RebelCapitalist: Financial Information for the Rest of Us

Social Security Straight Talk

Mar 17, 2010 | By: Mr_Blue | Tags: social security

I received an email from a very concerned social security recipient regarding this Associated Press article. I replied hogwash that piece of “panic” journalism was an example of 1) corporate owned media helping out Wall Street; 2) writer and editors who are clueless about economics and government accounting or 3) or both 1 & 2. Social security is not in trouble and the fact that its cashing in the IOUs doesn’t matter.

Let’s start with some straight talk about Social Security. First, Social Security is NOT a pension plan. It is an intergenerational assurance plan meaning that working generations help support retirees, dependents, survivors and persons with disabilities. Yes, this is very much based on a ‘values’ judgment - that we as Americans are willing to take care of our own when they need it. This is why conservatives hate this program and have been trying to kill Social Security since it began.

Second, Social Security is NOT going insolvent. Social security is very much a part of the Federal government and the Federal government, contrary to what we hear in corporate owned media, is NOT and cannot go insolvent. Why? Because Federal government is the sovereign issuer of its currency (and as long as its financial obligations are issued in that currency) and it will continue to make all social security payments simply by crediting banks accounts or issuing checks just like it has since the program began.

Finally, this ridiculous “panic” journalism - let’s get real straight. In 1983, the Greenspan Commission (yes, that’s Alan Greenspan) tried to change Social Security from “paygo” system to an advanced funding system. Under paygo, current revenue from payroll tax was matched with current Social Security expenditures. The Commission thought that paygo would not work well when Baby Boomers began to retire so it created this fiction of advance funding. Under advance funding, the thought was that any surplus revenue would accumulate in the Trust Fund and would be invested in special U.S. Treasury securities that earned interest—the IOUs. These IOUs would be sold when Social Security expenditures would be greater than tax collected plus interest earned.

Guess what we are in the Great Recession and the advance funding fiction is working as intended. But does it really matter?

Advance funding system or even the existence of Trust Fund doesn’t change the Federal government’s ability to pay Social Security benefits. The only constraint on payment maybe a political one but NOT an economic one. Social security benefits are paid like any other government expenditure/obligation - crediting somebody’s bank account. Only congress and the president are the ones who could impose a constraint on payments - meaning politics.

Bottomline: Advance funding, Trust Fund, IOUs - it’s just an accounting gimmick that results in the Federal Government owing money to itself. Nothing more nothing less.

Good luck.

Additional Reading:
Social Security: Truth or Useful Fiction
Social Security: Another Case of Innocent Fraud