The annual report of the Social Security Trustees has been out for a few days now, and the news was bad on its face; the Social Security Trust Fund is now expected to be depleted by 2033, three or four years earlier than had been previously thought. This means that after 2033 the Social Security system will depend entirely upon the payroll taxes it will then be collecting, and the huge surpluses built up from payroll taxes of the past decades will have gone.
That is the nightmare in the headline news; the reality is much worse.
The Social Security Trust Fund does not exist in any meaningful way. What happened was this: Over the past years, the Social Security Administration collected more in payroll taxes (often listed as OASDI on your pay stubs) than it needed to collect to pay out the benefits of those on the Social Security rolls at the time. These surpluses were then “invested” into the “Trust Fund,” which is statutorily required to consist of securities that are backed by the full faith and credit of the United States – that is to say, government bonds.
To summarize, the Social Security Administration used tax dollars (from OASDI) to buy government bonds. Congress then used that money as part of the general budget, just as it would do with any other proceeds from income taxes or the sale of a savings bond.
What this means is that the Social Security Trust Fund (currently estimated at about $3 trillion) is marked as a liability to the general government budget, and is included in the calculation for the national debt. The $3 trillion of bonds that make up the assets of the Trust Fund, are part of the liability of the national debt, and the only way for those bonds to be redeemed is for Congress to raise income taxes or borrow even more. The government borrowed from itself, and promised to pay itself back.
Imagine that instead of saving for your retirement, you wrote out an IOU to your retirement fund every month or so, and then spent that money on something else. After a while, you will have a stack of IOU’s that you owe to yourself. You wouldn’t have saved any actual money for your future, and those IOU’s aren’t real assets; nor are the bonds held by the Social Security Trust Fund.
But not to worry. We are told that even after the fund has been depleted, the Social Security Administration will still be collecting revenue from payroll taxes, and is expected to be able to pay out about 75 percent of scheduled benefits. Unless they raise payroll taxes to avoid spending less.
So, there you have it. You paid payroll taxes to fund an entitlement surplus, and the
money collected was borrowed by Congress and became a debt liability to the general budget, which will now have to be paid back by raising income taxes to redeem the bonds bought with the payroll tax proceeds. Then, when that process is complete, payroll taxes will have to be increased because cutting Social Security by 25 percent will likely be as politically popular in 2033 as it would be today. Money collected through taxes thus becomes debt, and debt leads to more taxes. The professional political class needs another crop of taxpayers to keep the cycle going – somebody needs to pay the payroll taxes for the Social Security program, as well as the income taxes needed to redeem the bonds held by the Trust Fund and bought with payroll taxes collected decades ago.
In other headline news, around half of recent college graduates are either unemployed or underemployed.
About the Author
Mr. Waechter is an attorney and a recent graduate of Drake University.
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