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THERE IS NO $2.85 TRILLION SURPLUS IN THE SOCIAL SECURITY TRUST FUND [1]

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Date: 2023-03-21

Yesterday I received a Daily Kos petition regarding Social Security containing the following statement: “Let's set the record straight: Social Security has a $2.85 trillion surplus in its trust fund and can pay every promised benefit to every eligible American until the year 2035. Republicans rely on fearmongering because the facts don't support their solutions. We can't allow them to continue spreading misinformation.”

I’m as liberal as they come, but I have to correct this common mis-statement about the alleged $2.85 trillion surplus in the Social Security Trust Fund. What’s in the Trust Fund is a $2.85 trillion tax bill disguised as a “non-marketable, special obligation bond,” not cash nor cash equivalent marketable government bonds. To further this deception, the government relies on the public’s inability to tell the difference between these two types of bonds. Let me explain.

Shortly after taking office in 1981 President Reagan, facing with deficits in the Social Security Trust funds, established a Commission on Social Security Reform Commission in 1981, chaired by Alan Greenspan (before becoming Fed chairman). In 1983 the Commission dutifully recommended a hefty increase in Social Security tax rates and gradual extension of the time to retire from age 62 to 66 by 2015 (since further extended to 67). These measures, duly implemented by the Social Security Reform Act of 1983, produced immediate annual surpluses originally intended to be set aside in marketable government bonds purchased by the Trust Fund on the open market to provide cash to fill in the deficits anticipated when the unusually large cohort of the Vietnam Generation (aka Baby Boomers) began retiring in 2010, without the need for further borrowing. In effect, the increased taxes levied heavily on the Vietnam Generation were intended for them to provide partly for their own retirement.

However, instead of setting the surpluses aside, the Reagan administration, and every subsequent administration through the G. W. Bush administration, spent the surpluses on current government operations, leaving no surplus cash or cash equivalents in the Trust Fund. To cover up what can only be called a misappropriation of funds, the government inserted “non-marketable, special obligation bonds” into the Trust Funds and called them assets.

These bonds cannot be sold to raise cash to fill the Trust Fund’s deficits but must instead be tendered to the Treasury, which must then go out and borrow the funds and ultimately raise taxes necessary to fill Trust Fund deficits starting in 2010 when the Vietnam Generation began retiring. Accordingly, these special obligation bonds are not assets, any more than an individual’s promise to pay (IOU) deposited in their 401k is an asset. In effect, special obligation bonds represent a tax bill handed to working generations (X through Z) to pay for deficits incurred in paying benefits promised to the Vietnam generation through 2035.

Now the tax bill is coming due, you’re seeing Congress squirm, with Republicans proposing draconian spending cuts and Democrats proposing tax increases to be borne by “the rich.” In the likely event the two parties can’t agree on a strategy, the only viable alternative short of default, is to borrow more (which Republicans oppose) or print money, and that leads to inflation.

For a more detailed explanation of the current Social Security predicament, see the first 3 parts of my 4-Part series on http://davidlsmith.substack.com titled EVERYTHING YOU NEED TO KNOW ABOUT SOCIAL SECURITY AND WERE AFRAID TO ASK.

The subscription is free, and you are encouraged to leave a comment and forward the link to anyone who would benefit from the analysis. Stay tuned for the fourth part of the series “What will it take to make Social Security secure?

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[1] Url: https://www.dailykos.com/stories/2023/3/21/2159418/-THERE-IS-NO-2-85-TRILLION-SURPLUS-IN-THE-SOCIAL-SECURITY-TRUST-FUND

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