Half-truths can be as deceptive as outright lies. The Democrats are
using a half-truth in their propaganda campaign to block President Bush’s
effort to reform Social Security. Unless the other half is explained, the
prospects for reform are bleak.
The half-truth is that the so-called Social Security trust fund is flush
with real assets. It is true that Social Security has assets beyond its
current receipts. Those assets are government bonds. A bond is a debt
instrument, guaranteeing its holder the right to be paid. Think of it as an
account receivable, whose payment is guaranteed by the full faith and credit
of the United States. So, if we stop our analysis here, we are led to
believe that there are enormous assets set aside that are earmarked for the
payment of Social Security benefits for that time in the future when payroll
tax receipts will be insufficient to fund benefits.
But to comprehend the full picture, we must understand the significance
of the fact that the government is guaranteeing payment of the bonds – and how these bonds were created in the first place.
Historically, the ratio of payroll taxpayers to beneficiaries was such
that payroll tax receipts far exceeded Social Security benefits. But instead
of putting this surplus money aside in a trust fund to finance benefits down
the road (when current payroll taxes will fall short of benefits paid out),
the government used it to pay for big-government programs it otherwise
couldn’t afford. In exchange, the government issued bonds – promises to
repay the money in the future.
It may sound comforting that the government guarantees the bonds, but it
is misleading because money doesn’t appear out of thin air, even government
money. The money must come from somewhere. No matter how you cut it, the
money will come from general-revenue taxpayers, the same people who have
already been taxed on this money (as payroll taxpayers). It’s one gigantic
shell game because the Social Security assets (the bonds) are offset by an
equal government liability.
Let’s consider a private-sector analogy. Assume that an individual owned
two separate corporations and that one of them borrowed all of the funds of
the other (in exchange for bonds). The owner could claim that both
corporations were robust with assets and that he was rich. Unless we
understood that the bonds would have to be paid off with assets from this
person’s other corporation, we would have a distorted view of the
individual’s wealth.
The assets of one of his corporations (the bonds) are negated by the
liability of the other, just like the Social Security bonds are offset by an
equal liability that will be born by the general revenue taxpayers. And, the
general revenue taxpayers are the same people as the payroll taxpayers.
So, yes, Social Security bonds are assets held for the benefit of Social
Security recipients. But when you consider the liability side of the ledger,
these assets are shown to be illusory because the bonds can only be paid off
by increases in taxes (payroll or otherwise), reductions in Social Security
benefits or other government services, or further government borrowing. The
people will be paying themselves back in one form or another.
It would be different if the Social Security bonds were to be paid not
by the government, but by third parties. Then their payment would not
constitute a depletion of government assets. That would be the case had the
government invested these surplus funds, instead of greedily and
irresponsibly throwing them down the rat hole of government largesse.
The time is rapidly approaching when Social Security Benefits will
exceed payroll-tax collections (2016). Shortly thereafter (2038), the
interest on the bonds will be depleted also and, absent major structural
reform, the government will have to pay off its own bonds. And taxpayers, as
usual, will be left holding the bag.
President Bush, his bipartisan Social Security reform commission and
most congressional Republicans want to do something to avert that result.
They want to allow taxpayers to set aside part of their payroll taxes into
private accounts – which will be invested in assets that can be redeemed
without punishing future taxpayers.
Democratic leaders are trying to mislead us when they imply that Social
Security assets are like other assets. If they admitted the rest of the
story, they would have no legitimate reason to oppose bipartisan reform.
