It appears that proposals to reform Social Security are and will continue to be an important part of this year’s campaign for U.S. Senate between Erskine Bowles and Elizabeth Dole. Unfortunately, this is an easy issue for demagoguery and misrepresentation.
North Carolina Democrats have been taking full advantage of this. They are claiming in television and radio ads that proposals, supported by Dole, to allow individuals to keep part of their withholding taxes and invest the money for their own retirement, will drain the Social Security “trust fund” of $1 trillion. The big lie in this ad stems from the fact that there is no trust fund, there never was a trust fund, and there never will be a trust fund. In this instance the term “trust fund” is nothing more than a euphemism for a bundle of IOUs from the U.S. Treasury that are being held by the Social Security system.
Currently, Social Security is taking in more than $160 billion more in taxes each year than it is paying out in benefits. The surplus is expected to rise to more than $300 billion by 2011. The image that is portrayed is that this extra money is being put aside into a “lock box.” In the year 2016, when Baby Boomers begin to retire and payments into the system are not enough to pay these future retirees, the lock box will be opened and the trust fund will be tapped. The fact is that nothing is further from the truth. All future retirees, no matter how much is in the so-called trust fund, will be paid out of the tax base at the time the benefits are doled out.
In order to see this we must follow the money. When the Social Security system collects revenues in excess of its obligations to recipients it is required by law to purchase U.S. Treasury bonds with the extra funds. In other words, the money is loaned to the Treasury and used for spending on other government programs. It is never actually set aside. In return, the Social Security system gets a note, that is an IOU. Every excess dollar ever collected by Social Security has been transformed into a dollar’s worth of IOUs. By the year 2016 the Social Security system will hold more than $5 trillion in IOUs from the U.S. Treasury.
Here’s the rub. When Baby Boomers begin to retire they will want cash — not IOUs — for their retirement benefits. This means that the Social Security system will have to go to the Treasury and cash in the IOUs. And where will the Treasury get the money to pay off these trillions of dollars in obligations? That’s right, from our children, who will have to pay higher taxes. What politicians are fraudulently calling the Social Security trust fund is nothing more than a bundle of claims on future taxpayers. The way the system is set up, every dollar that is paid out must come out of taxes that are paid at that time. There is no other way it can work.
What this means for current proposals to “privatize” a portion of Social Security is that, since there is no real trust fund, there would be no negative impact on the government’s ability to pay future recipients out of revenues from the fund. The money that people would be allowed to keep and invest for themselves would come out of today’s excess funds and not funds that are being paid to current recipients. This means that there would be a reduction in the amount of money the Social Security system lends to the Treasury and would therefore reduce the dollar value of the IOUs held by the system. Since the returns on these private investments will reduce the future obligations of Social Security they would have the happy effect of reducing the tax burden on our children.
If the only way the Democrats can counter proposals that would give citizens ownership rights to their retirement funds is to lie about how the Social Security system works, then the Bowles campaign must be in much worse shape than anyone is letting on.