Real Bonds, and Worries, Draw Interest

WASHINGTON — Yes, Mary Platz, there really is a Social Security trust fund. You can find it — about $1.7-trillion worth of special-issue Treasury bonds — in a Bureau of the Public Debt safe in Parkersburg, W.Va.

Platz, 78, of Mableton, Ga., was one of many people who complained to their representative in Congress at meetings around the country in recent weeks, that the government was squandering its surplus Social Security funds on other federal programs.

“We need to do something to keep [the government] from taking money out of Social Security,” Platz told Rep. Phil Gingrey (R-Ga.).

The trust fund has become an integral part of the debate over President Bush’s proposal to allow workers to divert some of their payroll taxes into private retirement accounts invested at their discretion. Everyone agrees, as Platz complained, that the government has been spending money from the fund — money raised through the Social Security tax and that is intended for future retirees.

But debate has escalated over whether the government has the ability — or even a reliable intent — to repay that money to the retirement system. As Bush battles his critics over his plan to restructure Social Security, both sides are characterizing the trust fund and the IOUs it holds in sharply different ways.

Bush, in arguing that the system needs major changes, has portrayed the trust fund as an unreliable source of money for retirees.

At a rally in North Carolina last month, the president said, “Some of you probably think there is a kind of bank, a Social Security trust bank.” In fact, Bush said, “there are empty promises, but there’s no pile of money that you thought was there when you retired. That’s not the way the system works.”

Not so fast, said Rep. Sander M. Levin of Michigan, the ranking Democrat on the House Social Security subcommittee.

It is a fact, he said, that each individual does not have a segment of the Social Security trust fund reserved in his or her name. But the bonds in the fund are no empty promises. In the 11 years between 1959 and 1981 when payroll taxes fell short of what was needed to pay Social Security benefits, $26 billion worth of the bonds were cashed to make up the difference, and full benefits were paid.

“These bonds are real,” Levin said. “Retirees can rely on them. The administration doesn’t dare say otherwise too loud, because it would cast suspicion on all other U.S. Treasury bonds held around the world.”

On this much, Bush and Levin agree: Many Americans seem to believe the trust fund contains a section with money earmarked just for them. In fact, Social Security spends its money in benefits almost as fast as it collects it from the payroll tax.

Each generation of workers pays payroll taxes to support retirees and the disabled in return for the expectation that the next generation will support them when they retire.

Right now, with the baby boom generation still of working age, workers are paying more in payroll taxes than retirees and disabled persons are collecting in benefits. The excess goes into the trust fund.

Congress deliberately created today’s excess in 1983, when it raised payroll taxes and effectively cut benefits by lifting the eligibility age for full benefits. In doing so, lawmakers were adopting the recommendations of a commission led by Alan Greenspan, who went on to become chairman of the Federal Reserve.

The idea was to build up a surplus in the Social Security trust fund for the day when the baby boom generation would become eligible for benefits.

That raised a question: What to do with the excess revenue in the meantime? The government does not have the same choices that individuals enjoy when they have money to invest.

If the government were to invest in the private sector, the private sector would no longer be private. It could invest in government bonds, as private citizens do, but then it would in effect pay itself interest and show no profit.

And it could not even comfortably invest in nothing at all. What would people think if they knew the government was collecting billions of dollars from them, only to tuck the money under a mattress?

“A mattress is not an option,” James B. Lockhart III, deputy commissioner of the Social Security Administration, said in a recent interview.

In the 1990s, President Clinton gave some thought to having the government invest in the stock market. Greenspan pointed out that would have made the government a part-owner of many American companies.

“In every country where they do that, the retirement fund has become politicized,” said Thomas R. Saving, a Texas A&M economist who is one of the six Social Security trustees. “Decisions are made not on the basis of what’s good for the people who are eventually going use the money, but whether the government should invest in things like tobacco companies.”

Hardly considered by the Greenspan commission was the option getting so much attention now: letting individual workers invest a share of their payroll taxes themselves.

“Personal retirement accounts are the only other way, and they avoid the drawbacks of having the government invest the money,” said David C. John, a Social Security expert at the conservative Heritage Foundation and an advocate of private accounts.

Instead, Congress said the Social Security system should invest its surplus in government bonds. The government used the proceeds to help make up for the deficit between its general revenue, mostly from income taxes, and its spending for everything except Social Security.

But to some, the sale of bonds to the Social Security trust fund looked suspiciously like a raid on Social Security’s surplus to finance the rest of government — “everything from paper clips to battleships,” said Larry Hunter, senior economist at FreedomWorks, an organization that advocates for lower taxes and less government regulation. “In exchange, the Treasury placed IOUs in the so-called Social Security trust fund, promising to pay back the pilfered payroll tax revenue with interest.”

At first the transaction was strictly on paper. But when the public expressed doubt that the Social Security system would be paid back, Congress instructed the Treasury Department in 1994 to prepare nonnegotiable bonds of five to 15 years in duration, carrying interest rates prevailing in private markets.

These are not garden-variety $1,000 Treasury bonds. The 3.5% bond due in 2018, for example, is for $86.9 billion.

The bonds, Congress decreed, would state that “the United States is pledged to the payment of the obligation with respect to both principal and interest.”

Some remain suspicious.

Platz, of Mableton, Ga., is afraid the government is making the same mistake with the trust fund that many people make with their own finances. Instead of saving its surplus payroll tax revenue for a rainy day — in Social Security’s case, the baby boom generation’s retirement — the government is spending its money as fast as it collects it. The government says that the Social Security system, like any other investor, will be able to get its money back — with interest — when it needs it.

It will next need it, the Social Security trustees estimate, in 2018, when payroll tax revenue will be too small to pay for the promised benefits.

How will the government get the money it needs to repay the bonds? By raising taxes or borrowing from the public — the same choices if there were no trust fund and no bonds. By cashing in a small share of its bonds in 2018 — an estimated $18-billion worth — the Social Security system would make only a small contribution to the government’s debt. The contribution would increase rapidly, to about $400 billion a year just before the trust fund runs dry in 2042.

At that point, by law, Social Security benefits would be limited to what could be paid by annual payroll tax revenue. That translates into a 27% benefit cut across the board.

The president argues that offering workers private accounts holds out the promise of high returns to help offset the benefit cuts that he has said are inevitable. Opponents of private accounts say they would destabilize the system by forcing the government to borrow the money it would have otherwise received in payroll tax revenue, so that it can pay for current retirees’ benefits.

Many experts believe Congress, whether by trimming benefits, raising taxes or other means, will act in time to keep Social Security from tumbling off a cliff in 2042.

“It is inconceivable that Congress would not act, and the prudent course is to act soon,” said John L. Palmer, a Syracuse University economist and one of the Social Security trustees.

Platz says the first step is to keep the government’s hands off the trust fund. When she suggested as much to her congressman during a meeting at a Smyrna, Ga., senior center last month, she drew applause.

“If we don’t stop the government from dipping its hand into the Social Security fund,” she said after the meeting, “pretty soon we won’t have a fund.”

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