The Social Security IOU

There has been a lot of talk lately about the social security trust fund. The Democrats are accusing Bush of spending part of the trust fund because of his tax cut. The Bush administration is taking up some creative accounting practices to try to avoid spending part of the trust fund while denying that they are using any of the trust fund. Back and forth it goes. There’s just one problem…the social security trust fund doesn’t exist.

What comes to mind when you think of a trust fund? Money set aside in an account somewhere right? Maybe a rich uncle dies and leaves his nephew $50,000 in an account that his nephew can collect when he reaches 21? So what does a social security trust fund bring to mind? Well we all pay social security correct? So if there were a trust fund, that money would be set aside somewhere so that we could draw on it when we became eligible. That’s what the social security trust fund SHOULD be. Now let’s take a look at what it is.

After you pay your social security taxes the government takes the money and spends it. Yes you heard me correctly, they spend it. They spend it on debt reduction, welfare, the military, government salaries, and all the other things the government spends your money on.

Now you’re probably thinking “Wait a second Hawkins, what do you mean we spend it? If we spend that money, how can there be a trust fund?” It’s an accounting trick. After the money is spent, the government creates non-negotiable bonds for the same amount that’s spent. Now you’re probably thinking “There you go Hawkins, the money is in bonds.”

But what is a bond? It’s basically a loan. Typically, you loan the government your money and they pay it back with interest after a period of time. In this case, the money has already been spent and government is loaning itself money and paying it back with interest after a period of time. Now here’s the kicker. How does the government pay these bonds back? With tax money.

Here’s an analogy. You have a 10 year old son. He doesn’t have a job. In fact his only source of revenue is a $20 a month allowance you give him. Let’s say that you decide to give your son $100 of your money to hold for you over and above his allowance for some reason. Your son takes the money and spends the entire $100 on going to the movies, the zoo, and a birthday party for his friends. He then writes down IOU $100 and puts it in his piggy bank. Now, do you have a trust fund or do you have an IOU that you will have to pay for yourself?

Let me really drive the point home for you. In 2016 it’s currently estimated that the benefits owed to people on social security will be greater than the revenues generated by the social security tax. So that shortfall will have to be made up somewhere. Now if there is a trust fund, that is when it would come into play correct? So what’s going to happen in 2016? The US government is going to redeem some of those bonds to pay the shortfall. Now, here’s the big question…who pays for the redeeming of those bonds? The Answer? The taxpayers in 2016.

So why is all of this relevant? Because the non-existent trust fund has very real effects on our decisions. Why is it that people aren’t allowed to opt out of social security? Because the tax money you pay in today helps pay the bill for the people who are already on social security. It’s almost a certainty over the long term that investing social security in the stock market or other investments would spur the economy on while getting the government a nice return on the money. So why is this difficult to do? Again, because the government would REALLY have to put the money in a type of trust fund instead of simply spending it to help pay for social security benefits.

Words mean things folks. A trust fund and an IOU are not the same thing and we’re going to have to deal with that fact sooner than you think. This could mean people have to retire later than they’re planning to. Some of our senior citizens may not have as much income as they previously thought. Taxes may have to be raised significantly much sooner than we’d anticipated. When the politicians tell you that we won’t have to deal with these decisions anytime soon because of the trust fund, remember where the money is really going to come from…..your pocket.

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