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  Social Security, Part 3 -- An Accountant's View  
 

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The Truth and Lies about the "Trust Fund"  

Diversion of FICA Taxes for Creating a Dependent Minority: 

By: Thomas Lee Abshier, ND

4/30/2005

 

 

The current Social Security System is configured as follows:

  1. The individual pays a percentage of their income in FICA taxes.
  2. That money is given to the current Social Security beneficiaries and the excess collected funds are spent on other government programs.
  3. The excess funds should go into real investments that produce interest and grow with time; but this money was already spent and is now a debt owed by the next generation of taxpayers to those who will retire.
  4. Thus, all the extra money collected is simply a large IOU owed by the Federal Government to the retirees of America.
  5. The government can only pay off debts by increasing taxes.

The Media, Democrats, and Bureaucrats are telling two major lies:  

  1. The Social Security system needs to be fixed because it will run out of money in 2042 when we exhaust the Trust Fund.
  2. Privatization will produce tremendous deficit spending, so we should fix Social Security by making minor modifications of the current system.

The truth is:

  1. There is no Trust Fund, only a debit sheet listing money already spent.  Thus, there are no saved assets available to fund the system until 2042.  Therefore, the Social Security system will go into deficit in 2018.
  2. Solving the problem with Social Security will produce a deficit or reduction of benefits depending on the solution implemented.

There are three major methods that can solve the Social Security problem:

  1. Privatizing Social Security: A solution where the individual owns and administers his own retirement accounts.  Privatization can be implemented by putting a portion of the FICA taxes into private accounts, and a portion into supporting the current beneficiaries.  This solution will produce a deficit for a period of time, but eventually the system will support itself.  
  2. A government administered pension system: A solution where the individual owns the accounts, but government administers and guarantees the benefits.  This solution is the same as privatization in that FICA taxes are collected, a portion goes to current retirees, and a portion goes to build up the individual's retirement account.  Government invests those funds and administers the system for the individual.  This solution will also produce a deficit.
  3. Reducing benefits: This solution will require no changes in taxation.  The retirement age will be increased, and/or the benefits will be reduced so that the FICA taxes collected equal the benefits disbursed.  The benefits will begin dropping in 2018 and drop by an estimated 27% in 2042.

In other words, if we continue using the current benefit and retirement age structure, the system will generate a deficit in 2018.  But, if we transition to a system where a portion of the FICA taxes are used to invest in interest yeilding securities we will eventually free ourselves of the large tax burden that will begin rising in 2018.  If we do nothing, the debt will rise.  To balance the budget we can reduce benefits, increase the retirement age, or euthanize those who have lived too long. 

 

The problem underneath all of this is that the US government has not invested the excess FICA tax collections in actual interest bearing securities.  As the President has stated, the Treasury Bills in Parkersburg simply represent a debt the American taxpayers must pay to meet the obligations to the retirees who paid money their entire working lives into this system.  These T Bills represent the money that government has diverted into other programs; all of which will someday come due for disbursement.  In fact, the "Trust Fund" contains no securities representing ownership of any American or foreign businesses, precious metal, real estate, patent/process, or any other valuable property. 

 

The taxpayers will actually feel the increased load due to this theft of their pension funds around 2018 when the FICA collections transition from excess to deficit.  The American people did not agree to increase their tax burden in this way.  The people elected representatives whom they expected to enact ethical legislation and this diversion of funds can only be understood as a betrayal of that charge.  While the problem has been developing and becoming more obvious recently; we cannot justify continuing down this track of long-term financial irresponsiblity now that it has come fully into our national consideration.

 

The Social Security system is a pay as-you-go system, and currently we over-collect revenues.  We commonly assume that the excess is invested and earning interest in preparation for withdrawal by the retiree.  But, in actuality the excess collections of $60 Billion (in 2004) to $108 Billion (in 2008) go directly to the general fund for immediate consumption.  After 2018, the Social Security disbursements will exceed collections and the government must fund the additional liabilities of the Social Security system by increasing taxes, printing money, issuing bonds in the capital markets, or cutting spending for other programs.  The Trust Fund will be of no benefit in helping to defray the costs of the Social Security obligation.

 

Social Security was first enacted in 1935, and since its inception, it has taxed workers and transferred those payments to the beneficiaries.  The excess FICA taxes go directly into the general fund, and a "Special Issue" note is printed to track the amount owed to the "Trust Fund".  These SI notes are internal to the governmental accounting system (i.e. between the Social Security Administration and the Treasury) and cannot be purchased by the public.  The government pays the majority of its collected FICA revenues immediately to beneficiaries, while the excess goes to fund other government programs.  The excess collections will increase until around 2009 (peaking at $108 billion/yr), and then diminish to zero around 2018.

 

A reasonable person would expect the government to invest the excess collected monies in a conventional pension fund vehicle to earn interest (as should have been done since its New Deal inception).  But, instead of complying with this obviously ethical use of this forcibly extracted tax, the government has spent this excess increment of FICA income (the amount above current beneficiary expenditures) on social programs.  But, the public has not yet felt the sting of the increased taxes needed to support these programs.  Rather, we are in the years of plenty where many workers support a smaller number of retirees.  This ratio will reverse someday and we have not prepared for those lean years; instead we consume all the grain collected each year and put none in our storehouses.  This policy has proceeded legally (but unethically) for decades.  The President has chosen to take a stand against this fraudulent and ultimately hemorrhagic drain on the economy.  But, instead of acknowledging the obvious accounting reality, the Democrats and media have misportrayed the nature and implication of this policy of spending the retirement funds now instead of investing them.

 

Instead of investing our retirement savings, the government has irreversibly consumed those pension funds on many social programs which have proven barren in actually solving the problems of sickness, poverty, and lawlessness.  The vocal opponents of Social Security reform which include senators, representatives, and officials such as Nancy Pelosi, Ted Kennedy, and GAO spokesmen, have obfuscated the fact of the broken contract with phrases such as, “Social Security is not facing a crisis”.  But, the President did not say the situation was a crisis.  Nevertheless, they can attack the President for a position he did not take.  This principle of falsely attributing intent, speech, or action to someone, and then attacking the person for this fictional error is a standard tool of propagandists -- we call it slander when spoken and libel when printed or broadcast.

 

This silent theft of the funds dedicated to Social Security pension investments has enabled politicians to spend money on a combination of Great Society ideals and Pork Barrel politics.  This method of fund redirection has allowed them to seduce various voting blocks and win loyalty without asking the taxpayers for the money to fund these programs.  If successful, the Democrats could produce enough dependent classes by the time the lie unravels to establish a loyal voting majority.  With a majority of voting dependents, the liberal social policy do-gooders could attain and maintain power in the face of an angry minority of taxpayers who vocally rebel against this policy of creating dependency.

 

The NYT editorialist claimed that President Bush was making a declaration of the worthlessness of the American debt owed to foreign governments.  Rather than attempting to portray the President as foolish, the editorialist should have explained the distinction between debt to foreign governments and the debt to the American retiree.  There is a difference between the Treasury bills issued to Foreign governments and the Notes the Treasury issues for the funds diverted from their proper use in Social Security.  Both Types of Treasury Bills are public debts, and the taxpayer must redeem them, but the source of their generation is vastly different.  We expect the debt to a foreign government to be called debt.  We do not expect that the "Trust Fund" is also a debt.

  1.  External Notes: The government can issue Treasury Bills to attract investors from Foreign countries and the Capital Markets.  These notes compete with other financial instruments such as savings accounts, bonds, and stocks, etc.  Treasury bills finance the government’s deficit spending above the amount received from taxes.  The Treasury notes also finance short term deficits produced by cash flow fluctuations, i.e. obligations that come due before the collectable taxes arrive.  Individuals and corporations who invest in government securities may redeem their principle with interest, but the money loaned to the government does not actually grow by being placed in enterprises which return a profit.  Every loan to government, and its interest, is repaid with tax dollars.  Borrowing money from the capital markets simply delays the inevitable day when the taxpayer must surrender additional taxes to repay the government’s debt with interest.  In general, debt should not fund ongoing social programs and non-emergency projects.  Many programs are good, humane, and beneficial, but if they do not increase the productivity of the economy, deficit spending will eventually reduce the quality of life for the entire spectrum of the economic classes.
  2.  Internal Notes: In an effort to account for the excess monies collected for Social Security beneficiaries, an internal governmental accounting system keeps track of the money diverted to non-Social Security expenditures.  In the case of the already-spent FICA tax excess, the Treasury Bill is simply a bookkeeping entry called "Special Issue" Treasury Notes indicating that the Treasury will repay Social Security with interestThis obligation for taxpayers to pay the Treasury back for the money already spent is the "Social Security Trust Fund".  The notes are continually cashed and new notes purchased to meet the daily obligations to the beneficiaries.  Since the system will go into deficit mode after 1918, Social Security will then draw off money from the general fund.  The general fund will have fully paid off the debt owed to America's retirees in 2042, but all the money used to pay off the debt came from a tax burden.  This fact is the dirty little secret of the Social Security Trust Fund, and everyone with any intelligence or level of knowledge realizes.  This dishonest accounting and PR system can only be understood as an Orewellian double-speak as we call money already spent an asset.  The Republicans and the President have displayed some level of candor regarding the truth of the system.  The Democrats, Media, and GAO/SSA Bureacrats have been totally dishonest in their obfuscation of the truth.

Government functions as a buying club or proxy shopper for the individual in purchasing impossibly large items by aggregating the income of our millions of citizens.  But shopping for consumption produces no return on investment.  We all know that purchasing products will not result in a refund check with interest in our mailboxes.  Government expenditures beyond income produce a deficit just like an individual borrowing today and repaying tomorrow.  Spending the Social Security excess today for expenditures produces a debt to the retirees, and government cannot repay that debt without taxing its citizens since it does not engage in for-profit enterprises.

 

The IRS forces every American taxpayer and worker to participate in the Social Security wealth-transfer program.  Large numbers of people put money into the system with the promise of getting more out of it than they put in.  On the surface, this system sounds reasonable because we assume the government has invested the principle, and will return our investment with both principle and interest when we retire.  But in fact, the “interest” we earn on our FICA tax investment comes only from a higher tax burden on the next generation.

 

A cursory evaluation of this system reveals that the government takes in FICA tax income, spends all of it, and issues T Bills for the margin that does not disburse to beneficiaries.  The obviousness of the unethical diversion of funds leaves no doubt that the government has purposefully created this illusion.  The very intelligent people in the SSA, GAO, and Congress know that our FICA (Social Security) taxes are not invested in secure retirement accounts for withdrawal in our later years.  But interestingly, only the Democrats and liberal media defend the current system of taxing the present generation to support the retirement accounts.  This entire group of liberal ideologues have banded together firmly to maintain the current system of tax diversion.

 

The Social Security obligation will continue to rise as the number of retirees increases.  In particular, the combination of the baby boomers reaching retirement age, and the 40 million (plus) aborted babies who are not in the workforce to provide FICA payments, will produce the perfect storm of high demand and low resources to fund the system.  As a result, we may see the grim scenario of the ever-increasing burden on the tax payers resulting in a push to endorse euthanasia of anyone who reaches an old, poor, or feeble state.

 

The April 7, 2005 Editorial, "Shameless Photo-OP" leaves no doubt about the agenda of the Left and the collusion of the media to mantain the current system in place for as long as possible.  We cannot positively identify the motivation driving the Lef to engage in such intellectual and political dishonesty.  But, given the pattern of behavior regarding their courting of voting blocks through the establishement of entitlements, we shall consider the hypothesis that the Democrats wish to buy as many votes as possible by creating citizens dependent on the government for their welfare and survival.

 

The one flaw in this theory is the current President's history of deficit spending.  The Republicans have passed a drug bill that will add billions to the Federal Budget each year.  But, if we remember the debate, the Democrats opposed it because the benefits were inadequate.  Likewise, the war has cost us billions of dollars per year.  The Democrats would claim that the liberation of Iraq was purely a grab for oil, power, and benefit for big business.  They wanted to spend the money for creating more social programs.  Thus, the pattern if accurate holds true even in the face of seemingly contrary evidence, the Democrats hold to a course of almost monomanical promotion of more and more social spending.  Interestingly, regardless of the actual source of the votes that produced another entitlement or social program, somehow the Democrats end up claiming to be the source and champions of every new dependent class or liberated minority.

 

The funds available to fund social programs from the excess collection of FICA taxes is only one example of funds which can be used to continue the flow of money to the dependent classes.  And since the excess Social Security collection will disappear in 2018, we may assume that we may begin to feel the pinch of the increased burden of funding at that time. But in actuality the problem may begin in 2009. 

 

The Social Security excess will only continue to increase until 2008.  And, if current governmental spending and appropriation habits prevail, the government will continue to expand its spending so as to completely dedicate and maintain the same spending levels as were achieved at the peak of the FICA collection excess.  Thus, in 2008 the government will have appropriated the entire excess FICA tax income for expenditures, and they will probably continue to spend at that level even though in 2009 the FICA tax excess will decrease.  Thus, to prevent a deficit we must increase taxes to make up the deficiency starting in 2009.

 

The Left cabal ("progressive" media, administrative government, special interests, God haters (e.g. the humanists, communists, ACLU, and the homosexual activists), and Democrats) have attempted to distract the public from their fund-diversion scheme.  Numerous strategies are thrown up by the media to create confusion around the issue, and thereby minimize the attention paid to the actual problems with the system.

 

One of the distractors used to confuse and sway the public into supporting our current system of Social Security is a study showing that most people want to retain the government backed system of Social Security because it is more secure.  This argument has a strong appeal since on its surface a government-based retirement system which raises funds by forcible collection of taxes would appear to always be more secure than a system dependent upon the growth of a national economy.  

 

But, the forceful/command nature of taxation and government programs can push the system into compliance with uneconomical practices far beyond the time when a social-economic experiment would have collapsed in a free market environment.  A governmentally mandated economy can produce extreme debt and economic imbalance without allowing a correction for a very extended period.  As a result of the extreme imbalance produced within the system when it finally does correct can be so severe that it actually precipitate the collapse of the entire social, economic, governmental system.  In a free market system, the reversal and correction would have been much smaller and less damaging; localized to a particular market segment. 

 

The Left rejects the President's proposal to actually invest the current excess FICA collections with claims that unspecified minor changes will salvage the current system.  But, making the current pay-as-you go system sustainable will require significant reductions in benefits and/or large increases in retirement age.  The Democrat's counter-proposals are neither specific nor genuine.

 

The most common argument used by the Left to delay reform declares that the Treasury notes in the "Trust Fund" will continue to fund the Social Security System deficit from 2018 until 2042.  By placing the projected date of Social Security “bankruptcy” at 2042, the accountants have made the problem seem unimaginably distant.  Thus, their argument that “There is no crisis” seems plausible, and lulls us into a sense of complacency.  Many unknown factors could arise between now and 2042 to make the situation better or worse.  But, this argument for delaying reform is based on the faulty assumption that the Trillions in Treasury Bills in the Trust Fund are assets which will fund the system from 2018 to 2042.  In fact, these Treasury Bills in the Trust Fund are simply obligations requiring taxpayers to pay for the Social Security benefits that have already been spent.  There is no "Trust Fund" with assets which will fund Social Security past 2018 other than the willingness of the American taxpayer to fund the retirement system.

 

The Social Security system has been used as a disguised tax embedded into the Federal Budget to fund social programs other than retirement accounts.  Allowing the government to collect taxes for retirement and then spend it on social programs makes it easier for the Democrats to continue funding the dependent classes.  This fund diversion and vote buying scheme will continue until the voting public awakens and demands a rectification of this travesty of public trust.  The Democrats have wagered that the dependent class will grow faster than the taxpayers who support them.

 

Instead of standing for fiscal responsibility and solvency of the nation's retirement sysem, the Left has foolishly chosen to make the reformation of Social Security a partisan issue.  They clearly have no respect for the truth, and have used every tactic to humiliate and negate those who stand for full disclosure and truth.  Instead of admitting that in 5 years we must begin increasing taxes to pay for all our established social programs, they have stood together to prop up the system for a few more years.  Few will notice the deficit increase somewhere around 2009.  It will be small compared to our other budgetary indiscretions, but it will begin the long slow collision with a potentially fatal disaster.    

 

Continue this Essay: Part 4:

 

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