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The Watch Is Back!   How Social Security Works

Here are our postings so far.

02/19/2010: A Plot to Sneak Social Security Into the Federal Budget...

01/28/2010: A crisis is brewing for America’s Social Security system

01/06/2007: How to tell if the Washington debate is improving.

10/05/2005: Some Reassurance on Social Security - for an old friend upstate.

09/03/2005: $2 Trillion More for Our Retirements -- If We Can Keep It

08/27/2005: Is Social Security Out of Danger?

07/18/2005: A Note to the Democratic Party

05/22/2005: A Social Security Shortfall? Not in the Trustees’ Forecasts.

02/19/2005: An Open Letter to Friends of Social Security

02/16/2005: An Elephant and a Horse: Do four legs make them alike?

02/11/2005: The biggest lie is now in black and white. Where’s the outrage?

02/04/2005: It’s a matter of interest.

01/28/2005: Who will benefit from Social Security “reform“? -- It’s the Bond Market, stupid!

01/20/2005: They call this a mandate?

01/19/2005: Tales from The Heritage Foundation

01/14/2005: Social Security is not financed by the Government. Surprised? Read on.


How Social Security Works

Here's a bit of personal history to illustrate how Social Security works - and why it has been so successful.

My father was born in 1898. When he was 14 years old his father died, and he and his sister went to work to support the family. Social Security survivors' benefits were decades in the future.

In 1937, when my father had already been working for over 20 years, he and 40 million other working Americans began for the first time to pay into a new Social Security system. The initial contribution rate was 1% of their first $3,000 of salary; their employers contributed a matching amount. For three years, millions of dollars accumulated in a Trust Fund, all of it from payroll contributions. No money was added by the government.

In 1940, the first Social Security retirement benefits were paid out of the Trust Fund. Recipients were only those men and women who had been working and contributing since 1937 and then retired. By 1945, the number receiving Social Security retirement benefits had grown to over 1 million; 46 million working Americans were paying into the system.

When my father retired in the mid-1960s, he was one of 20 million former contributors receiving benefits; 80 million working men and women were paying into the system. By that time, my sister and I had also begun working and paying into the Social Security system. The contribution rate, determined by actuaries to keep the system solvent, was then 3.9% on $6,600 of salary. My father continued to receive benefits until his death in 1986, and we continued to pay into the system.

By 1990, the contribution rate we paid had increased to 6.2% on $51,300 of salary. Also by 1990 my son and daughter had begun working, and for the next 11 years all three of us were contributing to Social Security. In 2001 I retired, having paid into the system for all of my working years, and I began to collect my promised retirement benefits. I continue to receive a monthly check. My son and daughter continue to pay into the system, at the same 6.2% rate. They'll continue to work and contribute to Social Security until they retire some 25 years from now. By the time they begin to receive retirement benefits, their sons and daughters, my grandchildren, will be working and contributing to the system.

As for my grandfather, if he died a century later, his wife and children would be supported by the Social Security system. At the end of 2008, 51 million Americans were receiving Social Security benefits; 6 million of them were survivors of deceased workers.

That's how Social Security works.

That's also why it works. As Franklin Roosevelt imagined Social Security in 1935, and as Americans of every generation still believe, it is a self-funded, inter-generational retirement system. Its money is contributed by working men and women and their employers. The money is paid into a Trust Fund during their working years, and the money in the Fund is used only to pay benefits to contributors when they retire. No one who has not contributed to the system receives any benefits from it.

Maintaining the proper amount of money in the Trust Fund - that is, keeping contributions and benefit payments in balance - is the complex job of Social Security's actuaries. It requires them to monitor, and forecast, not just economic and population shifts for the whole country, but individual financial accounts for many millions of Americans. Yet for 70 years the actuaries have succeeded admirably. Since 1940 all promised benefits have been paid to all Social Security contributors, and today the Trust Fund holds enough money to pay baby-boomer benefits for as far into the future as anyone can forecast.

The way Social Security works means that it is independent of general government revenues, and independent of the Federal budget. It is a closed system that impacts only its participants. As one of over 210 million participants, I can truly say: It's our money.

Unfortunately, Social Security's independence is under attack today. Members of Congress, administration officials, and economists are trying to convince working and retired Americans that Social Security is part of the Federal budget. Worse, they propose that any rebalancing of contributions and benefits should, in the words of one prominent official, "enhance the overall performance of the economy." In these times of economic turmoil, the last thing we want is to have Social Security sucked into the whirlwind.

Social Security Watch will continue to expose the attacks. You can help. Circulate our postings. And use the link on our home page to tell your Senators and Representatives that you know Social Security is an independent financial system, and you want to keep it that way.

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A Plot to Sneak Social Security Into the Federal Budget

For anyone who thinks that our Social Security system is secure against fundamental harm, the Senate Finance Committee's proposal for stimulating job growth should be a wakeup call. The proposed law would exempt employers from paying their 6.2% share of the payroll tax if they hire workers this year who have been unemployed for at least 60 days.

The rationale for exempting employers from the tax, rather than offering them a tax credit (the usual incentive), is the immediacy of the exemption. "No business wants to wait until 2011 to receive a tax credit," wrote Senators Charles Schumer and Orrin Hatch, who jointly proposed the exemption in a January 26 New York Times Op-Ed. Apparently the Senators forgot that any employer enticed by the exemption would still have his savings spread over 52 weeks. An employer who adds a $50,000 employee would be able to save $60 in the first week - if he's willing to spend $900 more. That's not an incentive likely to create many new jobs.

The danger to Social Security, however, is not an inconsequential loss of revenue, even should that occur. The danger lies in the way the Senators propose to replace any loss: "The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget [my italics] between now and 2015."

This not-so-subtle suggestion that Social Security is part of the Federal budget is a falsehood that has been so widely broadcast over the years that many working and retired Americans have come to believe it. Payroll taxes are presumed to be government revenues, and Social Security benefit payments government expenses, so that if benefits are raised, there will be less money to be spent elsewhere in the budget. The truth is that all of Social Security's inflows and outflows are separated from the rest of the government budget and have no impact on the budget, neither to increase nor decrease the deficit. No piece of legislation passed by Congress has ever authorized shifting money from one to the other.

Quite to the contrary, three pieces of legislation that Congress did pass between 1983 and 1990 placed Social Security legally "off-budget." The reason for the legislation was to prevent administrations from masking real government deficits by including Social Security's surpluses in their annual budgets.

Of course successive administrations have skirted those laws, presenting misleading annual budgets to the public by distorting the structure and finances of Social Security. The reality is that the purported government surpluses from 1998 to 2002 never happened, and the accumulated sum of past government deficits - our $12.3 trillion national debt - is 85% of current GDP, not 53% as the administration claims. (More on that story later.)

Pursuant to law, the budget that Congress actually passes each year does treat Social Security, but separately. Congress sets the level of payroll taxes and the formulas for retirement benefits, and it allocates payment from the Trust Fund for such things as administrative expenses. It is guided in this process by Social Security's actuaries, whose good work has kept the system's revenues and benefit payments in balance for 70 years. When Congress turns to the rest of the Federal budget, it leaves Social Security behind.

This process ensures the continuing independence of Social Security, as Franklin Roosevelt envisioned it in 1935. FDR insisted that the system had to be self-funded, that revenues were to come from working men and women and their employers, but, most importantly, not from the government. That independence has long been under attack from enemies of Social Security, for whom the system smacks of collectivism and cooperation - both of which charges are true and help to explain not only the system's financial success, but also its immense popularity through generations of Americans.

Social Security's independence is now under attack from its apparent friends as well. Should the Schumer-Hatch proposal become law, with Congress promising to repay the system in the future, it will be the first ever authorization to transfer money from the government's general budget to Social Security. The first step toward integrating Social Security into general government operations will have been taken, and the mischief that ensues, when an administration really can save money by cutting retirement benefits, will be unbounded.

There are other ideas floating around Washington for transferring general government revenues to Social Security, which would similarly destroy its independence. But the Schumer-Hatch scheme is the first to be actually proposed for legislation. FDR cannot be resting easily.

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A crisis is brewing for America’s Social Security system

A crisis is brewing for America’s Social Security system. It is not, however, the crisis that politicians and economists have been predicting for decades: the system’s insolvency. In fact, after 30 years of surpluses (annual receipts exceeding benefit payouts), the Social Security Trust Fund is awash in money.

Rather, the threat is coming from the Federal government, which has been borrowing the surpluses from the Fund – a total of more than $2.5 trillion to date – and using them to camouflage a portion of the national debt. When Social Security’s surpluses turn into deficits later in this decade, as they properly will, the government will be in a dual predicament: it will not only have to find additional sources of public borrowing to finance ever-growing Federal debt, but it will in addition have to begin paying back the money it borrowed from the Fund. The crisis for Social Security lies in what the government will try to do to solve its predicament.

Let’s be clear about why and how the Social Security system created annual surpluses and why they will properly turn into deficits. The 30-year build-up of money in the Trust Fund was produced in anticipation of the bulge of retirement benefits that will be due to the baby-boomer generation. Congress raised the payroll tax five times between 1980 and 1990, from 5% of salaries to 6.2%, where it remains today. The maximum salary on which the tax is collected has also steadily increased; it rose from $25,900 in 1980 to $102,000 in 2008. With increased revenues, Trust Fund assets have grown not only in absolute terms, but also relative to annual benefit payments. In the first 40 years of Social Security, the Trust Fund typically held enough money to cover one year of benefit payments; that is, it could pay all promised benefits for that year even without another dollar in contributions. This “coverage” meets what the Trustees call “the short-range [10-year] test of financial adequacy.” In contrast, the $2.5 trillion now in the Fund is equal to more than three and a half years of benefit payments.

As baby-boomers begin retiring in increasing numbers this decade, three things will happen: benefit payments will rise faster than revenues; annual surpluses will turn into deficits; and the system will draw on the money saved in the Trust Fund to pay baby-boomer benefits. By the time the baby-boomers will have moved through the system, Trust Fund holdings should be reduced once again to the normal one year’s coverage.

While this process will unfold as planned for Social Security, for the Federal government it represents a looming disaster. Total Federal debt is expected to balloon in this decade to unprecedented levels, and the ability of the U.S. to continue financing that debt is no longer unquestioned. There is much concern over a possible "doomsday" scenario in which the Chinese stop buying U.S. government bonds. The fact is, however, that the Social Security Trust Fund holds a larger portion (over 20%) of the current $12 trillion Federal debt than do the Chinese. And it isn’t just possible that the Trust Fund will begin cashing in its Treasury bonds. It’s what will happen.

It will happen, that is, unless the government succeeds in convincing the American people that Social Security needs to be “saved.” Past administrations insisted for decades that the structure of the system is fundamentally flawed, and that it faces impending insolvency. They cited the critical moment when annual surpluses will turn into deficits as the beginning of the descent into bankruptcy. The current administration, in its few mentions of Social Security so far, is repeating the same message.

In order to “save” Social Security, and by the way shore up its own precarious debt financing, the government needs only to increase the payroll tax rate and/or reduce benefit payments. The result for Social Security participants would be a financial squeeze, continuing annual surpluses in the system beyond the years they are needed, and an unnecessary, indeed undesirable increase in the years of payout coverage held in the Trust Fund.

For the Federal government, however, continuing surpluses in Social Security would mean a continuing source of private borrowing and, most important, a reprieve from having to redeem a significant portion of outstanding Treasury bonds.

The government is betting that the American people do not read the annual Social Security Trustees Reports and will not understand the truth about the system’s financial health. Social Security Watch is back, to report on what the Trustees are saying, and to expose misleading and dishonest statements from officials, economists, and the media. Stay tuned.

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How to tell if the Washington debate is improving.

Despite the change of party control in Washington, the debate over Social Security, which the New York Times says will “unfold anew in 2007,” is not likely to be any more enlightening than it has been for the past five years. What continues to be ignored by all sides is the fundamental structure of Social Security: a self-funded, government-administered, but not government-funded program. The Times itself allowed a whopper, in a December 26 article by Larry Rohter that compared Social Security to other nations’ schemes: "Workers, employers and the government all contribute" to Social Security. The Editor ignored my letter pointing out the error, and no correction was published.

The fact is that our Social Security system, unlike other national retirement systems, receives funding only from workers and employers. The government, under a provision of the original 1935 act that FDR insisted on, is prohibited from making up any shortfall in the system. In the early 1980s, when assets in the Trust Fund covered only a month or two of benefit payments, there was no expectation that the government would put in any money. Instead, contribution rates for workers and employers were gradually increased, from 5.1% (each) in 1980 to over 6% in 1988.

These facts, like everything I’ve written about Social Security, come from the annual reports of the Trustees. The latest is available to all at It contains every detail of the system’s finances, from 1940 to today, and every actuarial assumption about the future.

As the Democrats take charge, the touchstone for knowing whether the political debate over Social Security is changing will be any mention of the following two matters. I’ve written about them many times, but to the best of my knowledge they have never been talked about publicly, nor written about in the press.

First, the assets in the Social Security Trust Fund are going to increase by over $2 Trillion between now and 2015. At that time, the Fund will have sufficient assets (nearly $4 trillion) to pay four years of benefits -- compared to the few months it could pay in the early 1980s.

These numbers can be found on page 2 of the 2006 Trustees Report (see link above). The buildup in assets is necessary because in 2015, the retirement of the baby-boomer generation will begin in earnest. (Those born in 1950 will be 65 years old in 2015.)

It’s true that in 2015, Trust Fund assets, which have been increasing for 35 years, will begin shrinking. That’s the infamous moment when, as Social Security bashers love to say, the system will be paying out more than it’s taking in. But that is precisely what has been intended. As the boomers retire, their benefit payments will draw down the Fund. And by 2040 or so, the boomers will be mostly gone.

Which leads me to the second fact whose mention will indicate whether the “debate” over Social Security is serious. Despite claims from both sides that something has to be done now to shore up the system’s finances, the actuaries of the system, who have been keeping it afloat since 1940, make no such statement. What they do say is that when pressed (as they are, by politicians) to produce a 75-year forecast, they do so, and if you are silly enough to believe that the current long-term forecast has any validity, you can shore up the system for 75 years by making small changes now.

But of course no sane person would claim to know with any degree of precision what, for example, the birth rate will be in the U.S. in, say, 25 years -- let alone 75 years. Indeed, the actuaries do not attempt to make annual forecasts for the factors that will impact Social Security’s finances, even over the next 25 years. Instead, they forecast as many years out as they dare, depending on the factor, and then they apply the forecast for that final year to every following year. They call that final forecast the “ultimate” number.

For demographic factors, like annual birth rates, death rates, immigration, etc., the actuaries forecast at most 20 years out and then simply use the last number for all following years.

For the economic factors that are crucial to Social Security’s future finances, the actuaries are appropriately even less confident. They allow themselves to forecast productivity growth for only seven years, and inflation for only two years. Does any Wall Street guru claim to know what inflation, GDP, and productivity will be in the U.S. in 2020, let alone 2040?

(For a fuller discussion of this point, see my 05/22/2005 posting, “A Social Security Shortfall? Not in the Trustees’ Forecasts,” at )

If either one of these points -- the coming increase in Trust Fund assets, or the impossibility of making accurate forecasts for critical demographic and economic factors many years out -- enters the debate over Social Security, any reason for having a debate in the first place will evaporate. It is clear today that Social Security is financially healthy and that it will remain healthy for at least a period that can be reasonably forecast, that is, for the next 10 years. Next January, and each January after that, the actuaries will provide a new look at the following 10 years and, although less confidently, the 10 years after that. Thus there will be more than enough time to make any adjustments necessary to keep the system on track. Social Security’s actuaries have been doing this successfully for 60 years, and there is no reason to think they will have more difficulty in the future.

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Some Reassurance on Social Security - for an old friend upstate.

Dear Will:

You say you’re worried about the future of Social Security. I’m not surprised. Politicians of every stripe tell us they are working to “save” Social Security. Some want to save it from bankruptcy, some from other politicians. With so many friends eager to help, you’re right to be worried.

Let me reassure you of one thing straight off. Social Security isn’t bankrupt, and it isn’t heading that way. The system works, and it can continue to work for you, for your children, and for your grandchildren. The truth is available in the annual reports published by the Social Security Trustees. The reports are freely available to every American, and I’ve been reading them carefully for years. My article in 2002, “The Good News About Social Security,” was based on them.

Instead of facing bankruptcy, Social Security in fact has a lot of money. There are trillions of dollars in the Trust Fund. The money has been accumulating for about 20 years, from annual surpluses of contributions over benefit payments. Even more will accumulate over the next 10 years. I’ll explain the Trust Fund surplus in a moment.

I wish I could be as reassuring about politicians, but the trillions of dollars in the Trust Fund have caught their attention. Under current laws, Washington can’t touch the money. It will remain in the system to pay the future retirement benefits of working Americans. But as you often say, no politician ever met a dollar he didn’t want to control. I’m afraid that many Democrats and Republicans alike are working on changes to the law that will give Congress control of Social Security’s money.

Can we prevent that? I think we can, but we have to understand what the current law is and how it protects our money. And then we have to let politicians know that we understand. So let me elaborate a bit.

The government’s only role in Social Security today is to administer the program. The Social Security Administration (SSA) is charged with making sure that enough money is contributed to pay promised benefits. It keeps meticulous records of the 200 million American working people who currently participate -- roughly 150 million contributing and 50 million receiving benefits -- and it monitors demographic trends like population growth, life expectancy, etc.

Using all of that input, the SSA makes “actuarial projections,” that is, it forecasts how much money will be coming in and how much will be paid out over the coming decades. When necessary, the SSA instructs Congress to adjust contributions and benefits so that the system will remain financially strong. Under current laws, these options -- raising contributions or reducing benefits -- are all that is available to adjust the system’s finances. Payroll contributions provide all the revenue to Social Security, and in turn all the money contributed is paid out in retirement benefits.

Of course this is just how you understand Social Security to work. But here’s the critical fact. In having retirement benefits paid solely out of working Americans’ payroll contributions, Social Security is unique among American social programs. In all other programs -- welfare, child support, Medicare, etc. -- if the money put aside to pay benefits turns out to be insufficient, the federal government has a legal obligation to make up the shortfall from other sources.

For example, if Medicare costs escalate even faster than expected, the government will cover them out of other taxes -- corporate taxes, income taxes, etc. If the government is running an overall budget deficit, it will have to borrow additional money to cover the higher Medicare costs. For this reason, the government is said to “guarantee” Medicare benefits.

But with that guarantee comes control. Since the government is legally obligated to borrow when necessary to pay Medicare benefits, it also has the legal right to raise Medicare taxes and reduce Medicare benefits. In that way the government can control the amount it has to borrow. It can also generate additional money to spend on other programs.

In contrast, if Social Security contributions are raised and benefits reduced, the only result would be an even larger surplus in the Social Security Trust Fund. The government’s overall borrowing would not be changed at all. Nor would Congress have more money available for spending on other programs.

Social Security is unique among our social programs simply because in the original 1935 law, Franklin Roosevelt refused to make the federal government responsible for any shortfall. He was criticized at the time, even by his friends, who considered it economic folly to limit Social Security revenues to payroll contributions. But Roosevelt later explained:

“Objections to payroll contributions were never based on economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions. With those taxes in there, no damn politician can ever scrap my social security program.”

No wonder FDR was our most beloved President in the 20th century.

I hope this explanation makes it clear how some politicians will attempt to change the current laws. They will try to make the case that a government “guarantee” of Social Security benefits is better than the current system. Of course they will not add that the “guarantee” also means government control of the money. And they will certainly not mention the trillions of dollars of Trust Fund surplus. Indeed they will continue to claim that the system is bankrupt.

So let me return to the Trust Fund surplus now.

The first thing to understand is that during the first 40 years of Social Security there was no significant surplus at all. Each year payroll contributions were sufficient to cover that year’s benefit payments, with little or nothing left over. Politicians who paid any attention merely expected the Trustees to calculate the adjustments necessary in either the contribution rate or the benefits formula to keep the system afloat.

In the early 1980s, however, the Trustees’ forecasts showed that baby-boomer retirements are going to be very costly to the system. And so they began to prepare for the added costs by raising the annual contribution rate to a higher level than was necessary to pay that year’s benefits. Between 1980 and 1990, the rate was gradually raised from 5% to 6.2% of payroll, where it remains today. Contributions each year were greater than benefit payments, and thus the surplus began to accumulate. The surplus grew to over $100 billion in 1988 and to over $500 billion by 1996. And suddenly politicians began to take notice.

Let me repeat this point. Social Security benefits continue to be paid each year out of the current year’s payroll contributions. The annual contributions that are not needed to pay benefits that year go into the Trust Fund surplus.

Today, the Trust Fund surplus has become huge -- over $1.7 trillion. And Congress can’t touch it. The money is all safely invested in U.S. Treasury Bonds, on which the Fund receives interest of over $100 billion per year. That’s money over and above payroll contributions that will be available to pay retirement benefits. And despite President Bush’s attempts to scare us, it is real money. The Trustees’ Annual Reports describe the bonds in detail, including their interest rates and maturity dates.

The surplus, as I said, is being accumulated to help pay baby-boomer retirement benefits, which will start about 2015. In the following years, annual contributions, still at 6.2% of payroll, will not be enough to cover annual benefit payments. The shortfall will be paid out of the Trust Fund surplus, and the surplus will then begin to shrink. All this is playing out just as the SSA forecast in the 1980s. By the time the baby-boomers are mostly gone (around 2040), the surplus will have been mostly used up, and annual benefit payments will again be covered by annual payroll contributions.

But we haven’t reached 2015 yet. As huge as the surplus is today, it is still not large enough to support all baby-boomer retirement benefits. According to the Trustees, the surplus in the Social Security Trust Fund will grow by an additional $2 trillion over the next ten years. The Trust Fund surplus is expected to reach $3.7 trillion by 2015.

Is the prospect of watching an additional $2 trillion slip past their grasp sufficient to make some politicians try to change the laws? You can bet your beans it is. Here’s the choice they are going to offer us: Should we continue to depend on the Social Security Administration to do its job, and continue to rely on payroll contributions from working people to support future retirement benefits? Or do we want Congress to change the laws so that the government “guarantees” Social Security benefits?

I think I know what your response will be, but let me make two final arguments anyway:

1. By the time the baby-boomers are mostly gone (around 2040), Social Security will have been working well for over 100 years. There is absolutely no reason to fear that after a century of success, the Social Security system will suddenly fall apart.

2. If the government begins to “guarantee” Social Security benefits, the first thing it will do is absorb the coming $2 trillion of surplus into the general budget. The Federal deficit over the next 10 years would thus be reduced by $2 trillion. Congress would then be able to control the benefit payments it “guarantees” by both raising contributions and reducing benefits. As with other social programs, Congress would be able to divert any savings from Social Security into whatever other uses it chooses.

In the end, the best reassurance I can offer is this. If we understand what’s happening, and let our elected officials know that we understand, we should be able to shame them into leaving Social Security exactly as it is. We have some work to do, but as the sage cautioned, The price of liberty is eternal vigilance.

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$2 Trillion More for Our Retirements -- If We Can Keep It

Social Security is a cooperative retirement system that unites working people of all generations, as contributors and beneficiaries. It has been a notable financial success as well. For over 60 years, the system has paid all promised benefits, and it is now generating a sufficient surplus to pay all future benefits to retiring baby-boomers.

I wrote last week that precisely because it works, Social Security is being attacked by rabid capitalists, who would have Americans believe that the competitive marketplace is the only means possible for delivering any social good.

The second reason for the attacks on Social Security is that a huge surplus exists today in the Trust Fund -- $1.7 trillion -- and an additional $2 trillion will swell the surplus to $3.7 trillion over the next 10 years. This is money that under current law is earmarked for the future retirement benefits of contributors and cannot be used for any other purpose. (For the source of the data in this posting, see the 5/22/05 posting below.)

It isn’t hard to imagine how furious the current administration and its financial backers are, watching this huge flood of money slip by. There is no doubt that they will try to grab it by means of legislation that will claim to be saving Social Security but would in fact destroy it. This column will monitor all proposed legislation and unveil the facts.

This week, however, I want to dwell on the $2 trillion that will be added to the Trust Fund surplus in coming years. To the best of my knowledge, there has been no public mention of this money, not in the press, not in the administration’s portrayal of Social Security, and not in Democratic responses to that portrayal. The silence regarding such an ocean of money -- of our money -- cannot be an oversight. Nor can it bode well for us. I am trying to break the silence.

First, we have to understand that a large and growing Trust Fund surplus was not envisaged when Social Security was created in 1935. Rather, for the first 50 years, “financial adequacy” in the system was defined as having enough money on hand to pay one year’s worth of benefits.

This had to change when baby-boomers entered the workforce in the 1970s and 1980s. It could hardly have escaped the notice of Social Security Trustees that the bulge of new workers would become a bulge of retirees some 40 years later, imposing large financial demands on the system. Trustees therefore began to raise contribution rates, so that starting in the mid-1980s the Trust Fund took in more money each year than it paid out in retirement benefits in that year. The surplus started to grow significantly.

The specific long-term purpose of these annual surpluses was to bolster Social Security’s finances for the surge of baby-boomer retirements beginning around 2015. The total surplus, as I’ve said, has now reached about $1.7 trillion. It is intended to continue to grow.

In other words, under current laws governing contributions and benefits, the Social Security Trust Fund will continue to take in more money than it pays out each year. The annual surpluses over the next 10 years will total $2 trillion.

This money is not in the Fund today. It will come into the Fund in the future, to be used only to pay contributors’ retirement benefits, if current Social Security laws are not changed.

Will the administration try to change the laws? With $2 trillion at stake, the answer is obvious. The means of diverting the $2 trillion into the government’s general revenues, to be used as the administration chooses, will be revealed in proposed legislation.

One final note. Just as baby-boomer retirements were predictable, so is the inevitable passing of the baby-boomer generation. The huge surplus accumulated to pay their retirement benefits will not be needed forever.

Accordingly, when the total surplus in the Trust Fund reaches $3.7 trillion in 2015, two things will happen: Baby-boomers will begin drawing retirement benefits; and the surplus will begin to shrink. By 2035 or 2040, when the boomers will be mostly gone, all of their promised benefits will have been paid, and the Trust Fund surplus will have been brought back to an appropriate level of financial adequacy.

The administration likes to characterize the period after 2015 as years when Social Security “will begin to run out of money.” The truth is that the current financial condition of Social Security, and the scenario for the next 30 years, are closely following the Trustees’ plans of 20 years ago. Social Security is not, as the administration claims, bankrupt today. And the Trustees’ forecasts show that it will not be bankrupt when the baby-boomers are gone. (See the 5/22/05 posting below.)

Stay tuned!! The coming months in Washington will be interesting. As national attention swings between Iraq and New Orleans, the administration may try to slip in new legislation on Social Security. We’ll be watching.

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Is Social Security Out of Danger?

Don’t be fooled by the summer lull. Social Security bashers are preparing to return with a vengeance. Anyone who accepts Paul Krugman’s claim that Social Security has been saved (New York Times, August 15) underestimates the bashers’ determination.

Their hatred for Social Security as a program -- that is, apart from any question of its current financial health -- has two aspects. Both aspects will be reflected in legislation that the Administration will undoubtedly propose before next year’s congressional elections. I’ll try to explain the two in this posting and next week’s.

The first is an ideological hatred, but not based on self-interest. After all, the fundamental fact about Social Security financing is that it comes solely out of working people’s payrolls. It starts with the first dollar of payroll and allows no deductions; it is thus the most regressive tax possible. None of the financing comes from the usual taxes that anger the wealthy and that proponents of extreme free-market capitalism argue are bad for the economy: income taxes, corporate taxes, inheritance taxes, and taxes on dividends and capital gains. Not a dollar derived from any of those taxes goes into the Social Security Trust Fund.

Early opponents of Social Security, therefore, did not attack its economic consequences, but tried instead to convince working people that it was a bad deal for them. Franklin Roosevelt’s Republican opponent in the 1936 election, Alf Landon, claimed it was “a fraud on the working man” and a “cruel hoax.” With the first payroll deductions in 1937, some workers found a note in their pay envelopes that equated the new Social Security deductions with “theft.” (For the sources of these quotes, see “The Good News About Social Security,” in Investment Policy magazine on this web site.)

Despite these efforts, Social Security was at once a hugely popular program with working people. FDR was reelected in 1936 with the most overwhelming electoral majority since 1820. (See the 1/20/05 posting below.)

Social Security remains an immensely popular program today, and therefore similar efforts to mislead participants continue. The Heritage Foundation tried this year to convince working people that they actually pay not just their own 6.2% contribution, but the whole 12.4% contribution of employees and employers combined. The fairy-tale logic is that if employers didn’t have to make their contributions, they would immediately raise salaries by the full 6.2%. (See the 1/19/05 posting below.) This is, by the way, a particularly clumsy piece of propaganda, since it suggests that employers’ contributions to Social Security do not raise their costs at all -- an argument that can hardly appeal to the Foundation’s corporate supporters.

The basis for ideological opposition to Social Security is, quite simply, its continuing popularity and success. Social Security has proved to be a beneficial program for the country and financially successful as well, even though according to the political and economic principles to which this nation is supposed to adhere, it shouldn’t be either one. It is a cooperative effort that violates the competitive principles of free enterprise, yet it did not, as predicted, “end the progress of a great country” (“Good News”). By continuing to pay all promised benefits, Social Security has had, if anything, a stabilizing influence on our capitalist economy. It provides more of the basic retirement benefits for millions of Americans than they themselves expected it would.

As to its finances, a lengthy Brookings Institution report in 1950 declared Social Security to be a “more elaborate and costly [program] than any other nation has yet adopted,” and it predicted “ultimately stupendous costs” for the program. In reality, contributions to Social Security from working people have risen gradually from 2% of payroll in 1954, to 4.6% in 1972, and to 6.2% in 1990, where they remain today.

These increases have not generated discontent among working people, nor weakened the nation’s commitment to capitalism. The often heard argument that increasing the contribution rate today is politically impossible (“off the table,” in the President’s terms) is baseless. It is simply another attempt to mislead working people -- in other words, a new manifestation of the same ideological hatred for Social Security.

Next week: The other source of Social Security bashing is more practical: it’s the $2 trillion that will be added to the Trust Fund surplus over the next decade.

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A Note to the Democratic Party

Here is a question that the Democratic party should raise: Who owns the Social Security surplus?

The Bush administration would like us to believe that the government owns the surplus. The correct answer is: The participants themselves own it, not the government.

All American working men and women pay into the Trust Fund while they work, and they receive benefits from the Fund when they retire. They own the surplus together, exactly as an individual owns his or her personal pension account.

Nor is there any difference between the Treasury bonds issued to the Trust Fund and those sold to personal pensions. Both represent money borrowed by the federal government and owed to the lenders.

Democrats should announce these truths to the American people and bury the Bush administration’s attack on Social Security once and for all. If they do they will win the gratitude of the whole country. Republicans have consistently hidden the truth about the Social Security surplus from the American people (whether purposely or in error is irrelevant).

The media are mostly helping the Republicans (whether purposely or in error is irrelevant). Last week in The New York Times (hardly a Republican outlet), Edmund L. Andrews wrote: “Social Security’s annual surpluses, which have been running around $150 billion a year, have been a major source of operating cash for the government.”

This is nonsense. Social Security does not in any way provide operating cash to the government. The government borrows the surplus to help cover deficits. When it does, it issues Treasury bonds in return, and the result is an increase in the total federal debt. The administration includes Social Security in the budget to try to hide this fact, but the truth is that annual federal deficits are created (or diminished) by every government program except Social Security.

I explained the proof for this in my 2/11/05 posting (see below). We need to look at the federal debt ceiling, which is the legal limit on how much the government can borrow. When total government debt reaches this ceiling, Congress has to raise it to allow more borrowing -- or government comes to a halt. The debt ceiling is the truest measure of how much money the government owes.

Let’s say the ceiling is reached at the beginning of a fiscal year. During the year, the government spends more than it takes in, thus producing a deficit. The way to determine the true size of the deficit for that year is to see how much the ceiling has to be raised by the end of the year.

The administration has been understating the deficit every year, because it includes the Social Security surplus in the annual budget. The accumulation of these understatements is extraordinary. The administration would have us believe that the total national debt today is about $4.5 trillion. The legal debt ceiling, which precisely represents accumulated annual federal deficits, is today about $8 trillion.

These numbers take on immense importance at a moment when the administration is boasting of a supposedly smaller deficit. Democrats need to respond, and the best response is to explain the truth to the American people. The extent of the administration’s fiscal deceit is mind-boggling.

Incidentally, in the past 20 years Congress has passed several pieces of legislation dealing with whether the executive branch may or should include Social Security in the federal budget. To the best of my knowledge (see my 2/11/05 posting) legislation now in effect prohibits inclusion.

Is the administration breaking the law? Americans would love to hear from Democrats on this.

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A Social Security Shortfall? Not in the Trustees’ Forecasts.

When President Bush tries to convince us that Social Security is “insolvent,” the statistics he cites come from the annual Trustees Report. The 65th such report was published in March. It presents in detail “the financial and actuarial status” of the Social Security Trust Fund at the end of 2004. It also provides the complete financial history of the Fund, and it makes projections for the future.

The President twists the facts in the Report for his own purposes, which is not surprising. What is surprising (bewildering, really) is that the President’s opponents -- Democrats, pundits, the liberal media, etc. -- make no use whatever of a host of statistics that reveal the President’s disregard for the truth. The Report in fact shows that Social Security is financially sound and that there is no crisis today.

Most important, nothing in the Trustees Report justifies the assertion that Social Security’s finances will have to be shored-up eventually. The Trustees’ economic and demographic forecasts do not resolve the question of whether there will ever be a shortfall in the system. It’s time to listen to what the Trustees do say.

The President claims that the retirement of the baby-boomer generation will “bankrupt” Social Security. The Trustees Report does show that benefit payments from the system will increase when boomers begin to retire. It also shows that the system has been well prepared for that increase. After all, Social Security actuaries could hardly have missed the fact that the baby boom of the 1950s and 1960s would produce a retirement boom six or seven decades later.

When the boomers were entering the work force in the 1980s, Trustees began to build Trust Fund reserves to anticipate their retirements. The contribution rate for employees and employers was raised gradually from 4.9% in the 1970s to 5.1% in 1980 and 5.7% in 1984. It reached 6.2% in 1990, where it remains today. These increased contribution rates have for 20 years generated annual revenues that exceeded annual benefit payments. The resulting surplus is the largest by far in the Fund’s history.

The Trust Fund now holds assets of $1.7 trillion – equal to three years of benefit payments. This cushion is three times what the Trustees consider “financial adequacy” for the Fund -- that is, enough assets to pay one year’s benefits.

The growth in assets, moreover, will not stop here. The Trustees project that by the beginning of 2014, the surplus will reach $3.7 trillion -- over four times that year’s benefit payments.

As the boomers begin to retire in 2015 (those born in 1950 will then be 65), the $3.7 trillion surplus will be available to pay their full retirement benefits. During the 20 or 30 years after 2015, the surplus will be wound down -- or as the President likes to say, the system will be paying out more than it takes in. But that is precisely what is supposed to happen. A surplus four times greater than needed for financial adequacy is not supposed to persist. By 2045, most boomers will be gone, and the system will have paid all their promised benefits (as well as the benefits of retiring post-boomers).

So the Trustees Report shows that baby-boomer retirements will not bankrupt Social Security. What about the President’s other claim, that the system “will run out of money” some time after 2040? Is that what the Trustees forecast?

The quick answer is, No. But to understand what the Trustees do forecast, we have to understand how they go about peering into the future.

Trustees forecast the long-term health of Social Security by trying to predict what will happen to each economic and demographic factor that impacts it. But they do not predict year-by-year changes in those factors for the next 40 years. Instead, they predict specific changes for a limited number of years, and then they apply the final year’s number to every subsequent year.

As an example, let’s look at a demographic factor that’s critical to the future of Social Security: the “total fertility rate” (which represents the average number of children born to a woman in her lifetime). Since 1990, the fertility rate has varied between 2.02 and 2.07, with a dip below 2.0 for three years in the mid 1990s.

In their “intermediate assumption” (I’ll come back to what this means), the Trustees forecast the fertility rate to remain above 2.01 for the next ten years. Then, starting in 2015, they expect the rate to fall below 2.0 and to continue to fall to 1.95 in 2025. For each of the following 50 years, the Trustees simply use the same 1.95 rate. They call this repeated number “the ultimate total fertility rate.” What it really signifies is the Trustees’ admission that from 2025 onwards, they don’t have a clue whether the fertility rate will drop further or rebound upwards.

For economic factors, the Trustees are even less confident. They allow themselves to forecast productivity growth only out to 2012, and then they use the same “ultimate” number -- 1.6% growth -- for the subsequent 65 years. For inflation, they forecast only two years out, to 2007, and then repeat the same number for over 70 years.

The Trustees make these 75-year forecasts of the financial health of Social Security because they are required by law to do so. Their forecasting methods, however, reveal the obvious: No one in his right mind would claim certain knowledge of what is going to happen to the whole U.S. economy, and to the demographics of a nation of 300 million people, over the next 20 or 30 years, much less 50 or 75 years.

Because of this uncertainty, the Trustees publish not just one forecast, but three. The intermediate assumption, which I cited above, and which the President cites as proof of Social Security’s impending bankruptcy, is the middle one of the three. They also publish a “low-cost assumption” and a “high-cost assumption,” which, as the names imply, show the future in rosier and darker terms.

For example, we saw that the Trustees’ intermediate assumption for the total fertility rate is 1.95 for every year after 2025. They also make a low-cost assumption of 2.20 for all those years, which would improve Social Security’s long-term finances, and a high-cost assumption of 1.70, which would make the finances worse. Since no one knows which of the three rates will turn out to be closest to reality, the Trustees use them in three separate forecasts.

Similarly, for immigration, no one knows today whether the annual number of immigrants after 2025 will be 675,000 or 900,000 or 1,300,000. The Trustees use these three widely different assumptions in their three forecasts.

For each economic and demographic factor that impacts the future finances of Social Security, the Trustees make a low-cost, a high-cost, and an intermediate assumption. Aggregating all the factors produces three overall long-term forecasts.

What do these three forecasts show? On the negative side, the high-cost assumption shows the Trust Fund surplus disappearing as soon as 2030, a decade earlier than under the intermediate assumption. This possibility would seem to play into the purposes of the President and his supporters. Why then don’t they ever refer to this even worse scenario?

They don’t because referring to a scenario worse than the intermediate assumption would call attention to an equally likely scenario that shows Social Security in much better financial shape. The low-cost assumption shows the Trust Fund never running out of money, but instead retaining a surplus four times greater than annual payouts through 2080.

What’s more, admitting that the Trustees make three different forecasts would focus attention on the reason for the differences -- that is, the impossibility of making any confident long-term forecast for Social Security.

Let’s sum up. First, the President and his allies are wrong about baby-boomer retirements driving the system into bankruptcy. Those retirements have been long anticipated, and as a result the Trust Fund reserves are huge and growing.

Second, neither the President nor anyone else can say with certainty what will happen to the Trust Fund after 2025. It could run out of money in 2030, or in 2040. Or it could never run out, but continue to pay all promised benefits for a further 50 years and still retain a large surplus.

Does this mean that we can afford to make no changes at all to Social Security today? Can the contribution rate be kept at the current level and yet all promised benefit payments continue to be made?

The answer is, as far as anyone knows today, Yes. The Trustees’ best guess -- their intermediate forecast -- is that 10 years from now the Trust Fund surplus will still be growing. The system would then have sufficient assets to pay baby-boomer retirements in full. Actuarial forecasts made at that point, that is, in 2015, will tell us with far more certainty than we have today what the finances of the system might look like a few decades later, after the boomers are gone.

But what if the worst of the Trustees’ current forecasts comes to pass? It shows that the Trust Fund surplus will grow more slowly in two or three years and actually begin to shrink just five years from now. Even so, in 2025, after all promised benefits have been paid, the Fund would still have a surplus of nearly twice the financial adequacy level. And this is the worst possibility the Trustees foresee.

An equal possibility, however, is that 5 years from now the surplus will be even larger than under the Trustees’ intermediate forecast. The low-cost assumption shows that the surplus will then continue to grow and remain at over four times financial adequacy for the following 60 years. If this forecast looks accurate a few years from now, Social Security Trustees could then consider lowering the contribution rate -- surely an opportunity that a tax-cutting President would embrace.

In short, this year’s Trustees Report shows that 20 years from now, after all promised benefit payments have been made, the Social Security Trust Fund will still have assets equal to either twice or four times or over five times total benefit payments in that year. And 20 years is as far into the future as any rational person can hope to see.

The Trustees will make new forecasts next year, and each year after that, and those forecasts will bring us closer to understanding Social Security’s post-boomer finances. For now, our message to the President and his supporters is: Read the Trustees Report, and leave Social Security alone.

Our message to the President’s opponents is: Read the Trustees Report, and tell the President – and the American people – the facts about Social Security.

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An Open Letter to Friends of Social Security

The Business Roundtable and other groups are ponying up at least $40 million to help the White House sell Social Security reform to the American people (New York Times, Feb 17). They must be afraid that the “capital” the President says he earned in the last election won’t be enough to do the job.

Their entry into the fray is important but not decisive. Business leaders use the same misrepresentations and outright lies about Social Security that the administration uses, and we can respond. But we need to do better than we have to date.

The administration’s pitch has two elements: Social Security has a problem, and privatization is the solution. So far Democrats and supporting pundits have attacked privatization in detail, and only denied the problem. But at the grass roots level, the administration and its backers will emphasize the problem. Indeed, they’ve been scare-mongering about Social Security for 20 years, and now, with ultimate cynicism, they cite some Americans’ lack of confidence in the system as itself proof that the system is in financial trouble.

What we need to do is restore confidence in Social Security by responding to talking points on the supposed problem. Here are some of their talking points and suggestions for our responses.

Talking point #1. The President says that there is no Social Security Trust Fund, that the surplus has been “spent” on benefits and on “government programs” (Minneapolis Star Tribune Feb. 13).

First response. Between 1983 and 2003, Social Security collected $700 billion in interest on its Treasury bonds (Social Security Trustees 2004 Annual Report, page 133). That’s a lot of interest to collect on assets that don’t exist.

Second response. It’s extraordinary for a President of the United States to suggest that the American people have been victims of a massive deception for 70 years, over a program that has been a lifeline for their parents and grandparents.

Be aware that in 1998 President Clinton also said that the Social Security surplus hasn’t been saved. I doubt that this administration will want to draw the comparison, but if they do, we can say that Clinton was a liar too (friends, the stakes are high; we can give a little), and then go back to the first response.

Talking point #2. The President said in his State of the Union speech that there used to be 16 workers for every retiree and there will soon be only two.

First response. There were 16 workers per retiree in 1950, when Social Security was just getting started. By 1975 the number was down to 3.2. Since 1975, the number of workers per retiree has remained steady at 3.2 or 3.3 for the past 30 years (Trustees 2004 Report, p. 47). Not only is there is no downward slope, but the steadiness of the ratio of workers to retirees suggests some natural relationship between them. (See next response.)

Second response. There is no fundamental flaw in Social Security in the relation of workers to retirees. How can there be, when only workers who contribute are eligible for benefits? Fewer workers now means fewer retirees later, and vice-versa. Over time, the relation has to remain stable.

Talking point #3. The baby-boomer generation will begin retiring soon, and that will cause massive financial disruption in Social Security.

First Response. Social Security contribution rates have been gradually raised since 1980, from 5% to today’s 6.2%, in order to generate a surplus in the Trust Fund to cover the bulge of baby-boomer benefits. (Repeat the first response to Talking Point #1.) Trust Fund assets are now over $1.5 trillion, including $700 billion in interest. That is, Trust Fund assets total $700 billion more than wage-earners have contributed.

Second response. (This is critical. I’ll explain why.)

The surplus of receipts over benefit payments will continue. An additional $2 trillion will flow into the Trust Fund over the next 10 years (Trustees 2004 Report, p. 2). That’s additional money that will be available to pay for baby-boomer retirements.

This is a critical response because $2 trillion is also the figure most often used as the amount that will have to be borrowed to pay for privatization. We can point out that the money is coming in through contributions anyway, so it doesn’t have to be borrowed.

We know that this response seems to make no sense, but the point is to encourage the opposition to answer it. Once they talk about a future surplus, we’ve won the point that the surplus is real -- and growing.

Talking point #4. The President says Social Security will be bankrupt in 40 years.

Democrats and pundits have simply been denying this point and thereby falling into an “It will“/“It won‘t“ exchange. That does nothing for our cause but leave Social Security bashers alone to misrepresent a problem.

Here’s a better response. The American people are wise enough to know that neither the President nor anyone else has a crystal ball that lets them see half a century into the future. (Could anyone in 1950 have forecast all the changes in the world economy over the past decade?)

The Trustees of Social Security make new forecasts every year, and they say they are fairly comfortable about each forecast for 10 or 15 years out, but not further. Last March they told us that Social Security’s accumulated assets will grow through at least 2015, both absolutely and in relation to future benefit payments.

Repeat it: An additional $2 trillion will flow into the Trust Fund in the coming decade.

The Trustees next annual report is due this March. Let’s keep the focus on that report and attack every claim of a non-existent problem.

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An Elephant and a Horse: Do four legs make them alike?

A favorite ploy of Social Security bashers is to lump Social Security with Medicare as two financially-troubled programs. Yes, the government administers both. Does that mean they’re alike?

Alan Greenspan suggested today that they are:

“Benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead. Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable, and call for action before the leading edge of baby boomer retirement becomes evident in 2008.”

It apparently doesn’t matter that Social Security benefits are precisely defined for individual contributors, whereas Medicare is an open-ended program with potentially enormous costs from ever-increasing use of medical facilities and procedures which the medical establishment is intent on developing and promoting.

And never mind that each one of us hopes not to use Medicare benefits ourselves, whereas Social Security benefits will be paid out to all contributors for as long as they or their dependents live.

Or that the government is obligated to make good any shortfall in Medicare out of general revenues, whereas the government is legally restricted from subsidizing Social Security (which means that all benefits have to be paid out of contributions).

Forecasts of exploding Medicare costs indeed show that they could swamp the economy. Does Mr. Greenspan really mean to equate that possibility with the fact that Social Security can be made whole for 75 years through a less than 1% increase in contributions? (See page 3 in the Trustees latest report, available free at )

Does he believe that such an increase in contributions -- amounting to $32 per month for someone earning $40,000 annually -- would “strain the resources of the working-age population in the years ahead”?

No. Sadly enough, Mr. Greenspan is simply bashing. Calling demographics “inexorable” gives him away. That’s the code word for misrepresenting the change over the years in the ratio of workers to retirees -- see 1/14/05 below.

There is only one “difficult choice” we want Washington to make: speak the truth about Social Security. Considering how the administration has fiddled with it in its budget numbers (see 2/11/05 below), hearing the truth would be progress enough.

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The biggest lie is now in black and white. Where’s the outrage?

Washington wants us to believe that Social Security is a government-financed program. The reason is that politicians want to use our huge surplus of assets -- $1.5 trillion now, rising to $3.6 trillion in ten years -- for political purposes. And principal among those purposes is to reward their financial backers.

Now the administration’s proposed budget for fiscal 2006 is out, and it contains a lie that reveals Washington’s grab for our Social Security assets. The lie is the expected budget “deficit” of $390 billion, which is based on including Social Security receipts and payouts in the budget. The administration pretends that Social Security assets belong to the government, and that the government is running a surplus on those assets.

Here’s the truth. If every number in the proposed 2006 budget comes in exactly as the administration projects, the real deficit -- the amount of money that the government will have to borrow during fiscal 2006 -- will not be $390 billion but something closer to $600 billion.

Why? Because during fiscal 2006 Social Security receipts will show a surplus over payouts of about $200 billion. Stripping Social Security receipts and expenditures out of the budget increases the deficit on the rest of the government’s activities by that $200 billion. The fact that the $200 billion in Social Security surplus will be invested in Treasury bonds -- that is, borrowed by the government -- does not reduce the $600 billion deficit at all.

The simple proof of this is the impact of the projected 2006 figures on the national debt, which is the accumulation of annual government deficits. There is a legal ceiling on the national debt, and when accumulated deficits reach that ceiling, Congress must raise it or no new debt can be contracted. The current ceiling, and the current national debt, is approaching $8 trillion.

On the figures shown by the administration for the 2006 budget, the impact on the amount by which Congress would have to raise the debt ceiling, if it were reached, will be not $390 billion, but about $600 billion.

Where’s the outrage? We can’t expect it from Wall Streeters. While they talk about “fiscal responsibility,” they have been pushing the attack on Social Security for more than 15 years. Their goal is not only to gain private account management fees. As we showed in our 1/28/05 posting (below), bond underwriters stand to gain $2 billion in commissions on our coming $2 trillion of surpluses, if they can get the current law changed.

Democrats and some pundits claim to be outraged by many aspects of the budget, but why is there no outrage over the inclusion of Social Security in the budget, or over the lie about the proposed deficit?

The answer is that politicians of both parties have been making a grab for Social Security assets ever since those assets began accumulating. Prior to the mid-1980s, the surplus was never significant. After that, the changes in contribution rates that were made to prepare for baby-boomer retirements caused our assets to grow rapidly. The money became too attractive to ignore.

Here’s what Congress did in 1985, as reported by the Congressional Research Service:

“The Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99- 177), known as the Gramm-Rudman-Hollings Act, included several measures that altered the budgetary treatment of Social Security. . . . For the purpose of setting out a schedule for eliminating federal budget deficits by FY1991 (amended by subsequent legislation to FY1993), the receipts and expenditures of the Social Security trust funds would be counted in measuring projected budget deficits.”

Five years later, that subterfuge apparently became too much even for Washington:

“The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) . . . Removed the operation of the trust funds from budget deficit calculations under the Gramm-Rudman-Hollings Act. In addition, the legislation established separate House and Senate procedural safeguards to protect trust fund balances.”

I haven’t yet discovered whether recent legislation has reinstated the 1985 act. Two things are clear, however. Politicians have long been privy to using Social Security assets to lie about projected budget deficits; and with or without legal backing, the current administration is using the same lie.

What can we do if we hope to save our assets? First, if you haven’t already done so, go to and request your free copy of the latest Trustees report. That report is the basis for every fact cited in this column. Just by asking for the report, you will put the administration on notice that you know the truth.

Then contact your Senators and Representatives and ask them: Is Social Security part of the government budget? Demand an answer from them or from their staffs, and let us know what they say. We need to find out who our friends are.

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It’s a matter of interest.

If you worry about a “low return” to Social Security participants, consider the interest paid to our Trust Fund on the Treasury bonds we own. On page 133 of the latest Trustees Report, you’ll learn that between 1983 and 2003, the Trust Fund received nearly $700 billion in interest payments. In other words, Social Security’s accumulated assets today are $700 billion greater than what contributors have paid in. “In 2003,” the Trustees say on page 4, “trust fund assets earned interest at an effective annual rate of 6.0 percent.” Go to and send for your own free copy of the Report. Or read it on line.

Given all the political statements we’ve heard about “poor returns” to Social Security assets, I should back up here to make clear what’s really happening. Let me start with a trick question. Does a “balanced” Federal budget for one year mean that the tax dollars we pay in are equal to the dollar value of the goods and services we receive?

The answer is, Not exactly. The question ignores the interest on the outstanding national debt, interest that the Federal government pays annually out of annual tax receipts. That total national debt is now approaching $8 trillion. We can assume that the average interest rate on all those bonds is the same as paid to our Trust Fund -- 6% -- because, as the Trustees explain on page 127, the rate paid on our bonds is set by “the average market yield . . . on all of the outstanding marketable U.S. obligations that are due or callable more than 4 years in the future.”

So with our national debt of $8 trillion, a 6% average interest rate means that the government pays $480 billion in annual “debt service” out of that year‘s tax receipts. For an annual Federal budget to indicate that we received value that year equal to our tax payments, the government would actually have to run a surplus of $480 billion.

Some of the interest the government pays on the national debt goes to overseas lenders and is lost to our economy. But some of it goes to U.S. lenders, like corporations, pension funds, and individuals, and thus remains in the U.S. economy. Happily, some interest also goes into the Social Security Trust Fund, since we own $1.5 trillion of the outstanding $8 trillion in Treasury bonds. As we’ve seen, these payments increase the assets available for retiree benefits.

Was the 6% return to our Trust Fund in 2003 the “return” to individual participants in Social Security? Of course it was, because the only possible measurement of an individual return is as an average of the total return. Whatever portion of the Trust Fund is designated to each contributor‘s future retirement benefits, the assets available to pay that portion grew in 2003 by 6%. And those additional assets will all be paid out to contributors.

Individual portions of designated benefits differ by age and by income level. But at the end of the day, we can’t all get a lower return than average -- although some politicians would like us to believe that -- nor can we all get a higher return than average. Social Security is a cooperative, mutually-supporting system. Only our money goes in -- nothing comes from the government -- and every dollar paid in, plus the interest earned on our accumulated assets, gets paid out to us. Our collective return is the interest received on our Treasury bonds.

This brief analysis reinforces what Social Security Watch has already pointed out: Social Security is not a budget item of the Federal government. Here is a simple test of whether your Senators and Representatives are friends of Social Security. Write to them to ask: Is Social Security a Federal budget item? Friends will acknowledge that it isn’t. Social Security bashers will say it is. In the coming months, finding out who is what in Washington will be critical to saving our retirement assets.

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Who will benefit from Social Security “reform“?

-- It’s the Bond Market, stupid!

Do you wonder why politicians who advocate “less government” want to take over Social Security? The real answer may surprise you.

It will shock no one to hear that money and politics are responsible for the assault on Social Security, but the details of what is happening may indeed surprise you. It’s true that proposed “reform” would mean fees for Wall Street, but not necessarily for managing private accounts. And the politics -- truly bi-partisan in this case -- is not about ideology.

The money that’s really involved doesn’t depend on whether privatization happens at all. Over the coming decade, total Social Security assets -- Trust Fund assets accumulated from annual surpluses of contributions over benefit payments -- will grow by $2 trillion.

Don’t believe me on this. Go to and order your free copy of the latest Trustees Report, or read it on the web. On page 2 of the Report, you’ll find that our Trust Fund assets were $1.5 trillion at the beginning of 2004, and they are projected to grow to $3.6 trillion by 2013.

What is important to emphasize is that this additional $2 trillion will accumulate at existing levels of contributions and benefits -- that is, if absolutely nothing in the current Social Security law is changed. I’ll come back to Wall Street’s interest in this huge sum.

The $2 trillion figure may sound familiar, because that is the amount most commonly cited as what the government would have to borrow if the current system is changed. Why would any politician want the government to borrow money that Social Security contributions are going to generate anyway? Here’s where the money blends into politics.

Under current law, financing Social Security is not a government budget item. Franklin Roosevelt insisted in 1935 that all the money for the program would come from employee and employer contributions, none from “general government revenues.” That remains true today, although as we‘ll see Washington wants us to believe differently.

What has changed over the years is the sheer amount of money accumulated in the Social Security Trust Fund. Before contribution and benefit levels were adjusted in the 1980s, to prepare for baby-boomer retirements, the Fund had very little money. Annual surpluses or deficits were less than $5 billion. As late as 1988, total assets in the Fund were less than $100 billion.

As baby-boomer contributions flowed in, however, assets in the Fund grew rapidly. They reached $500 billion by 1995 and over $1 trillion at just about election time in 2000.

Even by Washington and Wall Street standards, this was just too much money to ignore. Politicians began to include the growing Social Security surpluses in the reported annual Federal budget, even though they know our surpluses don‘t impact the budget at all. The effect has been to make government deficits seem lower than they actually are (by over $150 billion in 2003), and to make a Federal budget surplus seem greater than it actually is.

To support this subterfuge, politicians of both parties have tried to convince Social Security participants that only the government can “save” the Social Security surplus and, worse, that Social Security is a government “entitlement.”

In other words, advocates for small and large government alike try to make us believe that Social Security is already a government program and that a “reform“ will only strengthen it. In this way, they hope to gain real control over the assets. In reality, “reform“ will, at a minimum, whether privatization succeeds or not, change the basic structure of the program.

The truth about our assets and the Federal budget in fact can’t be hidden, because Social Security surpluses are borrowed by the government -- that is, the Trust Fund invests in risk-free U.S. Treasury bonds -- and the amounts borrowed are added to the total Federal debt. As the debt grows, Congress is periodically forced to raise the legal limit on Federal borrowing, which is currently close to $8 trillion. Most of that $8 trillion is held by investors in the form of Treasury bonds, and it includes the $1.5 trillion in Treasury bonds owned by the Social Security Trust Fund.

Which brings me to the other hand reaching into our pockets, Wall Street -- or more specifically, bond underwriters. When most of the $8 trillion in government bonds was sold to corporations, pension funds, wealthy individuals, and other bond investors, it was sold through bond underwriters, who bid on new Treasury bonds for their customers. The government gathers the bids and awards the bonds according to the best bids. Underwriters in turn sell the bonds to their customers -- taking a tiny 10 basis points for their commission. That’s only 10 cents on every $100.

The practice of selling Treasury bonds through underwriters, however, does not extend to bonds issued to our Trust Fund. Instead of bidding for the bonds, our Trustees accept the market rate of return, which is determined by an average rate on bonds sold to everyone else, and the bonds come directly into the Fund.

As long as Social Security had no significant assets, this difference didn’t matter to Wall Street. But we now own $1.5 trillion in government bonds, on which no commission was paid to Wall Street. What was lost by missing the “tiny” underwriting fee? On $1.5 trillion, Wall Street would have collected $1.5 billion.

Remember the $2 trillion in future Social Security surpluses I described above? Under existing laws, that money will be invested in Treasury bonds, with no underwriting fees paid to Wall Street. If a “reform” law passes, the government will borrow $2 trillion to “strengthen” Social Security, and Wall Street underwriting commissions will be -- yes -- $2 billion. That seems to me enough potential new income to make Wall Streeters push politicians as hard as they possible can to be sure they get it.

Social Security Watch will review all the proposed “reform” legislation. Don’t be surprised if we find compromise on privatization, yet fundamental changes to financing our retirement system that produce a windfall for Wall Street.

If we hope to save Social Security from “reform“, all 200 million of us contributors and retirees have to demand explicit acknowledgement from Washington that a) Social Security today isn’t a Federal budget item, b) its assets belong to us, and c) changes in contributions and benefits affect only us, so we should be asked what changes, if any, we want.

Any politician who is a true friend of Social Security will acknowledge those truths. We need to find out who are friends are.

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They call this a mandate?

When Franklin Roosevelt ran for re-election in 1936, most of the New Deal was in place, including the Social Security Act. The Act was a peculiarity among New Deal legislation, however. In the midst of the great depression, its immediate effect was to lower the take-home pay of those Americans who still had jobs. The Act called for wage-earners to contribute a portion of their salaries to fund retirement benefits that most of them would not receive for many years. The Act specified that government would contribute nothing toward those benefits.

Despite bitter Republican opposition to the Social Security Act, Roosevelt was re-elected with over 60% of the popular vote. He won every state but Maine and Vermont. It was, according to the Encyclopedia of American History, “the most overwhelming electoral majority since Monroe’s victory in 1820.” Democrats won the Senate with 76 seats to 16 and the House with 331 seats to 89.

In 2004, another incumbent administration was re-elected, this time with 51% of the popular vote and 53% of the electoral vote. The administration received 60 million votes. With war, terrorism, and defense on every American’s mind, did every one of those voters intend to register opposition to Social Security? That’s hardly a defendable assumption. What’s more, those voters represent only 30% of the 200 million participants in Social Security. Does this sound like a clear mandate to break a 70-year-old successful, self-funded retirement system?

Washington needs to hear from all of Social Security’s contributors and beneficiaries. Go to and order your free copy of the latest Social Security Trustees’ Report. Doing so will tell Washington that we know the truth and we want politicians to keep their hands off our money.

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Tales from The Heritage Foundation

Social Security bashers have a favorite fairy tale about payroll taxes. As told last week by The Heritage Foundation, an early and aggressive basher, the story goes like this.

Throughout this land, wage-earners imagine that they and their employers contribute equally to Social Security. They contribute 6.2% of their salaries, and employers contribute another 6.2%. But the wool has been pulled over their eyes, because wage-earners “really pay the whole 12.4 percent tax in terms of foregone wages.”

Employers, you see, consider their 6.2% contribution as “an expense of hiring.” It is “money [they are] willing to spend” on their employees. Therefore (here’s the good part), if employers did not have to contribute their 6.2%, they would raise all salaries by exactly that amount.

If you believe that, The Heritage Foundation has more tales for you. For example, it would like you to believe that the annual Social Security surpluses “don’t really accumulate. Instead, the government spends them.”

Never mind that the government issues Treasury bonds when it borrows our money, and that our bonds – a total of $1.5 trillion so far – do not differ in any way from Treasury bonds issued to U.S. corporations, individuals, and pension funds, as well as to foreign corporations and governments. Total government debt is now approaching $8 trillion. Our portion is less than 20%.

On pages 135 and 136 of the latest Trustees annual report, you can see the list of U.S. Treasury bonds we own. If you haven’t done so yet, go to and get a copy of the Trustees report. You’ll learn the truth when you do. You’ll also put politicians on notice that you know it’s our money and that we plan to fight for it.

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Social Security is not financed by the Government. Surprised? Read on.

Social Security has served us well for 65 years, yet politicians of both parties have for a decade intentionally distorted the way it works. The current administration is continuing the effort to convince us of fundamental flaws in the system. No wonder some participants feel uncertain about the future. A jolt of the truth should help.

Social Security is a self-funded, cooperative program that unites generations to guarantee basic financial support to retirees. In effect, contributors and benefit recipients are one group. Only wage-earners who have contributed are eligible for benefits, and every contributor receives benefits upon retirement. Every dollar in Social Security comes from wage-earners and their employers. Not a penny comes from the government budget. Every dollar contributed gets paid out in benefits. Contributors and beneficiaries together now number more than 200 million Americans. We are virtually the entire adult population.

This is the basic structure of Social Security, and two important thoughts follow from it.

First, the guarantee behind our retirement benefits comes from ourselves, from the fact that we as wage-earners will always be the backbone of the U.S. economy. Corporations will come and go, and government administrations will be more or less sympathetic to us. But we will do the work of the U.S. economy for as long as there is an economy. Every generation will play its role in Social Security, both as contributors and as retirement benefit recipients.

The second thought is that over the long-term the number of contributors and the number of beneficiaries has to be in synch. If there are fewer contributors today, there will be fewer beneficiaries tomorrow. Since only contributors receive benefits, there can’t be a permanent imbalance between the two. (I’ll explain below how longevity does affect the long-term relation.)

Most scare-mongering by politicians misrepresents this relation between the number of contributors and the number of retirees. We have been repeatedly told that the number of workers per retiree has declined for 60 years and will continue to decline. The is the second biggest lie about Social Security. (The biggest is that it is in the government budget.)

The truth is on page 47 of the Trustees latest report, dated March 23, 2004. If you haven’t read it yet, click now on Read the report on-line or order your free copy.

Here’s the truth. When Social Security paid its first retirement benefits in 1940, the only recipients were those wage-earners who had retired in the prior three years. Yet all covered wage-earners were contributing. Obviously, the relation was not normal. In 1945, there were 42 wage-earners for every retiree. As the years went on, however, and more contributors retired, the relation headed toward what we might expect. By 1955 there were 8.6 contributors per retiree. The number was down to 3.2 by 1975.

What happened then? From 1975, the number of Social Security contributors per retiree has remained steady at between 3.2 and 3.4 for the past 30 years. So much for a built-in downward trend!

What about the future? It’s true that as the baby-boomer generation begins to retire, the ratio of wage-earners to retirees will drop. Eventually, though, the boomers will move through retirement and be gone. And the relation of contributors to retirees will be in synch again.

I referred above to longevity as a fundamental change in our lives that could affect the long-term relation between the numbers of contributors and retirees. If we get to live more years in retirement than our parents did, Social Security will have to adjust. It’s not reasonable for us to plan to work the same number years our parents did and contribute to Social Security at the same rate, and still expect to enjoy additional years of retirement benefits. If that’s a problem, though, it’s one we welcome.

In fact, the Trustees offer a simple solution. If the contribution rate for us and our employers is raised by less than 1% -- from 6.2% to 7.1% -- Social Security will “remain solvent throughout the 75-year projection period.”

Is that a difficult increase for us to accept? It would amount to less than $400 per year in additional contributions for someone earning $40,000. In return, Social Security would be guaranteed for 75 years, and the young workers this administration claims it want to help would receive the full benefits they expect through all their retirement years. Do we want to guarantee our future ourselves? Or do we want to depend on the good will of future administrations in Washington?

If you have an opinion on increasing the contribution rate, tell your Senators and Representatives. I’ll write next week about the Trust Fund and the assets we own. Meanwhile, read the Trustees Report -- -- and let us hear from you.

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