The untold story inside Social Security:

The facts the government does not want you to know.

By Dean Kalahar

March 22, 2011

With a 14 trillion dollar national debt and national bankruptcy looming, the United State is facing some sober budget realities. To solve the problem, Congress and the President will be forced to address spending in the largest part of the federal budget made up of what are known as entitlements. These are government programs that are supposed to serve the elderly and the afflicted. Addressing entitlements is made difficult because the programs were designed based on a flawed and some might say corrupt model that had more to do with purchasing political power than care for the elderly. In the largest scam ever perpetrated upon the American taxpayer, politicians sold the program to the public with smoke and mirrors, stole the taxpayer’s money, and then cooked the books. Plain and simply Social Security is a fraud. It will bankrupt America destroying our economy and way of life if it is not reformed.

Now, you will hear many say that social security is fine and call anyone who questions it an alarmist or is in favor of killing grandma. You be the judge of the reality you are about to learn. This is the true untold inside story of Social Security with the facts the government does not want you to know.

Social Security began as The Federal Insurance Contribution Act (FICA). It is the public insurance program set up under FDR’s “New Deal” as retirement income insurance called Social Security and later, under LBJ, for health needs called Medicare. For anyone who receives a paycheck, FICA is automatically deducted from your gross earnings and sent to the federal government. Supposedly, this money is to be placed in a “trust fund” and invested so it will grow and provide you with retirement income and health care benefits when you are old. Sadly, the Social Security Trust Fund was never secured with the dollars invested in order to allow them to grow as found in private insurance. Only public insurance can call its behavior a “trust” and not actually give the taxpayer peace of mind in actually trusting the investment to be there when they need it most.

Social Security is not like a savings account in which payroll taxes are saved for retirement. Social Security is a pay-as-you-go system, meaning that the taxes paid by today's workers are immediately sent out to pay the benefits of today's retirees. The other big difference between privatized pensions and Social Security is that the individual owns the pension he has paid for. This is not, as you will be told, simply a theoretical distinction to ignore, it is a fundamental practical difference. Personal ownership of one’s self and property defines morality and is a natural God given right. For example, rape, theft, murder, and assault are a direct infringement on a person’s property. As such, the taking of property in the form of FICA without property right protection is immoral. FICA may also be seen as unconstitutional because government has taken the property of citizens, and used it as their own, without providing the citizens the constitutional protections afforded under the 5th Amendment which states: nor (shall any person) be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

The problem with the Social security system is that it only functions when there are a lot of workers paying payroll taxes and just a few retired people getting benefits. Our senior population is growing much faster than our working population however. This means there are fewer and fewer workers supporting more and more retirees. In the early years of the program, the payroll tax dedicated to Social Security produced more money than the government needed to pay in benefits. By law, if Social Security revenues exceed expenditures, the “surplus” is credited to the Social Security trust funds in the form of U.S. government securities. The “fungible” cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund. In short, the extra revenue is spent by Congress and the Social Security trust fund is credited with “special issue,” non-marketable, U.S. government bonds or worthless pieces of paper that act as only a clever accounting entry. The irony is that bonds are also called “securities,” but there is no security provided to taxpayers no matter what they call the entitlement.

The taxpayer’s cash from payroll deductions (FICA) is used to pay for whatever other expenses or deficits the government may have at the time. The government does not save our Social Security taxes for future retirees. There is no separate pool of money set aside for Social Security purposes. Simply stated, Money for your future is spent today, and as everyone knows, you cannot spend and save the same money, no matter what accounting gimmicks you use.

In simple terms the FICA program is a pyramid or Ponzi scheme like the one Bernie Madoff used to scam his clients. In the fraud, people on the top of the pyramid collect as long as they can get others below them to pay in. For Social Security, early beneficiaries were being paid by workers not yet ready to retire. As a result, the scheme looks to actually work as some are receiving benefits and can truthfully say “it works.” Unfortunately now as the baby boom retires, the takers outstrip the payers. Like all Ponzi schemes this is when it will collapse like a house of cards. Except this time the house is the U.S. government and the American economy.

Like the famous Saturday Night Live parody of Vice President Al Gore’s Social Security “lock box,” the misnamed Social Security Trust Fund has no resemblance to a private investment fund where there is actual capital or money saved, invested and increasing in size for the rainy day of retirement. In fact, the Social Security trust fund is actually a white metal file cabinet at the Parkersburg offices of the Bureau of the Public Debt's Martinsburg, WV office. The agency, which is part of the Treasury Department, opened offices in Parkersburg in the 1950s.

When the federal government takes the cash coming into the Social Security fund from payroll taxes to spend on other things, it writes the trust fund a bond. When a new bond is issued, it is printed on a laser printer located at the bureau and then carried across the room, stored in a three-ring binder, and then locked in the bottom drawer of a fireproof filing cabinet. That filing cabinet is the Social Security trust fund. Until relatively recently, these bonds only existed as entries in a record book. Today it has been said they actually have the records on computer.

The entire retirement future of America is in that drawer. One bond is worth a little more than $15.1 billion and another is valued at just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds sitting in the 3 ring binder. Of course some will say they are all backed by the “full faith and credit of the U.S. government.” Don't bother trying to steal them, however, they're nonnegotiable, which means they are worthless on the open market. After all, common sense tells you that if you spend the money coming in and replace it with IOU’s that can’t be sold, then the bonds are not worth the paper they are printed on.

The Office of Management and Budget (OMB) explained in its fiscal year 2000 budget document that the Social Security "trust funds" do not contain stocks, bonds, or other assets that could be sold directly for cash. The OMB also noted, “the annual surpluses that many thought were being used to build up a reserve for the “baby boomers” have been spent on other government programs or to reduce government debt.”

The Old Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI) make up the Social Security trust funds. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. The funds hold a specific type of securities called “Special issues.” These are only available only to the trust funds. Although the trust funds have held public issues in the past, the trust funds currently hold special issues only. When the bonds mature, they are rolled over into new bonds that include both the original issue amount and any interest due. The new bonds pay whatever interest as regular Treasury bonds of the same maturity issued on that date. These bonds are really nothing more than IOUs from one branch of government to another. They are not a real financial asset. In other words, the government confiscates the public’s hard earned money, writes an IOU, then- and this is important- pays off worthless IOU’s that have interest attached with newer worthless IOU’s so as to make it appear as if the trust fund is solvent.

The trust fund balances are available to finance future benefit payments and other trust fund expenditures, but only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be paid for with real dollars. Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance all redemptions and pay interest payments.

In order to repay those IOUs, the government will have to either : raise taxes, borrow the needed funds from private markets, reduce or cut other federal programs, or reduce Social Security benefits by increasing the retirement age, link benefits increases to longevity, or lower automatic adjustments to benefits based on inflation. Even the President said in the 2011 federal budget: “The existence of large trust fund balances, therefore, does not, by itself, increase the government’s ability to pay benefits.”

The trust fund bonds may be assets from the point of view of Social Security, but they’re a liability for the government as a whole, and for taxpayers. The problem, of course, is that the government now owes the trust fund so much money and relies on its surplus so heavily that real problems will be created when it comes time to cash in those IOUs.

Social Security does not have borrowing authority, so when it exhausts the trust funds, the program will only pay out in benefits what it receives in tax revenue. That’s different from bankruptcy, which would imply that the program cannot pay benefits anymore. What that means is that Social Security can get what it needs from Treasury without having to ask permission from Congress and continue the Ponzi scheme indefinitely. At least until the entitlement program takes up so much of the federal budget that the nation is forced to borrow itself into bankruptcy.

Of the $13.5 trillion in gross federal debt, Social Security holds $2.5 trillion of the total $4.54 trillion in government-held debt. The net interest net interest owed by Social Security is $118.3 billion. An additional there is $2 trillion in debt from other government obligations that will impact necessary budgetary reforms. Cleverly, the securities held by the Social Security system are not counted as part of the national debt, because it is one government agency owing money to another. Here we see the magic act that is Social Security. Set up an accounting scheme where one agency owes another agency but no actual currency balances the books and you have the ability to claim vast wealth while not having two nickels to rub together. It’s a sleight of hand diabolical scam.

Today Social Security is collecting more money than it needs to pay benefits, but by 2018 it will begin running a deficit. The last 5 Trustees Reports have indicated that Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds would become exhausted between 2037 and 2041. In 2017, Social Security will begin paying out more than it takes in. For the first time, it will have to use the interest being paid on the securities it holds in order to meet its obligations. Thus, the percentage of spending for entitlements in the federal budget will begin to rapidly expand. This will force massive cuts in other programs. In 2027, Social Security would have to start redeeming the securities themselves. By 2041, Social Security would have cashed in the last security, and the system would have enough revenue to pay out only 75% of promised benefits and would drop over time.

Government “special interest” bonds are not an investment that adds one cent to the country's wealth. The real wealth in the form of the FICA taxes earned through the hard work of the American people is spent as fast as it is confiscated. As you can see the $2.54 trillion Social Security trust fund is really an empty bucket. It is a claim on future taxpayers so you know who will be paying the bill, American citizens.

Like a foolish parent who builds a college fund built solely on the good intentions of “I was going to save,” the day of reckoning comes when tuition is due. Likewise, the feds have written checks to themselves that they can’t cash, and the day of reckoning is here. Not even the all powerful OZ can spend other people’s money, write an IOU to himself, and then on some future day expect to use those IOUs to fund the Emerald City. It’s time to pull back the curtains and expose the naked emperor’s smoke and mirrors.

Social Security is a broken fraud. The sooner we admit it and deal with it, the sooner we can hope to stop the bankruptcy of the nation. The positive reality is that for the first time solving the problem is in everyone’s self-interest. Liberals, conservatives, left, right, Democrat and Republican all have a vested self interest in promoting change. Because if we do not attack the “third rail” of American politics, we all but guarantee that any money for individual “special interests” will be eaten up by Social Security. If we don’t rein in the monster, it will indiscriminately eat all of us.

Sources:

Allan Sloan, Washington post

Columbus Dispatch

Dawn Nuschler, Social Security: Trust Fund Investment Practices

Dean Kalahar, Practical Economics

Eric Schurenberg, Fiscal Times

E. Thomas McClanahan, Kansas City Star

FY 2000 Budget, Analytical Perspectives

Heritage foundation

Liz Pulliam Weston, 5 myths about social security

Thomas Sowell, Social Insecurity; Something for Nothing: Social Security; What Trust Fund?

Social Security.gov

U.S. Chamber of Commerce