Defenders of the current Social Security
system claim that huge future deficits in the program are not a
cause for concern because money in the Social Security Trust Fund
can be used to finance all promised benefits until 2032. Moreover,
because President Clinton has proposed that a significant share of
projected budget surpluses be diverted to the Trust Fund,
supporters argue that this move would allow benefits to be fully
financed through 2049.
The
implication is that Social Security can continue for another 50
years without a tax increase. Therefore, argue supporters of the
status quo, there is no need for fundamental reform, such as
privatization.
Yet
these assertions are based on a gross misrepresentation. The Social
Security Trust Fund is a deception. It contains no genuine assets,
only government bonds--IOUs that have no value beyond a promise to
impose higher taxes on future workers. Even the Clinton
Administration admits that the Trust Fund is fraudulent, stating in
its proposed budget for fiscal year 2000 that:
These [Trust Fund] balances are available
to finance future benefit payments and other trust fund
expenditures--but only in a bookkeeping sense. These funds
are not set up to be pension funds, like the funds of private
pension plans. 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, borrowing from
the public, or reducing benefits or other expenditures. The
existence of large trust fund balances, therefore, does not, by
itself, make it easier for the government to pay benefits.
[Emphasis added.]
Other government agencies and officials
acknowledge that the bonds held by the Social Security Trust Fund
are meaningless. The Congressional Research Service (CRS) notes
that "Simply put, the trust funds do not reflect an independent
store of money for the program or the government...."
What, then, is the purpose of the Trust
Fund? According to the Congressional Budget Office, "Trust Funds
have no particular economic significance; they function primarily
as accounting mechanisms to track receipts and spending for
programs that have specific taxes or other revenues earmarked for
their use."
The
bonds have no independent value because, as the CRS notes, "When
the government issues a bond to one of its own accounts, it hasn't
purchased anything or established a claim against another entity or
person. It is simply creating a form of IOU from one of its
accounts to another."
The
Comptroller General of the United States recently testified to this
effect: "[An] increase in assets to the SSTF [Social Security Trust
Fund] is an equal increase in claims on the Treasury. One
government fund is lending to another. These net out on the
government's books."
An
actuary from the Social Security Administration admitted that the
Trust Fund is a fiction, writing in 1990 that "in the more relevant
area of actually obtaining cash to pay promised benefits in the
future, the trust funds accomplish nothing...."
In
reality, the Trust Fund's holdings simply measure that one part of
the government--the Treasury--owes money to another part of the
government--the Social Security Trust Fund. Indeed, the best
possible interpretation of the Trust Fund is that the IOUs are a
measure of how much in taxes will have to be raised in the
future.
A
group of government actuaries acknowledged this fact, writing that
"we are not accumulating a true trust fund and are instead merely
accumulating a right to future government revenues."
As
the U.S. General Accounting Office (GAO) explains, "While the Trust
Funds' Treasury Securities [bonds] are assets of the Social
Security program, they are also liabilities for the rest of the
federal government that, when redeemed, will have to be financed by
raising taxes, borrowing from the public, or reducing other federal
expenditures."
It
should also be obvious that the interest "paid" to the Trust Fund
is equally meaningless. It is true that the bonds in the Trust Fund
receive interest, but that interest income takes the form of
additional IOUs. In other words, the original IOUs result in more
IOUs. The CRS refers to the supposed interest payments as "paper
income."
The
GAO concurs:
The
interest credited to the trust fund...is an internal transaction of
the government. One part of the government (the Treasury) credits
the interest to another part (the trust fund), so the two
transactions offset one another and have no budgetary effect.
The
President's plan is a disappointing diversion, an accounting
gimmick instead of real reform. As the Comptroller General recently
testified, "Without the President's proposal, payroll tax receipts
will fall short of benefit payments in 2013; with the President's
proposal, payroll tax receipts also fall short of benefit payments
in 2013."
Privatization is the only way to solve
Social Security's financial woes while also increasing retirement
income for today's workers. The concept of individual accounts has
bipartisan support in Congress. Moreover, about two dozen nations
around the world have shown that private retirement systems are
feasible. As evidence mounts that the White House plan is phony,
baby boomers can only hope that the Administration will abandon
gimmicks and embrace real reform.
Daniel J. Mitchell,
Ph.D. is a McKenna Senior Fellow in Political
Economy in The Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.