Government Spending: Social Security, Part 2

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff) submits another entry on Social Security spending, this time regarding the question of whether or not “Congress already spent our Social Security money.”

It’s no secret that around the year 2034 Social Security’s payroll tax revenues—combined with “reserves” stored in the Social Security surplus fund—will be insufficient to pay full promised benefits to retirees.

Government bureaucrats usually blame the aging American population for the shortfall, and other apologists for the program’s management often argue “When Social Security was created they didn’t anticipate people living until age 78.”

Conservatives criticize the looming shortfall as the product of government incompetence, usually arguing that “Congress saw the trend back in the 1980’s and set up a trust fund as a reserve, and then they proceeded to spend all the money.”

Government bureaucrats and liberals then shoot back, arguing “the surplus *was* invested.”

So who’s right? We’ll try to explain.

THE 1980’S

Early in Ronald Reagan’s presidency the Social Security payroll tax rate was 5.35% (employee) + 5.35% (employer) = 10.70%. During this time America’s aging workforce plus swelling payments to family beneficiaries and disability claims were already straining the program—even with the huge advantage of baby boomers entering the workforce faster than seniors were retiring.

-Full time employees 1983-1990: 80.5M to 99.1M (+23.0%)

-SS retired workers and dependents 1983-1990: 24.9M to 28.3M (+13.6%)

(Source: BLS and Social Security Administration)

During the 1983 crisis the program was forecast to be ***only three months away*** from no longer being able to pay all promised benefits to retirees.

Further compounding problems was the long-term retirement prospects for the baby boomers.

In 1983 government analysts saw a huge generation of baby boomers entering or already in the workforce, but they knew beginning as early as 2008 the first baby boomers would start retiring and drawing pension payments. The further into the 2010’s, 2020’s, and 2030’s America got, the larger the pool of seniors would swell with insufficient replacement workers to pay for promised benefits.

So in 1983 a compromise was struck between Democrats and Republicans to not only keep Social Security going in the short term, but also to prepare for the upcoming explosion of baby boomer retirees.

For the first time ever Social Security benefits were deemed taxable. A schedule to gradually raise the retirement age was introduced. And the payroll tax was raised in 1984, again in 1988, and finally to 6.2% + 6.2% = 12.4% in 1990 where it remains today.

In 1990 withholding 12.4% of workers’ paychecks was significantly more than needed just to pay retirees in the 1990’s, but the strategy was to proactively accumulate a surplus to help pay for boomer retirements in the next century and avoid imposing higher taxes on the next generation of workers.

STILL NOT ENOUGH

But today government actuaries have calculated that payroll taxes plus the reserve—the Social Security trust fund—will still be insufficient to pay promised benefits starting in 2034.

So what happened to that precious surplus? Conservatives complain that there would be more than adequate money available if Congress hadn’t “stolen” the money and spent it.

Well, that accusation is mostly correct. Congress did take the surplus money out and spend it—right away.

The part that’s partially inaccurate, according to lawyer language at least, is the surplus funds were also invested… sort of. For the law did require surplus funds to be invested, but “invested” meaning in U.S. Treasury securities.

(Side note: The federal government has a long history of requiring private and public funds be diverted into Treasuries as it creates large and generous mandatory credit lines for Congress to tap into. For example, the Economics Correspondent wrote last year on National Banking Act regulations (1863-1913) that forced private banks to back their paper currency issuances 111% by U.S. Treasury securities. The Federal Reserve has also required member banks to maintain large stocks of Treasury securities if they want to acquire bank reserves in open market operations. None of these legal requirements have been enacted by accident.)

Which gets us to the heart of the problem. Whenever a single dollar is “invested” in a Treasury bond that dollar becomes immediately available to Congress to spend. And we know Congress isn’t going to sit back and let that dollar sit idle.

Hence during the 1980’s, 1990’s and 2000’s Congress spent all the trust fund surplus money, leaving IOU’s (Treasury securities) in its place—effectively a promise to replenish the trust fund plus interest at a later date. Congress’ plan was effectively “We’ll pay off those Treasuries plus interest using taxes collected decades from now.” (more on that problem in a minute).

Where conservative accusations remain accurate is this was a horrible way to manage an alleged surplus trust fund meant to prepare for a tidal wave of future pension payments. Not only are returns on Treasuries inferior to private sector investment returns—particularly during the last 20+ years—but Congress spent the money on all kinds of unproductive government programs that did far less for the economy than had it been invested in private industry.

If the trust fund had been even partially invested in corporate bonds or equities and allowed to earn superior returns—something George W. Bush proposed in 2005, and which was immediately shot down—Social Security wouldn’t be forecast to dip into the red within the next decade. Depending on the private rate of return the trust fund may have even been able to hold the program up until the last baby boomers passed away and the retiree “hump” was cleared.

But the worst part is by immediately spending the trust fund surplus, Congress defeated the whole purpose of building a surplus in the first place.

Remember, the idea was to have a large reserve to tap into so as not to impose higher taxes on future workers when the baby boomers retired.

But the reserve is now stuffed with trillions of dollars of debt that the Treasury must make good on. And the Treasury will do that by levying higher taxes than would otherwise have been needed had the surplus fund had not been touched—or at minimum had been handed over to private capital markets instead of profligate politicians.

So even as you read this article Americans are being taxed to the tune of trillions of additional dollars that the original payroll tax hike of the 1980’s was enacted to prevent. Effectively the American public is enduring two giant multi-decade rounds of higher taxes instead of one—all to compensate for Congress having spent the first round decades ago.

There’s only one technical difference between these two forms of taxation. Today Treasuries are being redeemed with general tax revenues that come from income taxes, corporate taxes, excise taxes, etc… basically anything except Social Security payroll taxes.

Had there been no trust fund surplus and Congress instead dealt with the problem in the 21st century—raising taxes as baby boomers retired in large numbers—then payroll taxes would have been raised instead.

So the net effect has been a transfer of liability from today’s workers (higher payroll taxes) to the taxpaying public in general which includes not only households but also small businesses and corporations.

Ironically (and sadly) wealthier retirees, who planned wisely during their working years and saved to draw supplemental retirement income from investments, are also stuck with higher income taxes than would otherwise have been the case. It’s a cruel turn of events that wealthier retired baby boomers were subjected to higher payroll taxes in the 1980’s and 1990’s and are now being stuck again with higher income taxes—effectively being forced to pay twice themselves—to pay off Treasuries in the surplus trust fund.

But then left-progressives would probably welcome this outcome since the end result is socking it to evil rich people—old, retired ones at least—assuming enough progressives even understand how Social Security's finances have played out since 1983.