Social Security: We Can Solve This

Ugh. Dude, seriously, can we dispense with the “high earning taxpayers subsidize how earning taxpayers’ benefits! its not fair that they have to pay more!” meme?
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It’s pretty simple really, high earners benefit disproportionately from government expenditures, therefore they should pay higher rates to compensate for their higher usage of services. I’m not even going to get into all the unearned income you get as you climb the income ladder thats completely tax free, or taxed regressively (health care, mileage, points, freebies, investment income, etc.)
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Let’s say you own a Wal-Mart vs. a guy who works at a Wal-Mart. The guy who works there uses roads to get to and from work, and the city provides him police and fire protection for his property. We’ll say that those services are worth the sum total value of his property and salary each year. So, we’ll assume $35,000 (salary) + $125,000 (property) = government services value to worker of $160,000/year.
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Now lets examine the case of the Wal-Mart owner. Using just those two standards, his value from government services is something like $1.125 million. $1 million for the store and his home, and $125,000 for his salary. But wait, the Wal-Mart owner also benefits from the freedom of the seas provided by the U.S. Navy, without which his shipping costs from China would be dramatically higher, and he also benefits from the State Departments work on things like Free Trade Agreements and the general lack of US tariffs on consumer goods, which lets him buy cheaper products form overseas. And the court system, which enforces his purchasing contracts and prosecutes (and incarcerates) thieves who might otherwise steal his stock. And this doesn’t even begin to get into all the tax breaks and other sundry considerations he gets from being a local business owner and job creator.
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I don’t ask that you agree with me or my views, but could you please, please not repeat uninformed, ignorant talking points about a graded tax scale being “unfair”?

You said, “It won’t bankrupt the U.S. (the way Medicare and Medicaid can) . . .”

This is an ongoing myth. Neither Medicare nor Medicaid nor Social Security can bankrupt the U.S. Ever since 1971, the U.S. government has had the unlimited ability to create money, therefore the unlimited ability to create money.

Thus, it is absolutely, positively, 100% impossible for the U.S. government ever to go bankrupt. I challenge anyone to present a scenario in which the U.S. government would not be able to pay its bills.

If all federal taxation ended today, and federal spending tripled tomorrow, this would not reduce the federal government’s ability to pay its bills by even one cent. At long last, can we begin to look at facts, and stop relying on intuition and myths to run our government?

Rodger Malcolm Mitchell

Sean, there are no fair taxes — never have been, never will be. So typical discussions of tax “fairness,” are meaningless. You can see a complete review of this here

Rodger Malcolm Mitchell

Yes, you are correct that it is not a question of solvency, and I should not use such words figuratively in an era where sovereign defaults are the new market anxiety. Point well taken. Thanks

Thanks John.

Since it is not a question of solvency, what is it a question of? You said, “Social Security is slowly running out of money and that trend needs to be stopped.”

The federal government has the unlimited ability to create money to pay any size bills. This has existed since 1971. Therefore, the government easily could pay for all of Social Security, now and forever.

So why is there this wrongheaded connect between Social Security taxes and payments? Because the program was invented before 1971, when the government did not have the unlimited ability to pay bills.

The whole argument is based on the false premise that the federal government is like you, me, corporations and local governments. It isn’t. The federal government is unique. It alone neither needs nor uses taxes to pay its bills.

FICA could be eliminated today, and still Social Security need not run out of money. You can read a fuller discussion of this by clicking this.

Rodger Malcolm Mitchell

To say that soc sec is a good deal for its beneficiaries is a stretch too far. It depends how old you are.
For beneficiaries through 1990 or so, it has been a fantastic return – got full benefits for only a fraction of the contributions.
The next 30 years of beneficiaries sort of get a 5% return – not great but ok.
The youngsters are the ones with the headache. Since the payouts so far have been too generous relative to the contributions, there is a ‘slight’ underfunding that must be closed.
The real scandal is the racial bias in the benefits. An African-American male is getting a very poor return, given their life expectancy after age 67 is a fraction of other demographic groups. And yet there is no adjustment in their contribution rates. Same for the gender discrimination – women live longer and yet get the same benefits as men.

I hope you’d also consider the fact that the “guy working at Walmart” also benefits from all the stuff a “guy who owns Walmart” benefits from.

Without the Free trade agreements, lack of US tariffs; Walmart would not be able to bring in cheap goods which means that Walmart would either not exist or be of a much smaller size which effectively means that the “guy working at Walmart” would probably not have a job, not to mention not have cheap goods to buy from Walmart.

Yes, the court system works for the owner but it also works for the “guy working” by looking out for his interests not to forget again… his interests a s a consumer.

So its not like the big guys alone benefit. SO please.

Sean, we attempt to keep separate general taxes from payroll taxes, which is why payroll taxes aren’t progressive. Because Social Security is required to invest its surplus in Treasury securities (which provides revenue for general expenditures), this probably doesn’t make sense any more, but the fact is that there’s not a lot of difference between SS benefits based on lifetime income, as long as you are paying into the system. It’s not clear that your argument holds (as much) water for payroll taxes.

That said, John, I don’t understand the logic behind how not having an income cutoff violates any sense of fairness, as long as you accept the premise that SS is an intergenerational transfer of wealth to the elderly to enable them the opportunity to have a modest lifestyle in their waning years.

But you must know that there many who would deny even the hint of a problem with SS today or in the future. Bush proposed a solution and even many in the press declined to accept that anything needed to be done. Granted, Bush’s solution has been discredited by events, but I bet there is still the widespread lack of acknowledgement that anything at all needs to be done.

Sean–Your WalMart example is beyond ludicrous. In between the guy who works at WalMart and the fictional guy who “owns” WalMart (???), are all the folks who make more than $250,000. They don’t necessarily “own” anything. Yet they ARE paying a disproportionate share of taxes. Why is this allowed? Easy. a) Pure numbers, in terms of what their tax revenues add up to; b) There aren’t enough of them to throw politicians out of office. But that game only goes so far. As revenue requirements increase, all those WalMart workers will need to kick in more money as well. It’s simple math. So keep up your whining on behalf of the working folks. But they’re the ones who will ultimately have to join the “rich folk” and pay more/work more years.

Would it be better to consider ways to increase the funds available for Social Security instead of finding ways to block people from getting them?
I’m years away from that age but yet I feel the body aches and pains and wonder if I can make it that long.
People are all different and those who made there living in a more physical way have through the years worn down there body faster. It is unfair and unrealistic then to raise the age threshold in order to save funds.
I think we should look a further ways to raise money for SS and further ways to be more realistic with our National Budget.
If first we don’t take care of our own, then how do we spend so much elsewhere?

Abraham,
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I did consider it. My point was that the guy owning the place gets benefits worth $1.125 million/year while the guy working there gets benefits of $160,000/year. See the disparity? The reason I mentioned all the other stuff the govt. does for the rich guy is to point out that those things directly benefit him, while only indirectly benefiting his employees, who could theoretically go do another low-skill job for someone else just as easily, whereas the owner’s entire business model is dependent on the government.
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Stevesancarlos,
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Yes, people do own Wal-Marts. The individual stores are franchises, similar to McDonalds or Best Buy.
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Rodger,
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No, its pretty much impossible to make taxes “fair”. I’m just tired of hearing this “its unfair for rates to rise with income” meme from people who theoretically have enough education and experience to know better.
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Curmudgeon,
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You can say that my argument holds even more water for payroll taxes because the government collecting payroll taxes and providing social security allows employers to skimp on retirement plans.

thank you stephenpoo. you make some excellent points. Why arent we ALL asking: “If first we dont take care of our own, then how do we spend so much elsewhere?” Is it because we’re afraid the answer is “it lined somebody’s pocket somewhere”? Trillion$ have flown out our window – truckloads of our hard earned tax money. our wonderful beloved country is in big trouble from coast to coast. we need SELFLESS GOVERNANCE. Is that such an impossible dream? i’m scared.

When it comes down to it there is always a competition for the Federal dollars. Most of the time its won by the Corporations which have the best lobbyist in Washington. Since “we the people” are not represented well with lobbyist we get leftovers.
Once in a very very great while the situation becomes intolerable and the stars line up and we get lucky.
Then they go back and play us like a fine instument, and they can play us so well.

To John Curran,

The trust fund does not “have enough money to fund payouts for decades.” It doesn’t even have enough money to cover the $29 billion deficit for 2010. Every dollar of the $2.5 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, has already been spent on wars and other government programs.

Also, in addition to the unexpected deficits for this year, and for 2011 and 2012, beginning in 2016, Social Security will begin running permanent deficits that will get larger and larger year after year. As you know, a deficit means that the cost of full Social Security benefits is greater than the amount of payroll tax revenue. The government will have to find an additional $29 billion this year in order to pay full benefits. Where will it get the money? It will have to borrow the money, possibly from China or Japan.

About now, you and other readers will probably say, “They can just take cash from the hoard in the trust fund.” But there is no cash in the trust fund. “How about selling some of the Treasury bonds in the trust fund to raise the money?” you might ask. There are no real bonds in the trust fund–just non-marketable worthless IOUs.

I discovered this awful truth while doing research for a book in 1999. I was outraged, and I wanted to tell the whole world so everyone would be outraged. But nobody wanted to listen to such an awful story. I have been immersed in researching and writing about Social Security ever since. I have published four books on the subject. I have discussed the issue on CNN, CNBC. CNNfn, and more than 170 radio talk shows. In 2000, I made extensive efforts to convince Al Gore to break ranks with Bill Clinton and pledge to end the raiding of the Social Security trust fund, and I think I was the source of Gore’s “Social Security Lock Box” proposal. I have been trying to expose the Social Security fraud for longer than Harry Markopolos tried to expose the Madoff Ponzie scheme.

John, I would like to send you a complimentary copy of my latest book, “THE BIG LIE: How Our Government Hoodwinked the Public, Emptied the Social Security Trust Fund, and caused The Great Economic Collapse.” If you will just email me the postal address to which I should send the book, I will send it to you via Priority Mail. Will you read the book if I send it to you?

To other readers, I would urge everyone who cares about the future of Social Security to visit my website at http://www.thebiglie.net where you will find a lot of information on Social Security, including excerpts from my new book. Please feel free to download anything from the website.

Allen W. Smith, Ph.D.
Professor of Economics Emeritus
Eastern Illinois University
Website: http://www.thebiglie.net
Email: ironwoodas@aol.com

Now that coverage of health care reform is fading from the news, it is being replaced with increased coverage of Social Security. That is appropriate, but most of the articles, currently being published totally ignore the most urgent problem facing Social Security. That problem is the fact that, every dollar of the $2.5 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike has already been spent by the government. The trust fund contains no real assets. It is empty!

Most of the articles are written by well-intentioned people, who just amplify the misinformation that the AARP and the NCPSSM have been bombarding their members, and the public, with for years. The general message is that Social Security has $2.5 trillion in, good as gold, Treasury bonds stashed away in the trust fund that will make possible the payment of full Social Security benefits for decades to come without any action. The message may be comforting to those who believe it, but it is not true.

I have been researching and writing about Social Security for more than a decade, and I have published four books on the subject. The hard fact is that every dime of the $2.5 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, has been spent on wars and other government programs. Every month, for the past 25 years, the total receipts from the payroll tax have been split two ways. First, benefits for current retirees are paid from the Social Security revenue. Then, all remaining Social Security revenue, not needed to pay that month’s benefits, are deposited into the general fund and become indistinguishable from other general fund revenue.

Most workers think that at least some of the FICA taxes deducted from their paychecks will be saved and used to pay future Social Security benefits. But it doesn’t work that way. Not a single dime of payroll tax revenue has ever been saved and earmarked for the payment of future benefits. To put it bluntly, the government has “borrowed,” “embezzled,” or “stolen” every penny of the $2.5 trillion of surplus revenue that was supposed to be saved and invested. I consider this to be the greatest fraud ever perpetrated on the American people by their government. I have been trying to expose this awful truth for more than a decade, and some courageous people were trying to expose it even before I stumbled onto the scam in 1999.

On October 13, 1989, Senator Ernest Hollings (D-SC) issued the following warning in a speech on the Senate floor.

“…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund ..in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”

A year later, on October 9, 1990 Senator Harry Reid (D-NV) made a similar warning in a Senate speech. He said:

“…on that chart in emblazoned red letters is what has been taking place here, embezzlement. During the period of growth we have had during the past 10 years, the growth has been from two sources. One, a large credit card with no limits on it, and, two, we have been stealing money from the Social Security recipients of this country.”

On January 21, 2005, David Walker, the Comptroller General of the GAO, tried to make it clear to everyone that the trust fund contained no real assets. He said:

“There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.”

If anyone has any remaining doubts about whether or not the trust fund contains real assets, those doubts should be removed by the following statement from the 2009 Social Security Trustees Report:

“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

I urge everyone who cares about the future of Social Security to please visit my website at http://www.thebiglie.net to learn more about Social Security and my efforts to expose the scam. Excerpts from my latest book, “THE BIG LIE: How Our Government Hoodwinked the Public, Emptied the S.S. Trust Fund, and caused The Great Economic Collapse,” are posted on the site. Please feel free to download them.

Allen W. Smith, Ph.D.
Professor of Economics Emeritus
Eastern Illinois University
Website: http://www.thebiglie.net

In order to provide readers with more information than I could include in my earlier post, I am reproducing excerpts from an article that I recently published.

It’s official. The Social Security trust fund has no assets. It was declared empty by the Social Security Trustees in the 2009 Social Security Trustees Report, which was signed by Treasury Secretary Timothy Geithner and the other Social Security Trustees. The acknowledgement was in the form of a single sentence, buried deeply in the report. That sentence reads:

“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

There is nothing ambiguous about that statement. It says that the government does not receive any income from redeeming the bonds or from the interest that the “bonds” allegedly earn. Even worse, it says that the government must finance redemptions and interest payments by increasing taxes, reducing government spending, or going still deeper into debt.

Why is it that most Americans know nothing about this? It is because that, with a few exceptions, the media has not reported it. Instead, the media continues to help spread the misinformation that is dispensed by the AARP, other senior organizations, and many politicians.

I appeared on CNN with Lou Waters on September 27, 2000 and tried to convince him that the government was spending all the surplus Social Security revenue. He looked at me in disbelief and asked, “Are you a voice crying in the wilderness?” As it turned out, I was a voice crying in the wilderness in 2000, and I continue to be such a voice a decade later. I have been trying to expose the Social Security scam for as long as Harry Markopolos tried to expose Madoff’s Ponzie scheme. If the SEC had listened to Markopolos when he first reported his suspicions to them in 1999, thousands of individuals and organizations would have avoided being swindled out of billions of dollars. Similarly, during the ten years that I have been trying to expose the government’s misuse of Social Security revenue, and bring the looting to an end, an additional $1.5 trillion has been looted and spent by the government.

People, who are in a position to know the truth, have been stating the above fact publicly for years. But nobody has been willing to listen. Some examples:

“I come to you as a managing trustee of Social Security. Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.”—Paul O’neill, Secretary of the Treasury, June 19, 2001

“There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.”—David Walker, Comptroller General of the Government Accountability Office (GAO), Speech in Washington DC, January 21, 2005

“There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.”—President George W. Bush, Speech at West Virginia University at Parkersburg, April 5, 2005

Such public statements have been rare, and they have not received much news coverage. On the other hand, the AARP and the NCPSSM have no difficulty in getting media exposure for the misinformation they dispense. They bombard their members and the public with the message that Social Security is very solvent and can pay full benefits until at least 2037 without any action. That simply is not true.

The sad fact is that, in just six or seven years, the cost of Social Security benefits will begin to permanently exceed payroll tax revenue, and the government will have to cut benefits or raise taxes. The public just seems to be incapable of accepting the harsh reality that for the past 25 years, our government has spent all of the $2.5 trillion in surplus Social Security revenue that was intended to be used for funding the retirement of the baby boomers.

Allen W. Smith, is Professor of Economics, Emeritus, Eastern Illinois University. The author of seven books, Smith has been researching and writing about Social Security financing for the past ten years. Visit his website at http://www.thebiglie.net.

Dr. Smith: You undoubtly speak the truth on the state of finances here with SS and the rest. I don’t think I would have any arguement that the money is gone and not there. MY thoughts go to will we have the resolve to continue funding SS even though it costs us money that has to be borrowed to pay back borrowed money?
For instance will we decide to cancel or curtail other spending in order to payback SS? I hope thats a conversation that comes to Washington. When they do talk SS they use figures like yours as a excuse to dismantle SS. When it’s not the falt of SS that the funds were spent on something else. The trust has been broaken and the money gone, I can accept that, but not that it won’t be replaced. We need to insist they make it up to us and they need to decide what they have to cut to do it. I don’t think we can keep a civil society and do otherwise. I hope that citizens here will be vocal against what they have been preparing for us for years.

Rodger Malcolm Mitchell is technically correct, when he writes that a sovereign cannot go bankrupt in the same sense as an individual or corporation.

However, the unlimited printing of money (also known as monetization of debt) inflates currency to the extent that it becomes increasingly difficult to purchase needed goods from other countries. Another consequence of this hyperinflation is that a country becomes unable to borrow in its own shaky currency.

Because a country theoretically has unlimited money, does not mean that it cannot become insolvent.

If anyone is curious what this process looks like, there are numerous examples from the past 100 years.

One could imagine a scenario in which the US could not purchase oil in dollars, and would need to borrow foreign currencies in order to obtain needed energy supplies. Because our government isn’t allowed to print Euros, Chinese RMB, etc. we would eventually have to default on these debts. But not to worry! The Ottoman empire lasted about 40 years (with various impairments to its sovereignty) after defaulting on its sovereign debt.

Read this study from the Fed Bank of St. Louis, and it’ll shake ya up, and this was when time were “good.”

http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

Is the US Bankrupt?

To: stephenpoo

I agree totally with you. I have been crusading to expose the scam for the past 10 years so that we could save Social Security as we now know it. If Gore had been elected, and had honored his pledge not to raid the trust fund, there would be about $1.5 trillion of real assets in the trust fund today. Harry Markopolos spent nine years trying to expose the Madoff fraud to the SEC. If they had listened to him when he first contacted the SEC in 1999, thousands of individuals and organizations would have avoided being swindled out of billions of dollars. Similarly, if I could have gotten enough government officials to listen to me in 2000, Social Security would be better off today by $1.5 trillion. I have opposed every effort to privatize Social Security. I even published a book in 2005, “Social Security: The Attempt to Kill It,” for the explicit purpose of exposing the true motives and intentions of George W. Bush, the Heritage Foundation, The Cato Institute, and all the others who wanted to destroy Social Security as we now know it. However, the biggest opposition to my efforts to expose the truth about the Social Security trust fund has come from the AARP and the NCPSSM.

I have been a member of both these organizations for years, and my goal for Social Security is identical to their goals—to preserve and protect Social Security as we now know it. I have sent copies of my books to them and attempted to communicate with them by U.S. Mail, email, and fax. Neither organization will have any contact with me. This is a terrible shame, and I believe both organizations are betraying their members by attempting to keep the secret of the empty Social Security trust fund from being made public. If they had cooperated with me back in 2000, we could have stopped the raiding and Social Security would be $1.5 trillion richer today. If they would join my efforts today to get the government to acknowledge that all surplus Social Security revenue has been spent on other things and demand that the government immediately enact legislation that provides for the gradual repayment of the $2.5 trillion the wrongs of the past could evenually be made right, and Social Security could be made solid for future generations.

The window of opportunity for saving Social Security, as we now know it, will probably be closed by December when President Obama’s bipartisan commission on fiscal policy makes its report. I suspect that the commission will sweep the evidence of the great Social Security scam under the rug and call for cuts in Social Security. They will appeal to the people’s sense of patriotism and urge them to be willing to make sacrafices for the good of the country as a whole. They will probably point to the great economic collapse of 2008 as the reason that Social Security benefits need to be cut. If they do, it will just be another BIG LIE. The only problem with Social Security is the fact the the United States government, over a 25-year period, under both Republicans and Democrats, has “borrowed,” “embezzled,” or “stolen” (whichever word you prefer) $2.5 trillion of the Social Security contributions of working Americans. That’s it! That is the whole problem. But instead of demanding that the government own up to the crime, and make provisions for repaying the money, the AARP and the NCPSSM continue to bombard their members and the public with THE BIG LIE that the surplus Social Security revenue, generated by the 1983 payroll tax hike, was indeed saved and invested in marketable Treasury bonds like it was supposed to be, and there is enough money to pay full Social Security benefits for decades.

I very much appreciate your post and your questions. I will be making several additional posts in response to the issues you raise. The short answer to your question is that the ball is now in the court of the AARP and the NCPSSM. As a dues-paying-member of both organizations, I believe that I have a right, and a responsibility, to urge fellow members to pressure these organization to stop trying to block my message. Keeping the awful truth about the trust fund as a dirty secret cannot possibly be in the best interest of the membership of either organization. I will describe specific experiences that I have had with the organizations over my ten-year battle to expose the Social Security scam in followup posts. I am a political moderate who described Social Security in my book as, “the most successful and most popular program ever created by the United States government.” I have devoted enormous time and energy over the past decade trying to expose the Social Security scam so that Social Security as we now know it could be saved. In addition, I have spent more than $40,000 of borrowed money trying to publicize my message. To all who read this post, I ask you to please ask yourself, why would someone go through all that sacrifice in an effort to save Social Security if what he is saying is not true? Also, please ask yourself why the AARP and the NCPSSM would actively try to stifle the message of one of their own members? I have a Ph.D. degree in economics from Indiana University, Social Security funding was part of the curriculum that I taught to college students for 30 years. I have spent the past ten years immersed in researching Social Security funding, and I have published four books on the subject. When it comes to the narrow area of expertiise of what the government has done with the $2.5 trillion in surplus Social Security revenue that was generated by the 1983 payroll tax hike,which was supposed to be saved and invested so that it could be used to fund the retirement benefits of the baby boomers, who has more expertise than me. The fact that David Walker, former Comptroller General of the GAO agrees with me on this, should add some credibility to what I am saying. It has been a long and lonely journey for me over the past decade. I hope it has not been in vain.
Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University
Website: http://www.thebiglie.net
Email: ironwoodas@aol.com
Phone: 800-840-6812

Raise the maximum taxible wage rate by thousands. In fact, tax all wages and not just the first $108,600 like Social Security currently does. In my state, all 5 state pension programs tax all wages and so all pay their fair share….just like they should for Social Security. Then, there would be no worry about solvency of the Social Security program.

Professor Smith;

I truly am sorry you have been teaching your students that there is a Social Security trust fund, that it pays for Social Security benefits and that it is funded by FICA and by interest earned. None of these are true.

The “trust fund” is an accounting fiction. The federal government pays you your Social Security benefits by crediting your bank account. It can do this endlessly. Tax payments are not part of the process.

If FICA ended today, this would not affect the government’s ability to credit your bank account by even one penny.

Taxes do not support any federal spending. Just as there is no Iraq war trust fund or Supreme Court trust fund, there is no trust fund for any federal expenditures. In 1971, the federal government gave itself the unlimited ability to create money (i.e., credit bank accounts). All federal taxes could end today, and still the federal government would have the unlimited ability to spend.

You probably learned your economics prior to 1971, and believe the federal government is like you, me, businesses and state and local governments. It isn’t. It is unique.

There are state trust funds. There are county and city trust funds. There are business and personal trust funds. But, there are no federal trust funds. The government creates its spending money ad hoc. You can bring yourself up to date by clicking the word “Truth.”

Rodger Malcolm Mitchell

Kvac said, “However, the unlimited printing of money (also known as monetization of debt) inflates currency to the extent that it becomes increasingly difficult to purchase needed goods from other countries. Another consequence of this hyperinflation is that a country becomes unable to borrow in its own shaky currency.”

While in theory the unlimited printing of money could cause inflation, we are nowhere near that point, despite massive printing. See the GRAPH in point 8. Ever since we went off the gold standard in 1971, there has been no relationship between deficits and inflation.

Further, hyperinflation is a different process from “normal” inflation, which I would be glad to explain.

Rodger Malcolm Mitchell

“‘I come to you as a managing trustee of Social Security. Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.’—Paul O’neill, Secretary of the Treasury, June 19, 2001″

This statement should have been a great clue, but everyone seems to have misread it. He is saying there are no assets in the trust fund, but we have been paying benefits, anyway! In short, we don’t need to have assets in the trust fund to pay benefits, and in fact, we don’t even need a trust fund.

Benefits are paid ad hoc, by the U.S. government, which has the unlimited ability to credit your bank accounts. No FICA taxes used or necessary. Those charts and graphs showing when Social Security will “run out of money” are fiction. Paul O’neill said so.

Rodger Malcolm Mitchell

I feel sorry for Professor Smith. He has spent more than a decade researching something that doesn’t exist. Not only does the government not provide benefits from the Social Security trust fund, but such a fund does not even exist.

FICA taxes are not used for paying benefits. In fact, no federal taxes are used for any federal spending. The government spends by crediting bank accounts, which can can do endlessly, whether or not taxes are collected.

Rodger Malcolm Mitchell

(Aside.)

Well, Prof. Smith, would you say then that Treasury Bonds are a bad investment? That they are fictitious money?

Or, Prof. Smith, would you ever say that recipients of money invested in financial markets don’t end up spending it very quickly? Isn’t that precisely why they (issuers of bonds, issuers of stocks) wanted the money: to spend it?

(End aside.)
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How about this:

Each year, compute the following years benefit levels just as is done today. Then make the same forward projections that are already made by the SSA. If, according to the projections, the SS balance doesn’t go negative at any time in the next 40 years use the computed benefit levels.If the projections show the balance going negative any time in the next 40 years reduce the computed benefits to 99% of what they had been (but not lower than current benefits.) This is a benefit reduction. The intent and thought is to keep Social Security self-funding through FICA taxes, as was the original design.

Possibly it may turn out that the benefits are inadequate (with the Congress bearing the responsibility for the determination and for the definition of “inadequate.”) The Congress can change the benefit formula and the FICA tax if that happens. If the Congress doesn’t act the approach outlined above will at least serve to keep the program solvent.

Of course “real” Treasury bonds are not a bad investment. Public-issue marketable Treasury bonds, the kind of bonds that China and Japan, Bill Gates, pension plans, and all other serious investors invest in, are the safest investment in the world. They are as good as gold.

Unfortunately none of the Social Security surplus was invested in such bonds. In fact, none of the Social Security money was invested in anything. It was all spent!

If you have a thousand dollars in a savings accounty today, you can invest that money, or you can choose to spend it. But you cannot do both. If you choose to spend the $1,000 on a vacation trip, you cannot change your mind after you return from vacation and then invest the money. Once money is spent, there is nothing left to invest.

The Social Security surplus should have been invested in public-issue marketable Treasury bonds, purchased in the open market. If that had been done, we wouldn’t be having this discussion and Social Security would truly be able to pay full benefits until at least 2037.

The trust fund has owned public-issue, marketable Treasuries in the past, and it would have been perfectly legal and appropriate to have purchased such bonds in the open market with every penny of the $2.5 trillion in surplus Social Security revenue. The reason that was not done is that the money would have gone to the people who were selling the bonds to the government, and there would have been no remaining money for the government’s giant slush fund.

In order to have the money for itself, and at the same time give the public the illusion that they were investing it, the government created a gimmick called special issues of the Treasury. These are not marketable and have no monetary value. They are akin to a note that a bank robber might leave behind in the empty bank vault, stating how much money he took.

Prior to 1994, the IOUs consisted only of accounting entries recorded in government ledgers or stored on computers. However, some members of Congress began to worry that someone might want to actually see the IOUs, so legislation was passed that required the physical printing of documents to serve as certificates of indebtedness, in addition to the accounting entry. Today, when a new IOU is issued, it is printed on a laser printer located at the Bureau of the Public Debt office in Parkersburg, West Virginia. Once printed, the document is carried across the room and ;placed in a fireproof filing cabinet. That cabinet is the closest thing to the mythical Social Security trust fund that exists. .

“The US can’t go bankrupt”.

In a theoretical sense that is true. We have a Reserve currency and therefore the right to print money.

In a half dozen years we will have exceeded 100% debt to GDP. The debt service alone will cost us a Trillion a year at that point. A hard number to think about. The entire cost of the Iraq and Afghanistan so far is ~750B. So the annual interest will be greater than all of that. Every year. Forever.

There is no growth projection for GDP that puts this in any reasonable balance. But because we can print some more money you suggest this is not a problem. As you say we won’t be bankrupt. But our standard of living is likely to be halved as a result.
bk

SS is getting all the attention today because it has hit a big speed bump. In 09 they ran a deficit of $5b In Payroll tax minus benefits.

During 2009 they ran monthly deficits in February, May, July, August, September, October and November. To give an example of how things are progressing this year consider the February 2009 deficit of $1.255 billion. The February 2010 number is a deficit of $7.570 b. Things are steadily get worse.

To finance these monthly deficits the Fund sells (redeems) a small portion of its holdings of Special Issue Securities. I make this point in an effort to refute the notion that there is no TF and the TF has no assets. That is wrong headed. At anytime that the Fund needs to redeem a portion of its holdings to meet current benefits it has done so with no problem. That is how the system works. It will continue to work in that fashion.

Yes the surplus of the TF was spent. Same as all the other money we have borrowed has been spent. But there is nothing different between the IOU’s that SSTF and China own. They are both redeemable for cash as and when needed.

The problem is not “Can the TF cash in its IOUs?” The problem is, “The TF is cashing in its IOUs a few decades earlier than we thought it would”.
bk

Dr. Smith:

I repeat. The money that the government gets from issuing bonds is spent, has been spent, will be spent (for future bonds, although surely most future bonds will simply be re-financing exiting debt.) Same for businesses: the money gets spent. You complain about the money being spent but if there wasn’t a need (however “need” is defined) to spend money the bonds would never be issued. The bonds aren’t to serve the bondholders, they are to serve the issuer. All of which you surely know far better than I.

You make a false and artificial distinction between those bonds and the bonds in the SS trust fund. They are obligations incurred to support spending. Both are.

Nor do you ever seem to consider what the effect would have been had the trust fund been invested in stocks and other financial instruments. The shortfall this year would be financed by selling off those instruments. In the financial markets. Markets being places where something (or some things) are bought and sold, with the prices determined/set/resulting from the interaction of buyers and sellers. If SS had its trust fund in financial instruments the prices of whatever assets these were in would be driven down.

Were you making a case for overall government fiscal responsibility that would be splendid. It appears to me, though, that you are just one more person looking for talking points to lambaste the Social Security system (and avoiding any honest analysis.) The trust fund represents a problem, paying off the trust fund each year that FICA taxes are inadequate represents a problem. That problem isn’t due to Social Security, it is due to Congressional profligacy. What you ought to be pointing out (IMHO) is that the Congress will have to start acting more responsibly. The Congress indeed has spent the money that went into the trust fund and the Congress bears prime responsibility for seeing that the US government act responsibly in fiscal matters. It hasn’t, and it clearly has taken advantage of the funds that went into the trust fund in its overspending. That is not a flaw with Social Security nor a flaw with the trust fund. It is a flaw with and in Congress.

One possible action by the Congress, if it won’t reduce spending, would be to raise income (and perhaps other) taxes. In our progressive tax system this would hit the rich harder, in terms of dollars (the quality of life of the rich would still remain remarkably better than that of the rest of us.) There is a huge amount of propaganda relative to Social Security and the trust fund that is intended to somehow keep the rich from being taxed more heavily. It’s a free country with free speech and a free press: they have every right to blare their propaganda. Free speech and a free press enable equally the true and the false, enable equally advocacy of the common welfare and advocacy of advantage to the selfish.

I favor having Social Security and I maintain that in a country with the demographics of the United States you will never be able to have a stable general retirement program based on investments in financial markets. Never. It may be “bad” to base the US general retirement security system on tax revenues but basing it on investments in financial markets would be far worse.

Stephenpoo wrote,

“…it’s not the falt of SS that the funds were spent on something else. “The trust has been broken and the money gone, I can accept that, but not that it won’t be replaced. We need to insist they make it up to us and they need to decide what they have to cut to do it. I don’t think we can keep a civil society and do otherwise. I hope that citizens here will be vocal against what they have been preparing for us for years.”

I agree totally with Stephenpoo’s concerns. I aslo share his hope “that citizens…will be vocal against what they have been preparing for us for years.” If citizens don’t organize and speak up to save Social Security, it will almost certainly be doomed. My biggest concern is the failure of the AARP and the NCPSS, to acknowledge the truth about the empty trust fund and lead the fight to have the looted money replaced. As I mentioned before, I am a dues-paying member of both organizations, and I urge my fellow members to make their voices heard. At this point, I am not totally sure whether the organizations are still being hoodwinked by the government, and actually believe the misinformation they are spreading, or whether they know the truth and are just fighting to keep the truth from being made public.

In 2004, my book, “The Looting of Social Security: How The Government is Draining America’s Retirement Account” was released by New York publisher, Carroll & Graf. It received good early reviews and sold well for the first few weeks before it suddenly disappeared from bookstores throughout the country and was listed as “unavailable” by Amazon.com at a time when I knew for a fact that thousands of copies of the book were laying in a warehouse. Shortly after publication, it became clear that numerous groups did not want the message of my book to get out. The first hint I got was when the conservative Washington Times carried a lengthy article by Paul W. Robberson, denouncing both me and the book, in its January 26, 2004 issue. Although I was pleased that the newspaper devoted such a lengthy article to my new book (despite the negative nature of the article) I found myself trying to figure out the newspaper’s motive for doing so. At that point in time, there was almost no recognition by the public that the government was continuing to spend Social Security revenue for non-Social Security purposes, and I think the article may have been a red flag to the conservative community that a new book on Social Security was about to come out that would not be to their liking. _

Multiple copies of the book were sent to both the AARP and NCPSSM leadership, and my publisher sent a review copy of the book to each and every one of the AARP’s numerous publications. Since the content of the book was so relevant to seniors, the publisher thought that the publications would at least make AARP members aware of the existence of the book, and might even publish reviews of the book. The book was totally ignored by both organizations. I sent numerous letters and emails to various staff members and made numerous efforts to make contact by phone. But it was as if I were a leper or some kind of threat. They wanted nothing to do with me. Finally, I found a list of newly appointed members of the board of directors of AARP and decided to contact one of these new directors through his personal email. To my amazement, he was very cordial to me and apologized for the behavior of other AARP staffers. He agreed to read my book and pass the information on to others. I mailed him a copy of the book and we had email correspondence during the period he was reading it. I thought I was making real progress. But then one day he sent me an email worded as follows:

Dr. Smith,

“I choose not to have any further contact with you. May life be fair to both of us.”

I emailed him repeatedly, trying to get an explanation for his abrupt change in attitude. I requested that he agree to meet privately with me at a restaurant of his choosing so that we could further discuss the issue. But I never heard from the man again, and I continue to be persona non grata with the AARP, even though I continue to be a dues-paying member.

The IOUs in the trust fund are nothing like the bonds that China owns. The public-issue marketable bonds are marketable and can be sold at any time in the open market.

The IOUs in the trust fund are not marketable and can be held only by the trust funds. Granted, when they printe these IOUs.on the laser printer down in Parkersburg, W.V. they print on the face of them “Backed by the full faith and credit of the United States government.” But that doesn’t mean much these days. The United States credit standing in the world is the worst it has ever been at a time when we continue to run massive deficits in the federal budget. As far as the “faith” part goes, the Congress has the legal authority to default on its debt to Social Security.

The Social Security surplus revenue should have been saved and invested in public-issue, marketable Treasury bonds. These bonds are as good as gold and default-proof. They are the kind of U.S. Treasury bonds that are owned by China and Japan, Bill Gates, pension funds, and every other serious investor that owns Treasuries. Barbara Kennelly, president of NCPSSM, who asserts that the Social Security holdings are “as solid as what we owe China and Japan,” would be correct, if the Social Security surplus had been invested in public-issue marketable Treasury bonds, as it could have been, and should have been. Unfortunately, however, not a single dollar of the surplus Social Security revenue was saved or invested in anything. It was all spent. And, once money is spent, there is nothing left to invest.

The government cannot and will not default on any of its public issue, marketable Treasury bonds because of the panic it would create in world markets and the damage it would do to the nation’s worldwide credibility. But Congress has the legal authority to default on its debt to Social Security, and, if it should do so, the outside world would probably view it primarily as an internal matter between the United States Government and its citizens.

One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so. In a 1960 ruling by the United States Supreme Court, the court ruled that nobody has a “contractual earned right“ to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security. In the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.” As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.

Dr. Smith,

The 1960 rulings you refer to clearly establish that no one has a right to a given benefit level. Congress can change when and how it is distributed.

But there is nothing in the ruling by the Supreemes that challenges the full faith and credit of the Special Issue securities that the Fund does own.

You’re off the deep end with this argument. Harping on this aspect of the problem is not constructive.

All debts of the US are claims against future tax receipts. There is no difference between the Public and the Intergovernmental account. It is all money that is owed, and WILL be paid.

The question is only to who and when it is paid. That is something that we all can contribute to. It will be another series of difficult choices for us. Not unlike the Healthcare debate.

You have spent too long chasing something. Let it go.

Sean,

Yes, you are right that the employee gets indirect benefits. And you’re also right that he could go do another job.

BUT… if the guys like the “guy who owns Walmart” don’t have an incentive to create those businesses; the employee ultimately will end up with no job. I sincerely am assuming, working for the government aka road building is not an option. Even if it is it can’t last forever.

“All debts of the US are claims against future tax receipts.”

Not true. All debts of the U.S. are claims against U.S. full faith and credit, i.e. the ability to create enough money to pay those debts. If the federal government collected zero taxes, that would not change even by one cent, the government’s ability to pay its debtors and to spend in the future.

No creditor receives tax money. The government pays its bills ad hoc, by crediting bank accounts. It can do this endlessly, and the process is not related to tax collections.

Rodger Malcolm Mitchell

“The trust fund represents a problem, paying off the trust fund each year that FICA taxes are inadequate represents a problem.”

The “trust fund” is an accounting myth. There is no trust fund. Benefits are not paid out of a trust fund, and FICA taxes do not add to a trust fund.

The federal government pays your benefits by reaching into your bank account and crediting it. If you have $1,000 in your bank account and the government wishes to pay you a $200 benefit, it merely reaches in and changes the $1,000 to $1,200.

It can do this endlessly. It could do it if there were $0 dollars in the mythical trust fund. FICA taxes do not pay for Social Security benefits. The entire discussion about Social Security trust funds and bankruptcy is based on the false premise that the federal government is like us, i.e. needs to have income in order to spend.

The U.S. federal government neither needs nor uses income, in order to spend. It spends by creating money.

Rodger Malcolm Mitchell

Professor Smith reminds me of the man who spends his entire career writing about the life cycle of the Loch Ness monster. Having so much invested, he refuses to believe it doesn’t exist.

These are the facts:
1. The so-called Social Security trust fund is an accounting convenience without substance. Professor Smith himself admitted as much when he quoted Paul O’neill, Secretary of the Treasury as saying , “I come to you as a managing trustee of Social Security. Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.” This was back in June, 2001.

2. With no assets in the so-called “trust fund,” how has Social Security continued to make benefits flow? The same way the federal government makes all its payments. It credits bank accounts ad hoc. It can do this endlessly, and the process is not in any way related to tax collections. Yes, there are complex sales and purchases of T-securities, but none of these changes the fundamental truth: The federal government creates all its money out of thin air, merely by crediting bank accounts.

3. Note that without a fictional trust fund, the Department of Defense prosecutes several wars and spends trillions of dollars, also not supported by tax collections.

4. In just the past 30 years, the federal debt (should be called “money created”) has risen 1,400%, while none of the dire predictions of hyperinflation and economic failure have come true. If a 1,400% increase doesn’t do it, how much would it take to cause these debt hawk predicted disasters?

5. Financially, Social Security is not in trouble, unless Congress, in its wisdom, decides not to pay benefits. Social Security can be supported the same way virtually all other federal agencies are supported: From the general fund (which also is an accounting convenience.) FICA taxes, indeed no taxes, are used for federal spending.

Rodger Malcolm Mitchell

What I find curious is the argument that raising taxes on the wealthy will cause them to stop investments which create jobs for the rest of us.(trickle down)
If that were the case what then would they do to grow there wealth? They would have to sit on it and then there lifestyle would begin to eat it up or at least create some sort of dent in it. I wouldn’t think that would be the direction they would choose to go. After all even the rich have there insecurties. Besides they would not quit the big game it gets in the blood. Life would be a bore.

Once it became clear that my book “The Looting of Social Security” was no longer available through normal channels, I contacted the publisher and asked that the rights to the book be reverted back to me so that I could publish it elsewhere. The publisher refused to surrender the rights, so the message was effectively taken out of circulation. Three years later, after the publisher was sold to another company, my agent was able to get the rights reverted back to me, and I was once again able to publish the material from the book. I immediately began writing, “The Big Lie,” and decided that, in order to avoid a repeat of what happened the first time, I would not offer the book to any commercial publishers. I wanted to have control over the ongoing availability, so I self-published the book under my own imprint, “Ironwood Publications.” The down side of that decision is that I have no promotion budget and very few people know the book even exists. I’m sure that fact would please the AARP.

I simply wrote off the AARP as a lost cause with regard to the new book, but I still had hopes that I could get the support of the NCPSSM. One of the first people to receive review copies of “The Big Lie,” was Barbara Kennelly, president of the NCPSSM. I sent her a long letter explaining that I wanted her to have a copy of the book before it was released to the public. I asked her to please read the book and then give me the opportunity to discuss the issue with her either in a face to face meeting, or at least by phone. I was still so naïve that I actually thought Ms. Kennelly might invite me to her Washington office and openly discuss the empty trust fund issue with me. I explained that her efforts to continue to hide the Big Lie from the public would do nothing to save Social Security in the long run. I urged her to help me expose the truth, so we could then work together to get Congress to make provisions for repaying the looted money.

Months have passed since I sent copies of the book to Ms. Kennelly, along with the lengthy letter in which I pleaded with her to read the book with an open mind and then discuss the issue with me. I have sent numerous follow-up emails to her, as well as faxes. I have heard nothing from her. Again, she must think that I am either a leper or a threat to the organization. In her defense, I must say that I think Barbara Kennelly is one of the most committed people in America when it comes to protecting Social Security and Medicare. I admire her dedicated efforts and suspect that she does not really know the truth about the trust fund. From her public statements, it appears that she truly believes that the $2.5 trillion of surplus Social Security revenue, generated by the 1983 payroll tax hike, was actually saved and invested in real Treasury bonds as it was supposed to be. But it was not. None of the surplus money was saved. It was all spent on wars and other government programs. If it was all spent, then none of it was saved, and there was no money to invest.

In the hope that this public message might somehow get to Barbara Kennelly, I want to directly address her through this message board.

Barbara Kennelly, please look at budget receipts and outlays for every year since 1985 when Social Security surpluses first appeared. Look at the total revenue, including Social Security revenue, for each year and then compare that number with the government’s total expenditures. If you do so, you will find that in each year, except for 1999 and 2000, total government expenditures exceeded the total revenue of the federal government, including Social Security revenue. In other words, the government spent all of its general fund revenue, plus all of the Social Security revenue, and still ran deficits in all years except 1999 and 2000. It is clear that all of the Social Security surplus revenue was spent for general government. If it was all spent, then there was nothing to invest.
The Social Security trust fund contains no real assets—only IOUs.

It is true that the IOUs represent a moral obligation of the government to repay the “borrowed” money. But the government is not legally bound to do that. It is unlikely that future politicians will be willing to raise taxes in order to pay for the mistakes of past politicians. The only way that we can have any assurance that the “borrowed” money will be eventually repaid is to enact legislation at this time that requires the government to repay the looted money in installments as needed.

When you say that Social Security has enough money to pay full benefits until at least 2037, you are mistaken. Social Security does not even have the $29 billion that it will need to pay full benefits for 2010. As you know, since the IOUs are not in the same category as the public-issue marketable Treasury bonds that China and Japan owns, the government could default on the Social Security IOUs without having the major adverse effect on world markets that some suggest.

As you know, Section 1104 of the 1935 Social Security Act Specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” This provision was upheld by the 1960 ruling by the United State Supreme Court in the case of Fleming v. Nestor. In this case, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.” As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.

You may not like to hear any of these facts, but none the less, they are facts. Instead of pretending that Social Security is fine and does not need to be fixed, I believe the NCPSSM has an obligation to its members to seize the moment and push for legislation that will truly fix Social Security. As of now, we have a Social Security friendly President and Congress. We need to push through reform legislation that will guarantee that Social Security will be solvent in the future. Seniors who have paid into Social Security for all these years should not have to be in constant limbo and at the mercy of politicians. Social Security needs to be fixed permanently. I, like most Americans, view Social Security as a contract between the people and the government. But the Supreme Court does not see it that way. As things stand now, Social Security can be changed at any time by Congress and the President, and we can be sure that the next time conservatives have control of both the White House and the Congress, they will destroy Social Security as we now know it, unless we prevent that from happening by acting now. We must beat them to the punch by passing solid legislation that guarantees that future retirees will receive the benefits they have earned.

Ms. Kennelly, please abandon your efforts to convince the public that Social Security is in fine shape just as it is. It is time to wake up and smell the roses. The great Social Security scam of the past 25 years must be exposed, and you have the power to do that. Please acknowledge the truth and then let us push for Social Security legislation that will strengthen Social Security. I would still like to meet with you to discuss this issue.

Allen W. Smith, Ph.D.
Professor of Economics Emeritus
Eastern Illinois University
Website: http://www.thebiglie.net
Email: ironwoodas@aol.com
Phone: 800-840-6812

P.S. If anyone who reads this has access to Barbara Kennelly, please see that she gets this message. THANK YOU!

I don’t think we can dismiss Dr. Smiths point of the trust funds IOU’s so quickly. The differance is the willingness of Congress to put the funds back. That may come down to politcal philosophies and spending priorities. They won’t end the program but they will cut off the proverbial slice at a time. The end result may be very disappointing.
I think we all know that we cannot continue to spend money we don’t have. Many programs will have to change and cuts made.
Yet so many people rely on SS to stay alive and have an existence. We cannot let this be the place to balence the budget. To do so would undermine the confidence that any goverment should have from its citizens.

You said, “I think we all know that we cannot continue to spend money we don’t have. Many programs will have to change and cuts made. Yet so many people rely on SS to stay alive and have an existence. We cannot let this be the place to balence the budget.”

I wish knew a way to make this clearer, but unfortunately, most people think the federal government’s finances are like people’s finances. There is a mental block.

The federal government always spends money it doesn’t have. That is exactly the way it spends.

When the government pays a creditor, it merely reaches into that creditor’s bank account, and increases numbers. Taxes are not part of this. The government is unlike you and me. It does not need to “have” money in order to spend. Its spending is what creates money.

Balancing the federal budget would be a disaster. A growing economy requires a growing supply of money. The federal government creates that money by deficit spending.

If the government did not deficit spend, even the smallest inflation would reduce the real value of money. Imagine an economy with $10 trillion, 2% inflation and a balanced budget. After 11 years, that economy would be down to $8 trillion in real money and be in a depression. This is why recessions begin with reduced deficit growth and end with increased deficit growth.

Try to think, as the kids say, “Outside the box.” You need money to spend. I need money to spend. But the federal government creates money by spending. It’s a totally different process.

And for that reason, Social Security does not spend from a fund, and we can continue to spend money we don’t have, cuts do not need to be made, and we should not balance the budget.

Avoid knee-jerk reactions. Avoid popular faith. Think about it.

Rodger Malcolm Mitchell

Dr. Smith,
-
I don’t know what the “big lie” you’re referring to is. Everyone has always known that Social Security operated on its revenues as they came it. It has been that way since the very beginning of the program. There has NEVER been a stored up trust fund.
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If there were such a fund, it would be a disaster for the economy. One of the big problems that led to the recent commodities bubble was an excess of liquidity which came from a variety of sources – one of which was Sovereign Wealth Funds. Imagine the sheer size of a Social Security trust SWF. How could something that massive ever be invested without radically skewing the markets it was poured into? How could that be profitably invested at a return above inflation (has to outearn current interest rates in perpetuity or it’s value erodes rapidly) without destabilizing the entire economy?
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It couldn’t. The problem you’re describing is simply one of revenue. Social Security used to be a net producer of revenue for the Federal Government. In the future, it will be a net revenue consumer of revenue. This only remotely becomes a problem if for some reason the government can’t afford to make the necessary payments. Which will never happen because the Federal Government is not like a person or a corporation or even a state. They can print money. Or more accurately, simply add to the current account balance however much they want. This will continue to be the case unless the people lose all faith in the government, in which case social security would be the least of our worries.
-
Yes, there are concerns about runaway inflation, but sound monetary policy has done a pretty good job of quashing that since Paul Volckers turn at the Fed in 1983. You’re pretty much all worked up about nothing.

Thank you I feel better already. Now when I hear of any proposed cuts in SS my first reaction will be a hardy laugh. Laughing is so much better than crying.

Rodger Malcolm:

Re: “myth.”

The myth supports the concept that Social Security be self-supporting. That is, the FICA receipts shall cover the cost of the benefits.

The trust fund was necessary because of the impending retirement of the baby boomers. To keep SS self-supporting the FICA taxes were raised, creating a (“mythical,” if you want to call it so) positive balance. Isn’t the full faith and credit of the US government behind the bonds that constitute the “myth”?

What is perpetually irksome in discussions of this sort is that the political forces who would most willingly default on the bonds in the trust fund are the ones attempting to destroy the entire program. THEY are the ones who most surely would “alter, amend, or repeal any provision of this Act” to the detriment of workers and retirees. They tramp about screaming about how dangerous the Congress is to those who trust in Social Security without acknowledging that they are themselves the ones who would most strongly advocate default. They could say “Congress should not ever default” – but they do not. They instead keep saying that Congress may do so, and that the commitment and the trust fund may be regarded as meaningless. Congress would be extraordinarily cavalier to default, and the false saviors of Social Security would encourage them to do so.

Nor does that phrase matter in the slightest. Congress cannot pas a law that cannot be amended or repealed. Stating in a law that Congress can alter it is superfluous.

I’ll put my own position very simply: future Congresses must act such that Social Security benefits will be paid. Future Congresses should recognize that the trust fund (“myth” or not) represents money paid into the treasury for the retirement security of US workers. Future Congresses should honor the commitment made to the citizens of this country. The benefits have been paid for. Deliver them.

As you can see by my previous remarks I can accept alterations to the program to guarantee it remains solvent (even if solvency means only that the myth” is preserved, is a reality.)

I don’t normally reply to comments from people like Roger Malcolm Mitchell. Since I have not visited this blog before, I don’t know for sure, but I would guess that he has been bombarding others with his arrogant, gross ignorance for a long time. It doesn’t bother me when such people attack me and my comments, but when they deliberately muddy up the water of posts made by thoughtful individuals who are seriously trying to make a contribution to others, it is time to call them on the carpet. He quoted the accurate and thoughtful comment of a serious poster who had written, “I think we all know that we cannot continue to spend money we don’t have.” Then he rideculed the true statement by saying, “I wish (I) knew a way to make this clearer, but unfortunately, most people think the government’s finances are like people’s finances. The federal government always spends money it doesn’t have.”

That last statement has been true in most years since President Ronald Reagan, (who was economically illiterate), abandoned mainstream economics and began to steer the economy toward the ultimate collapse that finally materialized in 2008. Shortly after Reagan became president, the national debt reached $1 trillion for the first time in history. The combined deficits of all the presidents from George Washington through Jimmy Carter took almost 200 years to add up to that first $1 trillion. Reagan added a second trillion dollars in just five years. He added as much in five years as all the previous presidents had added in 200 years. By the time the 12 years of Reagan/Bush was over, the national debt had quadrupled to $4 trillion. Clinton’s deficit reduction package, which included both tax increases and spending cuts, managed to balance the budget by the end of his presidency. However, George W. Bush picked up where Reagan and the first Bush had left off and doubled the national debt during his two terms.

The future of our nation was terribly damaged by the incompetency of Ronald Reagan and George W. Bush,and it is going to be very difficult to overcome that damage. Although there are some differences between individual finances and the finances of units of government, it is still a hard fact that NO INDIVIDUAL OR BUSINESS UNIT, OR UNIT OF GOVERNMENT CAN CONTINUE TO SPEND MORE THAN IT TAKES IN OVER A LONG PERIED OF TIME WITHOUT SUFFERING SERIOUS CONSEQUENCES.

Ignorance is lack of data. You said, “President Ronald Reagan, (who was economically illiterate), abandoned mainstream economics and began to steer the economy toward the ultimate collapse that finally materialized in 2008.”

Do you really think this recession was due to deficits? I’ve not heard that before. What is your data to support this? Note that the recession is being cured by deficits.

You said, “Clinton’s deficit reduction package, which included both tax increases and spending cuts, managed to balance the budget by the end of his presidency. Here’s some data: Clinton’s deficit reduction package led to the recession of 2000. Every depression in history has come as a result of federal surpluses. Every recession since 1971 (the end of the gold standard) has come as a result of reduced debt growth.

Did you know that debt growth declined in the 4-year period, 2004 through 2007, immediately preceding the start of the recession?

You said “NO INDIVIDUAL OR BUSINESS UNIT, OR UNIT OF GOVERNMENT CAN CONTINUE TO SPEND MORE THAN IT TAKES IN OVER A LONG PERIOD OF TIME WITHOUT SUFFERING SERIOUS CONSEQUENCES.

A small economy has a smaller supply of money than does a large economy. Therefore a growing economy must have a growing supply of money. QED What is the source of money that would make America grow, if not federal deficit spending?

What is your data to support your statement? You can see mine by clicking this

Rodger Malcolm Mitchell

To Sean DeCoursey,
You are partly right. Social Security was set up as a “pay-as-you-go” program in 1935 and continued to operate as such until the Social Security Ammendments of 1983 were enacted. At that point, it became a combination “pay-as-you-go” and “prepay your own benefits.” program.
The 1982 National Commission on Social Security, headed by Allan Greenspan, foresaw solvency problems when the baby-boom generation, the largest generation in history, began to retire. They recommened a hefty hike in payroll taxes that would require baby boomers to prepay a large portion of the cost of their benefits. This surplus money was to be saved and invested to build up a large reserve that could be dipped into to supplement the inadequate payroll tax revenue that would result when Social Security began to run deficits.
These recommendations were enacted into law in 1983. From that point on, the baby boomers were required to pay enough payroll taxes to fund the retirement of the previous generation, which was customary, plus enough additional taxes to prepay most of the cost of their own retirement benefits, which was not customary. It was a good plan. The first surplus showed up in 1985, and the surpluses became larger and larger each year until 2010. The surpluses were projected to continue until at least 2016 but the reduced revenue and increased early retirement resulting from the severe recession brought the deficits earlier. Beginning in 2016, Social Security will begin to run permanent deficts, year after year. The plan was to save the surpluses in all the years up until 2016 and then begin dipping into the trust fund during the years after 2016.
The 1983 payroll tax hike has generated $2.5 trillion in surplus revenue that was supposed to be saved and invested. The money should have been invested in public-issue marketable Treasury bonds purchased in the open market. This would have had the effect of paying down the publicly held debt during the years 1985 to 2016 as the Treasury purchased outstanding bonds from the public to be held in the Social Security trust fund. After 2016, the Social Security trustees would resell the bonds in the open market as needed to pay benefits, and the effect would be to raise the publicly held debt back up. If this had been done, then it would be true that Social Security could pay full benefits until at least 2037. But this was not done. The reason it was not done was that if the surplus money was used to buy marketable Treasuries in the open market, the money would have gone to those investors who were selling the bonds, and there would be no money left over for the slush fund.
The “BIG LIE” is the claim that FICA taxes, that are a dedicated tax earmarked specifically for the payment of Social Security benefits, are indeed used exclusively for that purpose. If that were the case, all the surplus Social Security revenue would have been saved and could now be used to pay benefits. The Social Security Administration, the AARP, the NCPSSM and many others regularly assert that this is what is happening. The official website of the Social Security Administration say that surplus revenue not needed to pay current benefits are invested in Treasury bonds. That is a lie. All surplus money is spent for other government programs, and once money is spent, there is nothing left to invest.

You said, “The myth supports the concept that Social Security be self-supporting. That is, the FICA receipts shall cover the cost of the benefits.”

Point 1: The law was enacted while we were on a gold standard. At that time, the government did not have the unlimited ability to create money. Today, there is no reason for FICA receipts to equal benefits. If FICA were zero, the government still would create all the money to support Social Security.

Point 2: Most people acknowledge that the government has the power to create sufficient money to support Social Security, but they worry about the effect of creating that much money. You can see my thoughts on that by clicking THIS, items 8 and 12.

The real lie is that taxes pay for federal spending. This once was true, but has not been true since 1971. See Warren Mosler’s article on this by clicking HERE

Rodger Malcolm Mitchell

Dr. Smith,
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Again, you’re just restating what’s common knowledge. It’s long been known that the excess funds from Social Security were, and have been spent as they came in. This is what’s been referred to in the media as the “Social Security Surplus” when the federal budget is discussed. There is no big lie. This has been well known and done in the open ever since it started. Some people, yourself obviously included, got it into their heads that things worked in a different way than they actually do. When you discovered that this wasn’t the case, you assumed everyone else was operating under the same misconception, went on a crusade to educate others, and have been flabergasted ever since by peoples’ lack of reaction to your announcement that the sky is, in fact black and only looks blue due to an optical illusion created by light refraction in the upper atmosphere.
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Again, it doesn’t matter if Social Security starts operating at a deficit instead of a surplus. FICA taxes have been, and will be, added to general revenue, and benefits will be paid out of the same pot. They’re noted separately on your check because that’s how they’re assessed, not how they’re spent. Just like a corporation doesn’t designate “all revenue from sales of product X are spent on supplies for manufacture of product X” so the government doesn’t segregate its revenues. Mainly because that would be expensive, pointless, and largely insane.
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Dollars are 100% perfectly interchangeable, they all spend the same. FICA dollars aren’t some special species that can only be spent on Social Security and vice versa. You’re trying to create arbitrary distinctions in identical products and then getting upset when those distinctions are violated.
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I’m not sure what the point of continuing to engage with you is sir, there’s no disagreement about the facts here, you’re just really, really upset because you feel you’ve been lied to, and I don’t think anything anyone here can tell you is going to help with that. I hope you find peace with your anger sir.

Sean, I was about to write the same thing. One slight difference, that probably is no difference at all. There actually is no “pot.” Tax money doesn’t pay for federal spending. It is destroyed upon receipt. Federal spending creates its own money.

But, essentially you are correct. I think you might enjoy reading: THIS

Rodger Malcolm Mitchell

Your article mentioned 3 BIG IDEAS. I have a 4TH BIG IDEA that may help.

What if we fired the guys who decided to outsource our manufacturing and other jobs, laid off thousands of workers and now makes millions of dollars a year managing the new Global Supply Chain.

Then we bring back the jobs to this country and hire the thousands of employees back to manufacture products in this country.

For one person making $50 million in 2010, the employee and employer will pay a total of 12.4% of the first 106,8000 in Social Security taxes. No additional taxes are paid by either after $106,800.

Social Security tax is 6.2% of the first $106,800 of employee’s taxable income.
There is a 6.2% matching tax of the first $106,800 that is paid by the employer.

Medicare tax is 1.45% of the first $106,800 of employee’s taxable income.
There is a 1.45% matching tax of the first $106,800 that is paid by the employer.

Therefore, this $50 million a year person would contribute $13,243.20 to Social Security and $3,097.20 to Medicare, for a total of $16,340.40 a year.

If we took the same $50 million dollars this one person was making and divided it by the maximum taxable Social Security amount of $106,800 we could replace this one person with 468 people, which I think everybody will agree is a pretty good income.

Then instead of having a total of $16,340.40 of revenue going into the Social Security and Medicare accounts, you multiple that amount by 468 and your now have $7,647,307.20 (Yes, that’s $7.6 Million Dollars) going into the Social Security and Medicare accounts, per year.

Just for the heck of it, if we fired 500 high wage earners we could hire 234,000 workers making $106,800 per year and contribute $3,823,653,600.00 (Yes that’s $3.82 BILLION) to Social Security and Medicare instead of $8,170,200.00 (Yes that is only $8.17 million)

Therefore, as of February 2010 we currently have 9.7% unemployment, which represents 14,265,000 people in the U.S.

Let’s just say we hired all of them and gave them ½ of the $106,800, which is $53,400. I think most of them would be pretty happy with that amount. Which now means the $50 million dollars a year guy would still get $25 million a year, still not to bad and besides somebody has to manage the new labor force.

So, 14,265,000 people making $53,400 a year equal $761,751,000,000.00 or $762 Billion. (Just a note here: To bad the Stimulus Money went to the banks, we could have hired ALL the unemployed people for one year with the same money and they would have produced something tangible and valuable instead of just collecting unemployment. Now that would have been a Stimulus Plan, but that’s another story.)

Anyway, in order to get $762 Billion, we only need 30,470 people who make $50 million dollars a year to take a 50% pay cut, then hire the 14,265,000 unemployed people, and pay them $53,400 per year.

Then, according to my calculations, instead of contributing $497,892,641.62 (Yes that’s $497.9 million dollars) per year into Social Security/Medicare we COULD CONTRIBUTE $497.9 million dollars + $116,547,903,000.00 (Yes, That is $116.5 BILLION DOLLARS) for a GRAND TOTAL of $117,045,795,641.62 (Yes that IS $117 BILLION DOLLARS) PER YEAR into the Social Security/Medicare accounts.

Do you think that would be enough to keep it Social Security and Medicare solvent for the current and future generations?

After all, it’s always about the numbers and dollars, right. Just depends which side of the equation you are on that really matters.

But, hey what do I know, I’m just one of the unemployed with an idea.

Social Security will soon
Get a big baby boomer bump.
And pension checks will zoom balloon,
And more money needs will high jump,
As me and millions join the rolls.
I want to make no sacrifice,
So I tell my kids, bless their souls,
All I gave them – it would be nice
If they worked more so they could pay
Most of their pay in FICA tax,
And work up until their death day,
So dear old Mom can just relax.

Social Security will be
My childrens’ doing right by me.

Nice math. It does not work. We do not have 30,000 people making $50mm a year in this country. So this can’t work.

But if we use your math we somehow get to $117b which you think is a very big number. It is a big number. Here is a bigger number. The SSTF will pay out $700b this year alone. By 2016 it will reach 1 Trillion.

Those are big numbers. Those are the ones we really have to work with.
bk

To Sean DeCoursey & Rodger Malcom
Sean I think that because it now operates on a deficit having to call back ious its then easier to convince the public its not sustainable and to cut benifits. That would be diffcult to do if there existed a account with liquid assets. Its a matter of psycology and talking points. If the Goverment pays back SS then its going to eventually have to cut spending somewhere else.Who wants to call and end to the party, who wants to cut their prodject. Who wants to put themselves up to ridicule saying the empire has no clothes. Not good for relection to buck it all.
Which Brings me to Mr. Malcom, I’m not sure what you actually believe about Government revenue. You say it doesn’t matter how much comes in. To extrapolate your anology then why bother with the IRS collectiong taxes if they are not needed. Sure they spend more then they make and they sell bonds to cover those expenses. The bond holders expect repayment when promised. If there expectations are disappointed they won’t buy anymore bonds. Contiueing to print money only works for so long. And the bond holders won’t like it if you pay them back with paper worth less then they used to purchase your bonds. It sounds as though you belive the Government has a perpetual motion machine that creates wealth. From time to time somebody comes out with a gadget they claim produces more than it consumes. We know however that it’s impossible to do so, even if we want to belive its true.

This is true. And when social security was developed, the taxes collected were supposed to STAY in the social security trust fund. If I’m not mistaken, every president since Kennedy has raided the fund to pay for other government programs–most of the dollars going to the Pentegon. Raiding the trust fund should have been illegal and must be stopped.

The point is, the social security trust fund used to exist. The government started taxing wages in 1936 for social security and yet the first check was not issued until something like 1947.

Ok, I can’t remember the exact year, but it was in the ’40′s and that first check was to a little old black woman who got fewer than $50 a month. Back then, a person could live on that amount.

The government has raided the trust fund for years, to its non-existance.

As for your insistance that all taxes could stop today and the gov’t. could still pay its bills by printing money–hmm, that’s what China does.

erieangel;

You said, “The point is, the social security trust fund used to exist.”.

No, the real point is, the Social Security trust fund does not exist, yet Social Security checks go out every month, and none bounces. How do you explain that?

You said, ”As for your insistence that all taxes could stop today and the gov’t. could still pay its bills by printing money–hmm, that’s what China does.”

Are you referring to one of the world’s fastest growing economies?

Rodger Malcolm Mitchell

What a difference 20 years make: now NYT pinkos suddenly noticed that there there is a problem with social security indeed.

Is there any hope that these morons can do any better with social security than with long promised (6 years and counting) getting us out of the wars in the Iraq, Afghanistan and Pakistan?

Nope, not a chance, social security is way more complicated thing then a simple loading our troops on the boats and setting sail to home.

The social security trust fund DID EXIST once. Social Security taxes were collected and placed in trust a full ten years BEFORE the first check was ever issued. Read your history. It was part of the law that the tax monies were to be set aside only for the dispersement of social security payments. But every president since Kennedy has “borrowed” from the fund and few have paid anything back. Thats why the social security admin. is constantly announcing doomsday for itself.

As for China. Yes, they have the fastest growing economy. They also print money willy-nilly. There are many reasons we can’t compete with China. Their lack of consumer protections; their lack of child labor and minimum wage laws. All of these makes Chinese goods far cheaper than US goods. Then there is the debt owed to China. That in itself puts China in a pretty good position financially and internationally and the US in a precaious position.

Social Security:
We Can Not Solve This -

CIA report into shoring up Afghan war support in Western Europe :

http://docstoc.com/docs/31972387

.

What tactics do they plan to employ? And why is this report available?
I would have read it but they make you register.
I’m not paraniod but downloading cia documents will get you on some watch list. Sort of like depositing more than $10,000 cash in the bank, only much worse.

This is an article I wrote on my blog, http://www.progressiveconomics.com

Social Security: A View from the Bottom

Once the health care legislation is finished the debate will turn to Social Security. Hopefully the following will provide you with some understanding of the debate.

There have been many studies and analysis in the past to solve the Social Security (SS) shortage. I have read and reviewed the many solutions. The following is a list of the most important factors involved:

1. Increase the Payroll Tax Rate. 2. Increase the Payroll Tax Base. 3. Treat SS Benefits like private pensions for Income tax purposes. 4. Require SS coverage of new State and Local Gov’t employees. 5. Allow the SS trust fund to invest in the Private Investment market like other Pension funds. 6. Increase the SS Retirement Age. 7. Impose a gradual Means test to SS. 8. Reduce cost-of-living adjustments based on the consumer price index. 9. Reduce SS benefits across the board for future retirees. 10. Increase the number of years used in the SS benefit computation.

Unfortunately, these solutions only consider the solvency factors. They do not consider the human and macroeconomic-customer factors. We need to explore how to improve SS for the workers of America and the overall economy. It is obvious the one “age fits all” does not work for many occupations and excludes most health factors.

I want to explore these two issues, which have not been adequately discussed. This discussion will not include the real solution, which is that SS is NOT an accural Pension Plan. It is a tax and transfer, social insurance-income redistribution (recirulation) system. Currently, it is considered as a combination of pension plan and benefit program which is causing difficulties in creating a solution and public understanding. Therefore, its revenue should not be in a separate box. It should be within the over all budget and collected within a progressive income tax and other revenues instead of a highly regressive nature of the payroll tax.

Then on the receiving side, it should not be entirely based on how much one pays in but how much one needs the income. Knowing that this solution is politically improbable. I will discuss several solutions for overall improvement for workers, the solvency and the well being of the overall economy.

One point is the actual statistic of when the system will be bankurpt. The experts keep extending the date. As of this entry, the date is now 2038. Have you ever noticed that most economic projections over extended time periods can be very inaccurate. A thirty plus year future projection of insolvency lends itself to being very inappropriate. Attempting to solve something where we do not know the employment and retirement habits, the economic conditions and tax revenues four decades from now is probably impossible.

Therefore, how should we handle the potential baby boomer bubble insolvency? We should balance the annual budget as quickly as possible. We can then borrow the extra funds if needed to cover a shortage during those years. Please review the section on the “Monetary Solution”. I don’t believe the national gov’t has to borrow anything! Under the Constitition, the gov’t can create the money and avoid any interest expense as long as they don’t issue to much causing excess inflation. Either way, it should easliy handle a baby-boomer bubble short fall.

Now let’s discuss how to improve SS based on human needs which also aids in more macroeconomic expansion by providing more funds to more people-consumers.

Social Security should benefit the lower income workers, the more occupational hazardeous workers, and the medically hindered workers than others.

The SS start age should be lowered to age 60. Workers who have difficult jobs or in poor health (not just the severely disabled) can start earlier. The SS system can be based on a non-ridged/liberal basis so workers can start collecting early based on occupational verification and medical history review. Yes, there will be some who take advantage but most will need it. Those of us who sit in an office and are well off will be postponed until later years.

The SS pay out can still be reduced for earlier retirement and the less one pays into the system, but macroeconomically it is better if the payouts are somewhat equal. A poorer worker needs the money substantially more then a wealthy worker. This solution would help more workers than our current system and with more deserving workers having more for consumption activity, it would increase the stimulation of the economy.

Instead of having a means test, it would be more advisable and easier to adjust the income taxation of benefits. It should be 100% taxable for higher income brackets. Thus, the less needy pays more back indirectly. This helps the insolvency problem.

Obviously my suggestions are general in nature. Appropriate economists can reserach specific rules, numbers and ages at the time of proposed legislation. But, everyone wins. The poor and medically unfit receive more and the overall economy is improved, benefiting all.

You thought of ten possible solutions and you didn’t consider the only viable one?

See the analysis at http://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/

Rodger Malcolm Mitchell