- The Washington Times - Friday, April 12, 2002

Is Social Security in financial trouble? If you believe a press release issued by the Trustees of the Social Security and Medicare Trust Funds recently, the answer is no. However, if you heard last week's report on National Public Radio about public acceptance of personal retirement accounts or read the fine print in the trustees' report, the answer is a resounding Yes.
Why the difference? Because the press release treats the Social Security and Medicare trust funds as if they hold real assets when, in fact, they hold only IOUs the government has written itself. However, in recognition that Social Security and Medicare are pay-as-you-go programs, the fine print calculates rates future taxpayers will have to pay to keep the system going. And those tax rates are astronomical.
Despite misleading rhetoric from the Social Security Administration, we have never had a funded program. Every dollar collected in (FICA) payroll taxes is spent the very minute, the very hour, the very day it comes in the door. Payroll tax revenues are mainly spent on Social Security benefits and Medicare expenses.
If any funds are left over, they are spent on other programs or used to pay off the national debt. But nothing is saved. No money is stashed away in bank vaults; no investments made in real assets.
That means taxes taken from today's workers primarily pay benefits the government provides to today's retirees. And because there are more workers today, when they retire their benefits will be paid only if higher taxes are collected from the next generation of workers. How high will those taxes have to be? The tax rates needed to support the elderly will grow continuously as far as the eye can see.
When today's 19-year-olds become eligible for retirement in 2050, their children and grandchildren will face a payroll tax of 17 percent to pay Social Security and disability benefits, currently funded by a 12.4 percent tax. If Medicare Part A (which mainly covers hospital expenses) is added, the payroll tax burden will be 24 percent by midcentury about a fourth of all income that workers will earn that year.
Although Medicare Part B (which mainly covers outpatient services) is funded from general revenues, if it too is expressed as a percent of payroll the burden will climb to 28 percent.
Throw in other ways in which the federal government pays medical bills for the elderly (Medicaid, the Veterans Administration, etc.) and the total burden rises to 32 percent.
That means almost one-third of future workers' incomes will be needed just to pay benefits to today's teen-agers. Moreover, this burden will come on top of all the other services taxpayers will be expected to fund from roads and bridges to salaries for teachers and police officers.
Nor is this the worst that can happen. These numbers are based on the intermediate (most likely) projections of the Social Security Board of Trustees. Under the trustees' pessimistic projection, by 2050 the total taxes needed to support elderly benefits will climb to 53 percent of taxable payroll. On this projection, we have already pledged more than half of the incomes of future workers most of whom are not yet born and who have not agreed to be part of a chain-letter approach to funding retirement benefits.
All these scary facts about our future are completely ignored in the official trustees' press release, which tells us Social Security will run out of money in 2041 and Medicare will run out in 2030. These statements imply the trust funds can be used to pay benefits. In fact, they don't pay benefits at all.
The so-called "trust funds" for Social Security, Disability Insurance and Medicare Part A are trust funds in name only. They serve no economic function. Their purpose is purely accounting to keep track of surpluses and deficits in the inflow and outflow of funds.
The accumulated Social Security surplus is reflected in paper certificates (nonnegotiable bonds) kept in filing cabinets in the Social Security offices in West Virginia. The bonds cannot be sold on Wall Street or to foreign investors, however They can only be returned to the Treasury. In essence, they are nothing more than IOUs the government writes to itself.
Every payroll tax check written by employers is written to the U.S. Treasury. Every Social Security benefit check comes from the U.S. Treasury. The trust funds themselves do not receive money, spend money or borrow. Every asset of the trust funds is a liability of the Treasury. Summing accounts over all agencies of government (the trust funds plus the Treasury), the balance is zero. For the Treasury to write a check, the government must first tax or borrow.
The late economist Robert Eisner put it best: With the stroke of a pen, the government could double or triple the number of IOUs in the trust funds or even abolish the whole thing with no effect on the government's bottom line. Either option would allow us to dispense with the artificial crisis and focus on the real issue: How is the U.S. Treasury going to pay the government's bills?

John C. Goodman is president of the National Center for Policy Analysis in Dallas.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide