Don’t look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.
Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.
You know, with the problems we are having in the economy due to government meddling in the mortgage area, with the billions poured into a “stimulus” that used political rather than economic conditions to decide who got the loot’ and the continuing support for “Sub Prime” lending, does not lead me to having any confidence that they are going to be able to deal with the SS problem.
The attempt was made during the Bush Administration but not only was it blocked by the Democrats, but they have bragged about it ever since.
Here’s excerpts from testimony by my Representative Peter DeFazio, before the House Subcommittee on Social Security in Feb and Mar 2002.
I am in the middle of a series of 15 town hall meetings I’ve been holding throughout Southwest Oregon to discuss Social Security with my constituents.
If there’s one thing I want those who attend my town hall meetings to take away from those gatherings it’s that Social Security is NOT in crisis. It is a fundamentally sound program that can remain so for the next 75 years and beyond with only minor changes.
If there’s one thing I would like the Members of this Subcommittee to take away from my testimony today, it’s that when residents of the 4th District of Oregon hear the truth about what privatization of Social Security means, they oppose it.
I will go into the specifics shortly, but at the outset of my testimony I would like to put in a pitch for my own plan to ensure the solvency of Social Security. I have introduced legislation, H.R. 3315, the ‘‘Social Security Stabilization and Enhancement Act.’’ The Social Security actuaries have certified that my legislation would restore 75-year solvency to the program. And, just as importantly to me, the reaction of Oregonians at my town hall meetings has been favorable.
I would urge this subcommittee to seriously consider my proposal as a viable alternative to the wholesale dismantling of Social Security that privatization represents. The Social Security Trust Fund and the Financial Challenges Facing Social
As you know, currently, Social Security is collecting more in payroll taxes than is necessary to send checks to beneficiaries.
Congress made a conscious decision in the early 1980s, pursuant to a recommendation by the Greenspan Commission, to boost payroll taxes far above the level necessary to fund current benefits in order to build up reserves for when the Baby Boom generation began to retire.
These excess payroll taxes are being credited to the Social Security Trust Fund and then invested in government bonds that pay interest to the Trust Fund. The Trust Fund already has assets of more than $ 1 trillion, and will grow to around $6.5 trillion by 2024.
Some in Congress and the current Administration have claimed that the bonds held by Social Security are not assets, but rather are ‘‘worthless IOUs.’’
When you deposit money in your savings account at your local bank or credit union, the money doesn’t just sit there waiting for you to retrieve it. The financial institution loans the money out to other customers and makes money by charging interest. But, the institution also has an obligation, when you return to withdraw some of your money, to have the resources to cover that transaction.
Similarly, the money contributed to Social Security is not stacked up and locked away until a worker is ready to collect benefits. Rather, surplus Social Security funds have been used to fund other government programs or, more recently, at least until President Bush and Republicans in Congress created a fiscal mess with last year’s tax cut, to pay down debt. Yet, no matter what the surplus has been used for, the Social Security Trust Fund has always received a U.S. Treasury bond in return. U.S. Treasury bonds are the safest investments in the world. That is why, when there are periodic global financial crises, investors flee for the safety and soundness of U.S. Treasury bonds.
Because they are the preferred choice of investors around the world, it should be clear that U.S. Treasury bonds represent real financial assets. If some in Congress and the Administration continue to insist otherwise, then they’ve got some explaining to do to investors around the world, in which case I fear for the stability of our nation’s financial system.
For those who don’t believe the Trust Fund exists, or don’t believe it holds real assets, I would urge them to look at page 19 of the latest Social Security Trustees report. The chart on page 19 lists the current assets of the Social Security Trust Fund. As the chart shows, the Trust Fund holds bonds with varying maturity dates and varying interest rates (6.125 percent up to 10.375 percent). Clearly, the Trust Fund represents real assets.
In fact, the bonds held by the Social Security Trust Fund state explicitly, ‘‘The bond is incontestable in the hands of the Federal Old-Age and Survivor’s Insurance Trust Fund. The bond is supported by the full faith and credit of the United States, and the United States is pledged to the payment of the bond with respect to both principal and interest.’’
That said, I agree that demographic changes—a growing number of retirees, proportionately fewer workers, and longer life expectancy—create challenges for Social Security. But these financial challenges are entirely manageable without abandoning the concept of social insurance and the best anti-poverty program ever devised by the federal government.
In 2016, the payroll taxes coming into Social Security will be insufficient to cover all promised benefits. The Social Security Administration (SSA) will then begin to draw on the interest earned by the Social Security Trust Fund to help pay full benefits. In 2025, incoming payroll taxes plus the interest income from the Trust Fund will be insufficient to pay all benefits. The SSA will then begin redeeming bonds held by the Social Security Trust Fund to cover full benefits.
As the Social Security system begins to redeem these bonds over the next several decades, the government has to find the money to honor this debt. There is more than one way to do so.
The most obvious way is to reserve current Social Security surpluses to pay off our massive national debt, thus saving hundreds of billions of dollars a year in interest payments that could then be devoted to Social Security.
There had been consensus until last year in Congress on using Social Security surpluses to pay down debt. Unfortunately, President Bush and Republicans in Congress rammed through a $2 trillion tax cut last year under the misguided assumption that a projected $5.6 trillion 10-year surplus somehow represented real money that could be returned to taxpayers with no negative fiscal consequences. Now, not only has the promise to pay down debt been broken, thus burdening our nation’s children with a crushing debt they didn’t create, but the bipartisan consensus to reserve Social Security surpluses for only paying down debt and shoring up the program has been abandoned.
The budget recently submitted by President Bush would spend $1.5 trillion in Social Security money over the next decade. Essentially, the President is funding tax cuts that overwhelmingly benefit those making over $373,000 a year by shifting working Americans’ Social Security money into the bank accounts of our nation’s wealthiest individuals. That is totally unacceptable.
The federal government could also simply issue new debt to investors and use the cash raised to cover benefits.
Again, however, the first two options have been made more difficult by the fiscal irresponsibility of Republicans in Congress and the current Administration. Another option to find the resources to redeem the bonds is to collectively invest a portion of the Trust Fund in equities other than federal debt. Diversification would increase liquidity and has the potential to increase the resources in the Trust Fund through higher rates-of-return without the risk inherent in a privatized system. I will have more to say about collective investment in a minute.
The final key date for Social Security is 2038. In 2038, all of the bonds in the Trust Fund will have been redeemed, and Social Security will rely solely on incoming payroll taxes to fund benefits.
In other words, without any changes whatsoever, for the next four decades, Social Security will be able to pay 100 percent of promised benefits.
However, even after 2038, Social Security will never be ‘‘bankrupt’’ in the sense that it couldn’t pay any benefits whatsoever. If Congress sat on its hands and made no changes for the next four decades, under current projections, the program would still be able to cover 70–75 percent of promised benefits in perpetuity because of the payroll taxes flowing in from workers’ paychecks.
Therefore, we are here today discussing how best to plug that roughly 25 percent gap between expected revenues and benefits.