Heard the one about the Social Security Trust Fund that holds nothing but "IOUs"? That phony claim goes back to at least 1939, when a rabidly anti-Roosevelt journalist named John T. Flynn used a colorful analogy about a tin box in a drawer in order to argue that Social Security was a "monstrosity." But where Flynn was simply mistaken, many of those who repeat his arguments today have more cynical motives.
Flynn's essay, The Social Security "Reserve" Swindle, contains all the same arguments we hear today: The government's just writing IOUs to itself. Social Security is "an offense against younger workers" (who would be about ninety years old now) that will give older generations a free ride. "The best thing to do with this monstrous child," wrote Flynn, would be to slay it at once ..."
Years later a group of people came together to write a comprehensive rebuttal to the anti-Social Security arguments thrown around by John T. Flynn and the hundreds who came after him. They took on all of the myths one by one, demolishing them with a passion that was but thinly concealed by the dryness of their prose.
So who were these pseudo-socialist troublemakers? Was Krugman among them, or Stiglitz, or Dean Baker? Surely there must have been at least one bearded, malcontented economist. There must've bloggers, too, and other members of the "professional left," right? Meet the crazy hippies who took on the anti-Social Security crowd and won:
They're members of the 1957-59 Advisory Council for Social Security, appointed by HEW Secretary Marion B. Folsom (he's the dude standing fifth from the left with his hands folded) during the Administration of Dwight D. Eisenhower. Who was on the Council? The editor of Business Week, who was also head of McGraw-Hill's Executive Committee. The Chief Actuary for Metropolitan Life. (Didn't I meet him at Netroots Nation?) The President of Pacific Lighting Corporation. Some eminent economists and business professors. And three union leaders.
In 1959 they issued a paper called "Misunderstandings of Social Security Financing,".and here are the misconceptions they identified and rebutted:
They did such a thorough job that they probably thought they had put these issues to rest. But then, they have dreamers' eyes, don't they? (Especially Mr. R. A. Hohaus, the Met Life Chief Actuary, if you ask me. He's third from the left, and the bow tie shows he's not afraid to reach for the stars. )
It might have killed this group's bubbly and childlike idealism to know that fifty-three years later we'd be seeing blog posts like this one, entitled "I.O.U.? More Like 'You Owe You' By Way Of Social Security." It contains the same specious arguments first trotted out by Flynn in 1939, and decisively laid to rest by the 1958 Advisory Council report. (What's worse is that this guy claims to be a financial advisor.)
And it might have broken the visionary, I-see-a-better-world-to-come heart of Mr. Robert A. Hornby of the Pacific Lighting Corporation to read letters to the editor like this one, addressed to the editors of the Knoxville, Tennessee News-Sentinel from Tea Party supporter Karen F. Laffredi: "Social Security is broke. There are not enough workers to support current Social Security payouts and Congress has already spent the money in the trust fund leaving IOU's." (She goes on to make equally inaccurate statements about health care too, bless her heart, but that's not today's topic.)
A letter writer to the Greeley Tribune makes the same point:
"There is no real money in the "trust fund" -- it's an accounting gimmick -- a stack of government IOU's ... As an illustration, put some cash in a box every month for your kid's college education, then once a year Uncle Ned visits, borrows the cash for booze and puts an IOU in the box. When it's time for college, you'll have a box full of Uncle Ned's IOU's -- and he's drunk and flat broke."
It's John T. Flynn all over again, with a little Eugene O'Neill thrown in for color. Could this really be the state of public knowledge, so many years after the Advisory Council issued its paper? After all, the financial advisor has a vested interest into scaring people. And Ms. Laffredi's probably a person of good intentions who's been manipulated by cynical leaders.
But wait ... it gets worse. As we've discussed before, a Washington Post columnist and Senior Editor at Fortune is making the same "IOU" argument. A blogger who is also (disturbingly) an economics professor argued in 2005 that repeated the discredited Flynn argument with an even more vacuous example (at least Flynn's hypothetical saver actually puts money in a tin box. This guy just writes himself promissory notes for a million bucks.)
Worse, we have candidate for the United States Senate comparing Social Security to Bernie Madoff's crimes and calling it a "Ponzi scheme." As a fact-checking site pointed out, "A Ponzi scheme is based on a lie ... The IOU to the fund, on the other hand, is backed by the full credit and faith of the U.S. government. It must be repaid, with interest ..."
How did it come to this? How did we reach such a state of confusion about the solvency of Social Security? Actuaries deal in probabilities and statistics. What were the odds we'd be so confused in 2010? It isn't accidental, of course. It's the result of a concerted public relations effort, kicked off in 2005 by George W. Bush. Bush called reporters into his office and said "There is no trust 'fund' -- just IOUs that I saw firsthand." He showed them a file drawer to illustrate his argument that the government's obligation to the Social Security Trust Fund are just pieces of paper.
So is a dollar bill. But if the government ever refused to honor one it would set off a panic. Most Treasury obligations are electronic nowadays, and not written on paper, but the principle's the same. As for Madoff, he never had a team of actuaries who verified the financial soundness of his fund, but Social Security does. (Yes, we know that inside every actuary is a butterfly yearning to be free ... but they get certified to do this sort of thing.)
Former President Bush's message has been consistently promoted by billionaire Pete Peterson, too, through a variety of funded vehicles that include the "America Speaks" Social Security town halls and his Fiscal Times "news" service.
My money's on the actuaries. They have to take tests ... hard tests ... before they issue opinions. Check out Actuarial Note No. 142 from the Social Security Administration's Chief Actuary if you want to understand the nature of those "pieces of paper."(1) Here's what it explains: Lawmakers rightly thought that the money people pay into Social Security should earn interest when it's not used. It was invested in Treasury bonds, certificates, and notes because lawmakers thought that was the safest place to put the people's money.
The safest place? These lawmakers hadn't met Alan Simpson. He's the head of the Deficit Commission, that group that wants to keep the money instead of paying it back. If he and his fellow-travelers succeed, it would be the first time in the history of the United States Government that it has ever defaulted on an obligation. Why would they want to do that? Because then they wouldn't have to raise taxes on the wealthiest Americans. They'd have to cut benefits to get away with it, but that doesn't bother them.
But before they succeed, they're going to have to get past the Advisory Council. (You may say that Robert A. Hornby of the Pacific Lighting Corporation is a dreamer, but he's not the only one.) And they're going to have to deal with ... the actuaries. That's why they've mounted an enormous public relations campaign: to convince you that these government certificates of indebtedeness are just IOUs, and that Social Security is "broke." They're using arguments that are seventy-one years old, which is old enough to collect Social Security -- although if they have their way, it may not be for long.
The "IOU" story isn't true. The Social Security Advisory Council told you that in 1959, and so did the Head Actuary himself. Tell everyone: The Social Security Trust Fund has investments backed by the full faith and credit of the US government, not IOUs. It has a surplus, not an empty file cabinet. It's financially sound, and with a minor adjustment (raising the payroll cap will do it) it will be financially sound forever.
If they ask how you know all that, tell 'em R. A. Hohaus of Metropolitan Life told you so.
______________________________________________________________
(1) The Note was written in 1999, so the figures aren't updated, but it puts these obligations in the right context. "The law has required," says the Note, "that trust fund assets be invested only in 'interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States."
The Note explains that these investments "may be either short-term 'certificates of indebtedness' or longer-term special issues in the form of notes or bonds," which "the Treasury is authorized to issue ..." Why invest in Treasury notes, bonds, or certificates? Because "this provides the investments of the funds with the greatest possible protection against the risk of loss of principal or interest due to default."
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Strengthen Social Security campaign. Richard also blogs at A Night Light.
He can be reached at "rjeskow@ourfuture.org."
Website: Eskow and Associates
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow
Um, no, it wasn't massive government overspending. It was massive FOREIGN debt that did it.
It is mathematically impossible for a government to go broke on its own currency. Germany owed a great deal of money to foreign governments in THEIR currency and that is the formula for going broke.
It is a trivial and insignificant fact that governments who print fiat money can keep themselves from going broke because they can print enough money to cover any sized deficit. As it destroyed jobs, livelihoods, life savings, the tax base, etc. the government could keep ratcheting up the printing presses (or increasing an account balance in a Fed computer, low interest rates, and electronic transfers). The government accounting sheets would look fine. Society would dissolve into ruins as increasing the money supply creates no real assets, but destroys savings. Any Foreigners who held securities backed by the fiat currency would also be screwed. At the end of WWI, foreigners were smarter and specified in the Treaty of Versailles that German foreign reparations be paid in gold marks (gold), and not the German fiat currency.
Mr. Eskow uses the above words to refer to an excellent article by Allan Sloan, entitled “Social Security, the trust fund and funny money” in the August 10, 2010 Washington Post, which just happened to quote me and refer to my book. Mr. Eskow didn't even give you Allan Sloan's name, let alone say anything about his credentials.
Allan Sloan, Senior Editor at Fortune, is one of the most knowledgeable and highly respected business journalists of our time. He has won the prestigious Gerald Loeb Award seven times. That award was established in 1957 by the late Gerald Loeb to honor journalists who make significant contributions to the understanding of business, finance and the economy. I first began a periodic email correspondence with Allan Sloan in 2004 when my book, "The Looting of Social Security," was first released. In my opinion, Allan Sloan tells it like it is. He is just trying to alert the public to the facts. Is that such a bad thing to do? I wish Mr. Eskow would debate the issues with Allan Sloan instead of just criticizing him without even providing his name to readers.
Allen W. Smith, Ph.D.
Website: www.thebiglie.net
Phone: 1-800-840-6812
RECEIPTS
Non-Social Security Receipts $1,461.2 billion
Social Security Receipts 575.1 billion
TOTAL RECEIPTS $2,036.3 billion
OUTLAYS
Non-Social Security Outlays $1,890.0 billion
Social Security Outlays 510.0 billion
TOTAL OUTLAYS $2,400.0 billion
The total non-Social Security receipts, plus the Social Security receipts, totaled up to $2,036.3 billion. That was not nearly enough to cover the total government outlays of $2,400.0 billion for fiscal year 2005. So the government spent all of its non-Social Security revenue, plus all of the Social Security revenue, and still could not pay all of its bills. In fiscal 2005, the government ran an overall deficit of $364 billion. This means that, after spending all of its revenue, the government still had to borrow $364 billion.
The numbers are different, but the trend is the same for all years after 1985. All revenue, including the surplus Social Security revenue, was spent each and every year. Since all of the revenue was spent, none of it was saved. Money can be spent or saved. If it is saved, it can then be invested. But once money is spent, there is nothing left to invest.
Allen W. Smith, Ph.D.
Website: www.thebiglie.net
Social Security is not an investment scheme. It's insurance. The entire premise is based on insurance and not investment management.
What is so hard to understand about that? Social Security is no more in danger of collapse than Allstate's annuity fund is. It's about actuarials, not portfolios.
If we want to increase private investment and decrease dependence on insurance, there's no need for the government to administrate that. All they have to do is raise the contribution limit on private retirement accounts.
Know why they don't? Because it would hurt the economy. Too much saving. Right. And that's a principle that won't change if we hand SS over to the Wall Street casino.
What happens to the losers in SS if they're investing in pumpkins on Nov 1? Tough luck? That's the situation SS was created to prevent in the first place.
No other government agency is funded until 2040. Go fix one of them.
It's not insurance. It's a tax. Until now, SS has always brought in more than it sent out. The difference was spent by the politicians. The so-called 'insurance' part was a bribe for a political constituency that tended to vote more than those on whom the tax would mostly fall.
The problem is that now that it is paying out more than it is taking in, it is no longer a net revenue stream. It no longer serves the politicians and plutocracy as a revenue source, and consequently will be modified. Whether it is still overtly funded is irrelevant.
1) Who exactly is the full faith and credit of the US government?
Answer: Future taxpayers who currently cannot vote. The best constituents of all.
2) They money for Social Security goes into the general fun, and and IOU, which ONLY THE SSTF CAN BUY, is placed in the SSTF. What is the value of an IOU in the SSTF if it is not available in the open market?
Answer: Depends on the bond market at the time the bond must be sold to pay for that SSTF IOU.
But wait, there's more!!!
When the government sells treasuries, what is it essentially doing? That's right, creating money. Creating money cant result in? Yes, inflation.
Wow, you are good at this game.
For the $64K question, what is indexed to inflation? That's right, social security benefits.
HOPE ain't gonna help that one.
And did Carter really borrow trillions? The national debt under carter was 900 billion, so did he really borrow trillions?
The impact of Social Security benefits on the lives of citizens and on local economies is incalculable. In 1995 Social Security paid $340 billion in benefits. Forty-two percent of American senior citizens are kept from living in poverty by their Social Security payments. Nearly one in five Americans receives Social Security benefits and ninety-five percent of Americans have the Social Security benefit protection program. The poverty rate of the elderly was 35% as late as 1959. Now it's about 10%, because of Social Security.
We Must Stop the Cabal's Looting of Social Security Funds
Since the Johnson administration, the cabal that came into power through coup d'etat of the Kennedy assassination has been looting Social Security funds and using them to pay for their illegal imperialistic operations..
http://www.hermes-press.com/sss1.htm”
Muck- Raker i congratulate you ,fan and fave you for talking about the 800 lb gorilla in the room.
Americans are mentally , financially and soon will be legally enslaved by the same class of people who financed the slave trade, world war 1 & 2 and now have put in place the biggest power grab of all times.
While Americans are raving and ranting about stuff like who is a witch and ground zero mosque more and more constitutional rights are stealthily being taken away and the currency debased to the point that soon when inflation / deflation hit all the wealth accumulated by the middle class will be once more in the hands of the Banksters and their cohorts.
Americans have been brainwashed into avoiding research of those nefarious activities by labeling all such inquires / discussions as " conspiracy theories "
This is a dire time for the world in which all the rights of the working people won since the days of Oliver Cromwell is being taken away by the money masters and their cronies.
God help Americans because after you are enslaved the rest of us are up a creek without a paddle.
You are a gifted writer. You are also a very fortunate writer to have a forum with which to reach a large audience. As a gifted writer, with a large audience, you also have a serious responsibility to research the topics you write about and try not to contribute to the abundant misinformation that already exists on many topics, including Social Security funding. I know for a fact that you have not done much in-depth research on what has resulted from the Social Security Amendments of 1983, which were in response to the recommendations of the 1982 Greenspan Commission on Social Security Reform. How could I possibly know how much research you have done on the results of the 1983 Social Security payroll tax hike? I know because I have been immersed in research on that subject for the past ten years, and nobody who had done even a little research would write the things you write. WHY DID YOU START WITH 1939 in trying to make your point in this article. The whole issue of whether the government holds real bonds or just IOUs, in any significant quantity, was irrelevant prior to the 1983 legislation, which called for the baby boomers to prepay the cost of their retirement. After passage of the 1983 payroll tax hike, all Social Security surplus revenue was supposed to be saved and invested. That is where the problem started.
Allen W. Smith, Ph.D.
If Mr. Eskow would just take the time to reseach the federal budget numbers for all years from 1983 to the present, he would find that in every year the government first spent all of its general fund revenue, then it spent all of the Social Security surplus revenue, and then still had to borrow even more money from the public to just pay its bills. If all the surplus Social Security revenue was spent for non-Social Security purposes, how could any money have been saved or invested? Please visit my website at www.thebiglie.net for more information.
Allen W. Smith, Ph.D.
Phone: 1-800-840-6812
Translation into English: We will give your Social Security investment to a friend of the Republican Party, who will do a financial nutshell game to flip the money into his personal portfolio. You will end up with less than nothing. After he cleans out your SS funds, you will be in debt to pay for administrative fees and make up losses he shifted from underneath his shell to yours.
The cabal wants to pillage social security because it's where a big pile of money is--in the TRILLIONS!
Beginning in earnest with Ronnie Reagan and continuing on through Bush II--and now Obama--the cabal has looted the Social Security surplus fund by spending the money on Iran/Contra gun-running and Iraq and Afghanistan war-profiteering on weaponry manufactured by their defense industry cronies!
Since presidency of Lyndon B. Johnson, government has illegally used money from Social Security trust fund to support military spending and bailing out corrupt banks.”
No, I'm not talking about privatizing. That would be silly. But everyone is very very very worried that the magical dollar well will dry up and the United States will be the first country in history to go broke on its own currency. That our entire economy will shut down because of internal accounting and not foreign debt.
So, let's securitize that risk! Let's let people buy bonds against the future solvency of Social Security. If you buy a bond today that matures 10 years, you get X% return if Social Security still exists and we're not living in Road Warrior world.
Why not? Sure, betting money against the idea that money will have value in the future is a pretty safe bet since if you lose, well, you only lose money.
Other than that, I don't see any problems. Get Morgan Stanley on the phone. Or Laurel and Hardy.
Any takers? $1,000, right here. I'll put it right into an escrow account. Hold it there for 20 years.
Of course, I'll want odds. Everyone is so dead certain that the whole thing is going to collapse before Obama leaves office. 20 years is a long time.
How about....10:1?