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Fiction on the Social Security Trust Fund
By Dean Baker, truthout
June 16, 2006
In many ways Social Security is a model program in that does
exactly what it was designed to do. It provides a core retirement income
that ensures retirees a decent standard of living. In addition, it
provides insurance for workers and their families in the event of
disability or early death. There is very little fraud in the program, and
the administrative costs of Social Security are less than 1/20th as high
as the cost of private insurers. This background is crucial because it explains the Social
Security "crisis." The public fully appreciates what Social
Security does and would never support efforts to privatize the program if
they believed that Social Security was fundamentally sound. Therefore,
proponents of privatization have undertaken a massive effort over the last
quarter-century to convince the public that Social Security is going
bankrupt. The logic is simple; if the public is convinced that the
Social Security program can't be sustained, then there is no alternative
to privatization. If people buy the Social Security crisis story, then
privatization may be the only way to save the program. A big part of the crisis story is to convince the public that
the Social Security trust fund is just an "accounting fiction."
Politicians, columnists, and even policy analysts routinely repeat this
assertion. They have gone to great lengths to imply that the trust fund is
some bizarre and confusing entity that cannot be relied upon to help
sustain Social Security. For example, last year President Bush visited the
site where the bonds held by the trust fund are stored and announced that
these bonds were "just sheets of paper." Bonds are sheets of paper (like stock certificates), but those
of us who live in a modern economy should not be troubled by this fact. In
a modern economy, claims to wealth are most often just accounting entries
- as everyone who uses a bank account presumably understands. There is no real mystery about the trust fund. In 1983,
Congress voted to raise the Social Security tax by more than was necessary
to help pay for current benefits. The intention was to build up a large
trust fund which the program could then draw upon to pay for the
retirement of the baby boom generation. The trust fund is approaching $2
trillion, more than $13,000 for every active worker. Under the law, the trust fund must be held in US government
bonds. Government bonds are not very mysterious - the vast majority of the
public holds some amount of government bonds, either directly or through a
retirement account. The bond commits the government to pay interest each
year, and then to repay the bond in full when it comes due (usually in 5
years, 10 years, or 30 years). That is exactly how the bonds held by the
trust fund work. The Social Security privatizers try to make this process sound
strange or confusing. They claim that repaying the bonds just means that
the government is pulling money out of one pocket and putting it into
another. While this is true, the important point is that the pockets
belong to different pairs of pants. Under the law, the bonds will be repaid from general
government revenue. This money comes overwhelmingly from the individual
and corporate income taxes. These are relatively progressive taxes; this
money will come disproportionately from wealthy people like Bill Gates. On
the other hand, the Social Security tax is very regressive. It is paid
only from the first $94,000 of wage income. Income from high salaries,
stock, and businesses is not subject to the tax. In effect, the bonds
require the government to tax high income people to pay Social Security
benefits to ordinary workers. Of course, high income people don't want to pay the taxes to
repay the bonds. That is why they are so anxious to convince the public
that the trust fund is not real. I calculated that defaulting on the trust
fund would transfer more than $1 trillion from the bottom 95 percent of
the income distribution to the richest 5 percent ("Defaulting
on the Social Security Trust Fund Bonds: Winners and Losers").
The richest 1 percent of families would walk away with nearly $750,000
each. In short, there is a lot of money at stake in convincing the
public that the Social Security trust fund is not real. That is the reason
we hear it called a fiction. In reality, there is nothing more confusing
about the trust fund than an ordinary bank account. The public absolutely
should demand that the government not default on the bonds held by Social
Security and that the politicians and pundits start talking more honestly
about the program.
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