by John Koraska

March 5, 2005

 

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With surprising candor, Alan Greenspan, Chairman of the Federal Reserve, (Architect of the 1983 Social Security Reform) recently said problems with Social Security may begin as early as 2008. On Thursday, in remarks to the President's Advisory Panel on Federal Tax Reform, Mr. Greenspan floated the idea that "simplification is needed, perhaps, a hybrid between consumption taxes and income taxes". For those who follow the issue closely, the year 2008 is pivotal (not 2018 when Trust Funds are projected to go in the red). 2008 is the year when the first baby boomers begin to retire at age 62 and are entitled to Social Security benefits.

 

The Chairman's sudden candor may have been prompted by remarks made by President Bush last month when he inadvertently, perhaps, "Let the cat out of the bag". On his trips to sell his ideas on Social Security Reform to the public, The President on several occasions made these remarks:

 

"As a matter of fact, in 2018, the system goes into the red. And by the way, there's not a Social Security trust. In other words, people think your money goes into the trust and it's held for your account and then you get it out. That's not the way it works. It's pay as you go. It goes in and it goes out. And to the extent that there's money more than the retirees receive, like it is today, it goes to other programs. And so what you've got is an IOU, kind of a bank of IOUs. It's an important concept."

 

The Social Security Trust Fund is not a Trust fund. It is a Social Security Slush fund. It has been a slush fund since1983 when new reforms raised the FICA tax on workers to build a reserve of funds for their retirement. What the President admitted last month is the surplus contributions (a second income tax on wage earners, exclusively) has been spent on purposes other than those intended which I believe is against the law. The increased FICA income taxes (government calls it contributions to make it appear voluntary) have produced income surplus to that required to pay current beneficiaries. Since 1983 the accumulated surpluses plus accruing interests now exceed $1.6 trillion and growing.

 

The U.S. Treasury receives the FICA taxes, credits the Slush Fund with the surpluses (IOUs) and other government departments spends the cash. Last year, surplus contributions amounted to $71.1 billion plus an additional $80.1 billion in earned interest, that the Treasury credited to the Social Security slush fund. This $151.2 billion represents cash the Treasury did not have to borrow on the open market.

 

The President, last month was only repeating what others have previously stated. Examples:

 

"Trust Fund balances are available to finance future benefits...but only in a bookkeeping sense...they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes or borrowing." President Bill Clinton in his Analytical Perspectives section of the 2000 budget.

 

"We have no positive assets in the Social Security Trust Fund," Secretary of the Treasury, and one of the trustees, Paul O'Neill, June 19, 2001, at a luncheon speech to the Coalition for American Financial Security in the Sky Room of the World Trade Center and later to Sam Donaldson on This Week, Sunday, June 25, 2001.

 

"It holds no real assets. Consequently, it does not generate funds to pay future benefits. These so-called trust fund 'assets' simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations," June O'Neill, former Director of the Congressional Budget Office (CBO) at the CATO Institute's Conference for Women and Social Security.

 

THE LAW IS THE FLAW!

Had the law been changed in 1983, we would now have over $1.6 trillion in a REAL Trust Fund with real assets compounding daily instead of $1.6 trillion in a Slush Fund filled with debt, also compounding daily. One simple change back then and we would not have this enormous problem, today. The question would be where to invest the money NOT how can we redeem the IOUs. The $3.2 trillion difference between the debt and what should have been assets is more money that the entire U.S. government will spend this year.

 

The Social Security Act of 1935 requires all surplus contribution amounts be invested only in US government securities or Securities guaranteed by the US government. Repeal the flawed provision and replace it with: "All surplus contributions and Earned Interest may be invested ONLY in ventures external to the Federal Government".

All other ideas currently be considered, such as, Private Retirement Accounts (PRA) are peripheral to this central issue. Change the law! Stop the Bleeding! DO IT NOW!!

 

Social Security Slush Fund - (Art#9)