, there were many workers who were paying into the system, and few retirees to be covered. So things looked promising in the short term. But even at the beginning, the long-term outlook was less rosy. As Wikipedia notes:

The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92. [Emphasis added.]

As the population aged and the average lifespan increased, there were too few workers paying into the system to make up for the increasing number of retirees drawing from it. We are slowly heading in the direction of Europe, where there are too few births to sustain the population, much less to sustain the generous social benefits.

Europeans are attempting to overcome this problem by importing large numbers of immigrants, largely from North Africa, the Balkans, and the Middle East. Many of these immigrants are Muslims who do not want to assimilate − or are not allowed to. Europeans are only beginning to experience the problems created by immigrants who do not share their values.

Americans are much better at absorbing immigrants − or at least we used to be. But now we are hardly Americanizing our own children, much less the children of immigrants. So unless we control immigration and curtail overly generous social programs, we will follow the Europeans on their unhappy road to insolvency and civilizational collapse.

All of these are serious problems, but they are not the basic problem. The basic problem is that there is no “trust fund.” Whatever money taken in by Social Security that is not paid out in current benefits − and these days that is a steadily shrinking amount − is immediately spent on other government programs. Let me repeat that: Any funds in excess of current benefits are spent on other programs. In short, Social Security is a Ponzi scheme.

The charade of a “trust fund” is maintained by replacing the spent funds with government bonds. But wait, you object − government bonds are safe investments. No they are not. Let me explain.

Suppose my friend Fred is short of money and needs a loan until payday. I open my sock drawer, take out $200, and hand it to Fred. He gives me a piece of paper on which is written “IOU $200” and signs his name. I put the paper in my sock drawer and go about my business. Fred is a reliable fellow, so I can count his IOU as an asset. If I were totaling up my net worth, I could include his $200 IOU, because I have confidence it will be repaid.

But now suppose I want to go out on Saturday night. I open my sock drawer and take out $200. As a reminder, I leave a note with the date and the amount. But can I treat this note as an asset? Can I treat it like Fred’s IOU? After all, I’m as reliable as Fred. If I were totaling up my net worth, could I include my own note for $200? Of course not.

Can you see my point? Fred’s IOU is an asset. He is a reliable fellow and will repay me. My note is merely a reminder that I spent $200, which is gone forever.

An IOU from a reliable person or a reliable entity is an asset. But my own note is not an IOU. It is merely a memo that the money was spent. If I hold a government bond, it is an asset. But if the government holds its own bond, it is not an asset. It is merely a memo that the money was spent, regardless of what anyone may tell you.

If the “trust fund” were composed of bonds issued by a reliable foreign government, those would be assets. Even if the “trust fund” were composed of ordinary U.S. government bonds, those might be considered assets. Ordinary U.S. bonds are negotiable, so if Social Security needed funds, some of these bonds could be sold to investors or to other governments.

But in fact, the “trust fund” is composed of special, non-negotiable bonds, which cannot be sold, but can only be redeemed on maturity by the U.S. government itself. In short, the “trust fund” is nothing more than my sock drawer, stuffed with notes from myself indicating that the money was spent.

Still, there is a crucial difference. The slips of paper in my sock drawer indicate my savings that I spent. This is an economic problem for me. The slips of paper in the “trust fund” indicate savings intended for millions of retirees that the government spent. This is an economic problem, but it is also a moral problem for us all. Recall the old saying:

He who takes what isn’t his’n
Must give it back or go to prison.

If you spend the money you will need for retirement, that’s unwise. But if you spend the money others will need for retirement, that’s theft − unless you are the government, of course. Then it’s a “trust fund.”

Social Security is in trouble. There are too few workers paying into it to provide the promised benefits for all the people who will be retiring. We may need to increase the retirement age, increase the payroll deduction, or subject even the highest incomes to the Social Security tax. If these measures don’t suffice, we may need to means test retirees − that is, reduce or eliminate pension payments for the richest Americans.

But whatever measures we take to prop up Social Security, let us never deceive ourselves by babbling about a “lock box” or a “trust fund.” There are no funds, and even less trust.

Most images of a bankrupt Uncle Sam show him with a confused expression, as if he didn’t understand how it happened. But I chose an image with an angry expression, to indicate that those in charge understood exactly what they were doing. But they did it anyhow, buying votes with “free stuff,” while knowing that the roof would fall in after they left office. And that surely is enough to make Uncle Sam furious − and all of us as well.

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