U.S. Treasury Secretary Jack Lew has been telling the country two different stories about the government’s ability to pay Social Security benefits during the debt-ceiling crisis. So which one is true?
In his October 10 testimony before the Senate Finance Committee, Lew raised the possibility that unless the government increases the debt ceiling, Social Security checks might not go out. “How can the United States choose whether to send Social Security checks to seniors or pay benefits to our veterans,” Lew asked.
President Obama made a similar claim in July 2011, when the country was also facing a debt-ceiling decision.
“I cannot guarantee that those checks [he included veterans and the disabled, in addition to Social Security] go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Obama said.
But wait, there’s $2.7 trillion tucked away in the Social Security trust fund. Liberals have assured us for decades, often expressing indignation in their voices when contrarians’ doubts were raised, that the trust fund represents real assets backed by the full faith and credit of the federal government—which ironically doesn’t have much of either right now.
Here’s how Lew described it in USA Today in February 2011.
Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries. … Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.
So if the trust fund can pay “full benefits for the next 26 years,” how can its ability to pay benefits next month possibly be jeopardized? Is Social Security “entirely self-financing” or not?
Since workers continue to make their payroll tax contributions during the debt-ceiling battle, then why couldn’t the government continue making Social Security payments? Are liberals lying to us now, or were they lying to us then?
Social Security is a pay-as-you-go system. When the government collects more from the 12.4 percent payroll tax than it needs to pay current beneficiaries, it puts the balance into the trust fund, which has built up a $2.7 trillion positive balance over three decades—at least on paper.
However, the government then borrows that money, writes itself an IOU and promptly spends it. Using the borrowed money in the current budget makes the annual federal budget deficit look smaller than it actually is and therefore reduces pressure on Congress and the president to cut government spending.
If the government doesn’t have enough money coming in to pay current benefits—which has happened recently because of the economic slowdown and the two-year “payroll tax holiday” that ended in December—it must draw from the trust fund. And that’s the problem.
Because the government has borrowed the money in the trust fund and spent it, it must turn to general revenues to redeem the trust fund IOUs. And doing that actually would divert federal money away for other obligations the government could pay.
The reason the government must engage in this accounting sleight-of-hand is because it fills the trust fund with what it calls non-marketable securities. These are bonds that aren’t exposed to the market forces of supply and demand and thus have no real value – serving instead as accounting tools for the Treasury Department’s bean counters.
If the trust fund had real assets, then the government could cover those IOUs without having to pull money out of its right pocket to put in its left pocket. And suggestions that seniors might not receive their Social Security checks would be blatant fear mongering.
But if the trust fund is only financial smoke and mirrors meant to fool the public into believing that the assets are there when in fact they’ve been pilfered and spent elsewhere, then the debt-ceiling crisis would likely reveal the scam. And that appears to be exactly what’s happening.
The only way we can solve that problem long term is to move to a system of pre-funded retirement savings accounts, but there doesn’t seem to be much interest in that solution these days.
The government created a massive Ponzi scheme when it passed Social Security in 1935. And it exacerbated the problem when it later devised a way to overtax workers so it could “borrow” the excess and spend it. The trust fund balance goes up, making Social Security look more financially solvent, while the federal budget deficit goes down, making politicians look more responsible. What a deal!
And it works—until a debt-ceiling crisis comes along to reveal the scam.