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Source link: http://archive.mises.org/3643/the-fiction-of-social-security-bonds/

The Fiction of Social Security Bonds

May 29, 2005 by

How is Social Security different in kind from any other government program? Charles Rounds argues that it is not different at all. It is a spending program funded out of revenue. It can be abolished anytime. When the government speaks of “bonds,” it is merely is engaging in non-binding musings with itself about paying itself back for certain monies it has spent out of general revenues for purposes other than social security. They are not assets. Full Article

{ 27 comments }

Fidel the Infidel May 29, 2005 at 6:58 pm

No offense Mr. law professor but you need to get out in the real world more. A lot more.
All those bonds in the “Trust Fund” will be cashed. You know why Mr. Lawyer? Your profession is known for the reason why. IT’S THE FINE PRINT on those bonds. You see Mr. law Einstein the only way that those bonds will not be cashed( with tax increase’s or more debt) is CONGRESS TO VOTE ON DEFAULTING on those bonds. Please Mr. Lawyer give me the names of politicians who will go on record to default on social security bonds that people like me have been overpaying SS tax’s for years. The idiot in chief is the only one I know of and he’s just hinted at it. Name ONE politician who will sponsor a bill to default on the social security BONDS. I waiting Mr. Law Professor. Social security bonds have been “cashed” for years and nobody stopped it. Another thing ambulance chaser (just kidding) look for your social security tax’s to go up real soon. Thank you for your opinion. But in your defense the Republican senators are on record for voting for SS tax increases and benefit reductions. This is just a blue collar opinion from someone who remembers Reagan’s “ironclad” commitment to social security.

fidel the Infidel May 29, 2005 at 8:18 pm

One more thing Mr. Lawyer. In a round about way you are calling the Great Communicator a Liar. What do you have against Reagan? He told all Americans the bonds would be there for them. So did Alan ” BS is my game” Greenspan but we all know he’s an immoral opportunist.
AS for welfare all we have to do is look at your salary. Those poor taxpayer’s in the state you teach are forced to pay your salary. What a waste of good money.

Scott May 29, 2005 at 11:08 pm

The law behind Social Security makes it quite clear that the money collected and the money

distributed have no legal connection, making it a program of welfare. The best explanation I have

found is on page 118 of The Biggest “Tax Loophole” of All by Otto Skinner.:


The Social Security Act (of August 14, 1935, Chap. 531, 49 Stat. 620, which can be found in

Statues at Large, Volume 29), was divided into eleven different titles. Some of the title

provided for the appropriation of public funds for general welfare. Other titles of

the act provided for certain indirect taxes to be paid directly in the United States Treasury as

are all other taxes, totally unrestricted, not earmarked in any way, and available for the

general support of the government. None of these titles guaranteed the “taxpayer” any return for

the money paid.

For example: Title II provided for the appropriation of public funds for old-age

retirement. Title II provided for the appropriation of public funds for purposes of

unemployment. Title VIII imposed a so-called “Social Security” tax in the for of an excise

to be paid by employers, as well as a different tax to be paid by the “taxpayer”

employees, although at the same rate as the tax paid by the employers. Title IX imposed another

excise tax to be paid by employers of eight o more, which is collected under the name of

“unemployment taxes”. Regardless of the name used, none of these taxes are earmarked for any

specific purpose, but instead go directly into the federal Treasury to be used for any purpose

related to debts, common defense or general welfare.

A separability clause (Section 1103) was embodied in the act so that there would be no

direct relationship between the taxes paid into the federal Treasury and the purpose for which

the public funds were to be spent. Another reason for the separability clause was so that

if any of the eleven titles of the Social Security Act were to be considered by the courts to be

invalid it would not cause the other titles to be invalid.

If a bond is a contract, then in this case it cannot be between the federal government and the

taxpayer, it can only be between two arms of the government. That is apparently the case, as the

Treasury gives the money to the Social Security arm, then takes it back, replacing it with an IOU

(a bond). Even if there really are bonds, the holder and payor are the same entity, rendering

them meaningless, but not eliminating their political value in confusing the public, who have

been told by one politician that the bonds ought to go in a “lockbox”!

Back to a final word from Otto Skinner (p. 117):


The writers of the Social Security Act made certain that the taxes collected under the act

were not earmarked for any specific purpose to prevent the act from being

unconstitutional. The writers of the Social Security Act also made certain that the taxes

collected under the Social Security Act would be collected as indirect taxes (not insurance

premium payments), and that they were paid directly into the federal Treasury and not into

any special fund for the use and benefit of any particular group. Remember, Congress has the

power to collect taxes to pay the debts, and for the common defense and general welfare only; but

has no power to transfer funds from one group to another group.

Larry Ruane May 30, 2005 at 12:31 am

Fidel, it doesn’t matter whether Congress ever votes to default on these “bonds.” The author’s point (as I understand it) is that Social Security “bonds” are not assets; they have no economic value.

JG May 30, 2005 at 12:56 am

I think Fidel was trying to show off his mastery of the English language.

Elvis May 30, 2005 at 5:30 am

The Social Security “bonds” are not assets and have no economic value because:
1. unlike “ordinary” government bonds, SS trust fund “bonds” are special-issue non-marketable bonds, which cannot be sold on the open market, and…
2. It is impossible for the same entity to both spend and save the same money, yet still consider that money to be an asset. (Actually they could do it, but those outside of the government who do so usually end up behind bars.)

D. Saul Weiner May 30, 2005 at 8:58 am

Rounds is correct in his description of the bonds in the so-called Trust Fund; they are just one more misleading element in the smoke-and-mirrors arrangement that we call Social Security.

About the strongest thing one can say in connection with these “bonds” is that, to the extent that Congress continues to make payments on them, they defer the moment of truth when Congress will need to explicitly vote to appropriate additional funds to Social Security, once payroll taxes become insufficient (currently projected to be about 2018).

fidel the Infidel May 30, 2005 at 9:20 am

No disrespect to anyone but if the SS bonds are not “real” then is the money received for cashing them not real either? In other words a SS bond is like a falling tree in the middle
of a forest and if you knuckleheads are not around to see it cashed we poor folks don’t get the money? Before all the fancy BS about how the bonds are not real and other diatribe why doesn’t someone go back and look at the original intent of congress in 1983 when they created the social security act for the present day bonds. Look at the personal guaranties
our government gave us that the money would be there. Look at how the money was supposed to be “spent” and then look at how chainsaw George has changed his position (know as flip flopping) since 2000.

D. Saul Weiner May 30, 2005 at 9:42 am

Fidel,

If I hold you up with a toy gun and you give me your money, that does not make my toy gun “real”.

The Trust fund was created in the 1930′s, not in the 1983 Act. All that it does is attempt to force future generations to take on the debt of prior generations who were unwilling to live within their means. Is this what you mean by the “personal guaranties that our government gave us that the money would be there”? That they had a right to expropriate a virtually unlimited amounts of funds from my kids (who were not even born in 1983) when the bills become due? Not to mention footing the bill for Medicare and other debt.

Fidel the Infidel May 30, 2005 at 10:20 am

No offense but if you hold me up with a toy gun the phrase “real good health insurance” would take on a whole new meaning to you. 1983 is very important in that the guide lines
for the present day bonds was set. Before you say the bonds are worthless look at what was said. Look at what was promised by the government. What part of “Backed by the full faith and credit of the United States” do you not understand. What you are a party to is what
some in congress said in 83. Their worry was that in the future there would be those who would say the bonds were worthless and had no value. They worried that it could become one of the biggest boondoggles against the middle class of all time. That’s why The great communicator put an “ironclad” commitment on those bonds. That’s why they are backed by the full faith and credit of the United States. Look at the record. For you to say the bonds are meaningless without looking at the facts is very “plastic”.
If you want to complain about the small pitance your off spring will pay to SS you must be screaming real loud about the birth tax the Prez is laying on them.

D. Saul Weiner May 30, 2005 at 10:46 am

Fidel,

You have conveniently ignored the moral issue that I raised, which is disguised by the fiction that the “government” has made some kind of “personal guaranty”, when in fact what it did was try to impose a financial obligation on others who were not old enough to vote and/or still unborn. If you want to carry out a reasoned argument, then you will need to address the issue raised, not jush rehash your prior statements.

If you think that the amounts that my kids will have to pay for Social Security is a small pittance, then either you are woefully ignorant about the numbers involved (not to mention Medicare and other debt) or you are being blatantly dishonest. Get real Fidel or else you are just wasting the time of those on this board.

Ignorant(according to others) fidel May 30, 2005 at 12:53 pm

YOU SAY: You have conveniently ignored the moral issue that I raised, which is disguised by the fiction that the “government” has made some kind of “personal guaranty”, when in fact what it did was try to impose a financial obligation on others who were not old enough to vote and/or still unborn. If you want to carry out a reasoned argument, then you will need to address the issue raised, not jush rehash your prior statements.
I SAY: I have been paying “extra” social security tax’s for over 20 years. The reason I’ve been paying the “Extra” is so that when I retire I will get a small pittance from SS. Also the reason that I have been paying extra according to Allan Greenspan is to help pay down the national debt so when a certain generation retires we can better fund Social security. Now is it moral for me to pay extra tax for 20 years and just when I get to retirement age to yank it out from under me? The morality of it is our government has failed us on this issue. They have taken the money and have not spent it wisely. They did not pay down the debt.The present White House renter along with the congress critters spend our money like a drunken sailor on a short leave. Why do we concentrate on SS debt when the general fund debt is about to explode and destroy are ability to fund anything. The morality of it is the current tax cuts are not tax cuts. They are a tax shift from this generation to future generations. So to be brutality honest here is my “morality” of the situation: Just give me my SS check because I’m just as important as any pork project them so called legislator’s will spend the money on. Besides if you want to know what course the United States is on economically brush up on Argentina economics. Basically your Kids are headed for the worst economic quagmire in history. Social Security will be the least of their worries if things don’t radically change. So the bottom line is if the powers that be had done what they said they would we wouldn’t have this conversation. God help us all. The morality of one generation imposing debt on another generation is not easily answered. It would depend on the circumstances . In the present case to just pick out social Security and say it’s not just is kind of like two bald men fighting over a comb isn’t it? What about all the other stuff coming down the pike? The whole debt issue must be taken into account. And by the way I might be ignorant but I’m not stupid.

Ron Amos May 30, 2005 at 2:06 pm

You are simply engaging in a lot of specious, legalistic folderol. There is certainly an obligation to honor these bonds if there is any integrity left in Congress. That obviously seems to be something you are bereft of.

D. Saul Weiner May 30, 2005 at 2:37 pm

Fidel,

I must say that, based on your last response, I agree with most of what you have written. If Greenspan said that our excess contributions would be used to pay down debt, I would say that he was either lying or naive to think that would happen.

Ron,

There is a small remnant of integrity left in Congress … by the name of Ron Paul. No, there is no honor in one generation being forced to pay for the immoral actions of previous generations. Reread the Declaration of Independence; governments are established to serve their citizens, not bankrupt them.

Arman Demirjian May 30, 2005 at 2:38 pm

Wow, Fidel posts here?

Brandon Berg May 30, 2005 at 4:54 pm

You are simply engaging in a lot of specious, legalistic folderol. There is certainly an obligation to honor these bonds if there is any integrity left in Congress.

It’s not a question of integrity. The problem is that there’s no practical difference between the government “honoring” the bonds and defaulting on them.

Suppose, hypothetically, that there are no bonds in the “trust fund,” and that scheduled SS benefits exceed the SS taxes by $100 billion. In order to cover this, the government will either have to raise taxes by $100 billion or reduce spending in other areas by $100 billion (or some combination of the two).

Now suppose that the we do have $100 billion worth of bonds–just enough to cover the shortfall for this year. So the SSA cashes in the bonds and gets $100 billion. But in order to pay the bonds, the government will either have to raise taxes by $100 billion or reduce spending in other areas by $100 billion (or some combination of the two).

Whether or not the government will honor the bonds, the result is exactly the same: The government must raise taxes or reduce expenditures elsewhere in order to raise enough money to pay for the promised benefits.

Actually, though, Fidel is correct about one thing: If the government had been putting cash instead of bonds into the “trust fund,” we wouldn’t be any better off, because cash isn’t a real asset. The population at large would still bear the cost in the form of inflation as the cash re-entered the money supply.

Real savings requires an abstention from consumption and increased expenditure on capital goods. Putting cash in a hole or buying treasury bonds may work on an individual level, but a whole economy simply cannot store wealth this way.

By the way, are you the Ron Amos whom I (vaguely) remember from the Neo-Talk mailing list back in the late ’90s?

Don Lloyd May 30, 2005 at 7:34 pm

Brendon,

Actually, though, Fidel is correct about one thing: If the government had been putting cash instead of bonds into the “trust fund,” we wouldn’t be any better off, because cash isn’t a real asset. The population at large would still bear the cost in the form of inflation as the cash re-entered the money supply.

Absolutely, but it would be essentially the same even for real assets such as gold, or German bonds or whatever. It is the actual distribution of purchasing power to the retirees that will create the future price inflation, relatively independent of the form of ‘saving’. The only alternative is if the form of ‘saving’ results in an increase in the future supply of consumer goods.

Regards, Don

Fidel the Infidel May 30, 2005 at 9:30 pm

You say:
Suppose, hypothetically, that there are no bonds in the “trust fund,” and that scheduled SS benefits exceed the SS taxes by $100 billion. In order to cover this, the government will either have to raise taxes by $100 billion or reduce spending in other areas by $100 billion (or some combination of the two).

I say:
Lets do it the George Bush way. Hello 100 billion in cash Goodbye big ole IOU for 100 billion payable to Hop Sing plus interest. This is exactly what our politicians will do. (Don’t shoot the messenger). In your defense a reasonable person would want to do it your way but who is reasonable in congress.

Brandon Berg May 31, 2005 at 1:15 am

Don:
Absolutely, but it would be essentially the same even for real assets such as gold, or German bonds or whatever. It is the actual distribution of purchasing power to the retirees that will create the future price inflation, relatively independent of the form of ‘saving’. The only alternative is if the form of ‘saving’ results in an increase in the future supply of consumer goods.

Right. Like I said, real savings requires an abstention from consumption and increased expenditure on capital goods. With a pay-as-you-go system like Social Security, there’s no deferred consumption, so there’s no increase in the future supply of goods.

Fidel:
Lets do it the George Bush way. Hello 100 billion in cash Goodbye big ole IOU for 100 billion payable to Hop Sing plus interest. This is exactly what our politicians will do.

Okay, fine. They could also print money to pay Social Security benefits. But the “trust fund” and the bonds it contains are still irrelevant, and will not in any way affect the need to cut spending, raise taxes, borrow money, or inflate in order to pay Social Security benefits.

G.R. May 31, 2005 at 11:10 am

It is interesting to note all the concern that payment of social security to retirees will fuel inflation. While this reasoning may contain a kernel of truth, it is astonishing that we do not hear in equal measure about war expenditures. These seem to be particularly pernicious, because the capital goods used to support wars will never find use for the production of goods for the population at large. They are therefore the ultimate way to squander labor and resources. In addition wars are designed to destroy, kill and wound and so create the need for reconstruction and for support of retirees, all of it paid for by taxes and inflation.

Would it not be intellectually more honest if all sources of inflation and taxation were included in the discussion of social security, so that the public might choose what forms it would rather support? Unfortunately the support of the old folks who have paid for all expenditures during their productive lives is called in question, while the unwanted and largely counterproductive
expenditures going under the name of “security” escape scrutiny. It is therefore fair to ask whether we might not be dealing with a decoy hiding under the camouflage of a crisis in social security.

Brandon Berg May 31, 2005 at 11:47 am

It is interesting to note all the concern that payment of social security to retirees will fuel inflation.

I said that it would be inflationary if it were cash instead of treasury bonds that were stored in the “trust fund.” Of course, anything that shifts resources from savers (the young) to consumers (the old) will have an upward pressure on real prices in the long run, so even Social Security as we know it now will have that effect.

While this reasoning may contain a kernel of truth, it is astonishing that we do not hear in equal measure about war expenditures.

You must not be paying attention. I hear about them all the time. Do you mean that it’s astonishing that we don’t hear it in this particular thread, which is about Social Security? That’s just silly. War expenditures have nothing to do with Social Security, and if we had to enumerate all the ways government wastes our resources every time we wanted to talk about one of them, we’d never get done.

Would it not be intellectually more honest if all sources of inflation and taxation were included in the discussion of social security, so that the public might choose what forms it would rather support?

Of course not. The government is not required to divide a certain amount of money between Social Security and war. It can and should reduce expenditures on both and give us our money back. The question of how much we should spend on war is immaterial to the question of how much we should spend on Social Security.

It is therefore fair to ask whether we might not be dealing with a decoy hiding under the camouflage of anti-war rhetoric.

Nathan May 31, 2005 at 3:12 pm

Assets – Liabilities = Equity

The SS Bonds represent an ASSET in “Trust Fund” account. They are equivalently a LIABILTY for the General Treasury. Thus, ($X Trillion in the Trust Fund) – ($Y Trillion in the General Treasury) = ZERO. Is this clear enough?

This is the negative side of democracy; people, en-masse, are idiots.

Fidel The Infidel May 31, 2005 at 6:13 pm

You say: The SS Bonds represent an ASSET in “Trust Fund” account. They are equivalently a LIABILTY for the General Treasury. Thus, ($X Trillion in the Trust Fund) – ($Y Trillion in the General Treasury) = ZERO. Is this clear enough? This is the negative side of democracy; people, en-masse, are idiots.

I Say: Never had non profit accounting have ya? The SS fund has other assets that are separate from the general fund and the general fund has other liabilities other than the SS trust fund. And if you try to balance all government accounts GOOD LUCK. By the way do you think you could find all that money missing in Iraq?

Democracy does have problems but our republic will survive

Adamantane May 31, 2005 at 6:59 pm

I must have missed something. Never in all the years of discussion regarding the Ponzi scheme that is SS have I ever heard anyone refer to “bonds” of any sort being used as place-fillers to account for the funds diverted from SS taxes. When were these so-called ‘bonds’ invoked, and by whom? PPP

Somebody elsewhere asserted that the shortfall in SS revenues pales in comparison to the debt contracted by the government in connection with the military adventures of the past several years in the Middle East (and other GOP-mandated deficit spending). One presumes the government will in one way or another deal with the paper actually issued to the public for that purpose. If the SS deficit is comparatively minor relative to the legitimate [sic] public debt, is it possible that — ethics and honor aside — dealing with it when the baby-boom chickens come to their retirement roost, will similarly be relatively minor? PPP

The discussion of SS ‘bonds’ brings up an interesting possibility. As has been argued persuasively, ‘bonds’ held by one arm of the federal government for the benfit of another arm of the federal government seem more like a shell game than a federal obligation. What if these bonds [with accruing interest] were actually funded, like other federal debt, by offering “SS Trust Fund” paper — like Treasury Bonds — on the public market? Why anybody would purchase it is a separate matter. PPP

“Full faith and credit” clauses are all very nice, but even where such explicitly *do not exist* they have been imputed, and politically appear unavoidable, for, e.g., Fannie Mae and Freddie Mac debt obligations. Why would SS be different? PPP

Lest I be accused of wishing to minimize or trivialize a very real problem with the scandalous way that SS has been administered and the taxpayers misled and defrauded, I want to underscore my opposition in principle to SS, and reiterate — oddly resonating with a prior post — my lifelong desire to be present in the Senate chamber when that body votes to junk the entire sordid structure and to get out of the retirement welfare business altogether. I do not expect to live to see that day, but I never expected to see the Berlin Wall fall, and never expected I would be able to videotape the General Secretary of the USSR dissolving that unholy arrangement, either.

R. Davis June 2, 2005 at 2:06 am


Social Security, of course, is just another federal welfare program that is funded out of general revenues.

I have no idea what the author is talking about here. To my knowledge, the entire Old-Age, Survivors, and Disability Insurance (OASDI) program is funded via payroll taxes, not “general revenues”. Regarding the charge that Social Security is “just another welfare program”, how does the author explain the fact that Bill Gates will receive Social Security? Low-wage workers do get a better return so it is arguably true that Social Security contains elements of a welfare program. But it also contains elements of a retirement program and an insurance program.


The misframed debate about whether there is a social security cash flow crisis in 2018 or 2042 also turns on whether those “bonds” have any economic or intrinsic value. The argument that social security will not cause a serious drain on general revenues until 2042 presupposes that the “bonds” in the fictitious trust fund memorializing the spent surplus somehow have value either for the U.S. or for workers and their families.

I know of nobody who claims that Social Security “will not cause a serious drain on general revenues until 2042″. The cashing in of its bonds from about 2017 on will obviously be a drain on the general fund. However, it will be no more of a drain than the eventual cashing in of the trillions of dollars of public bonds that the general fund has issued. Of course, the general fund will likely issue new bonds to replace those bonds as they are redeemed. However, it can (and likely will) do the exact same thing with the Social Security bonds. In any case, the problem here is with the general fund, not Social Security.


They do not. It should be noted that each side of the cash flow crisis debate is presupposing that social security is a self-contained retirement program, which legally it is not. That social security has an “actuary” plays into this. Since when did a federal welfare program that takes its funding from general revenues rather than earmarked funds need an actuary?

Once again, what is the author talking about? Social Security takes its funding from the earmarked revenues known as payroll taxes.


Yes, the social security statute provides that on the face of the “bonds” memorializing the spent surplus there shall be a notation that they are “supported by the full faith and credit of the United States.” But this provision can only kick in if the bonds are actually issued by the U.S. to another party. The statute, however, does not provide for this. In other words, the “full faith and credit” language is illusory.

This is the second time that the author speaks of the bonds as “memorializing the spent surplus”. Does he likewise refer to public bonds as “memorializing spend monies”? In any case, the current issuing of bonds from the general fund to the Social Security trust fund treats those two entities as separate financial entities. The fact that they are both eventually funded by taxpayers does not change this. If it did, then no government agency would ever lend money to another government agency.

In addition, this all leads to a key question. If the “full faith and credit” of the Social Security bonds is illusionary, why does the author not call for the most immediate action to end this fraud? That action would be to change the law that mandates that Social Security lend its surplus to the general fund and allow the surplus to be invested in “real assets”. Another alternative would be to immediately cut the payroll tax (as Senator Moynihan suggested in 1990) to return the surplus to the workers who are paying it. The fact that the only reforms that the author mentions are personal accounts or the complete abolishment of the system suggests that the immediate ending of this so-called “fraud” is not the author’s top priority.

Nathan June 2, 2005 at 4:12 pm

R.,
All taxes, including the payroll taxes, must enter the General Treasury. They must be appropriated by congress through appropriations bills.

R. Davis June 3, 2005 at 12:36 am


R.,
All taxes, including the payroll taxes, must enter the General Treasury. They must
be appropriated by congress through appropriations bills.

Nathan,
Still, the payroll taxes that pay for OASDI are “earmarked” revenues, not
“general revenues”. They are referred to as such in the following excerpts
from the Encarta Encyclopedia and a U.S. Treasury document:


Financing for the cash benefits for OASDI comes from earmarked payroll taxes
levied on employees, their employers, and the self-employed. The rate of these
contributions is based on the taxable earnings of employees, up to a maximum
taxable amount, with the employer contributing an equal amount. Self-employed
people contribute twice the amount levied on employees.

Source:
http://encarta.msn.com/text_761561113___7/Social_Security.html


The OASI fund pays cash retirement benefits to eligible retirees
and their survivors and the much smaller DI fund pays cash benefits to
individuals who are unable to work due to medical conditions. Though the
events that trigger benefit payments are quite different, both trust funds
have the same earmarked financing structure: primarily payroll
contributions and income taxes on benefits.

Source:

http://www.treas.gov/offices/economic-policy/reports/budget_trust_fund_3_23.pdf

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