In the debate around Social Security, much is made of the so -called "trust fund" or "lockbox," which allegedly contains securities to partially fund future Social Security payments.
This notion is a mirage. There is no cash or marketable securities in any fund to make these payments. This has major negative consequences for the current and future generations.
Social Security (OASDI) was established in 1935. At that time, the ratio of people paying taxes in relative to those receiving payments was 35 to 1, and taxes greatly exceeded payments. Further, life expectancy was less than the retirement age, so payments weren't made for very long.
Politicians apparently can't stand to see money not spent, so they contrived a way of getting their hands on the surplus.
The system was, and is, "a pay as you go" type, which means that current payments are funded by current taxes. Although there was a separate accounting of the "Social Security fund" showing the growing surpluses, politicians required the excess cash be turned over to the U.S. Treasury for Congress to spend.
To cover their tracks, Congress requires the U.S. Treasury to issue the Social Security Administration a "special issue bond" for the amount taken.
The terms "trust fund" and "lockbox" conjure up images of bonds that may be sold for cash at the option of the holder. However, these special issues bonds are non-transferable to anyone other than the U.S. Treasury. As a result, they are nothing more than IOUs.
To add insult to injury, the Supreme Court ruled that the employer and employee taxes not only may be used by Congress in any way it chooses but also that you have absolutely no legal right to them. In Hevering v. Davis (1937), "The proceeds of both [the employee and employer] taxes are to be paid into the Treasury like internal revenue generally, and are not earmarked in any way." In Fleming v. Nestor (1960), the court said, "To engraft upon the Social Security System a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands."
Demographically, the chickens are coming home to roost as payments by the system exceeded taxes in 2010, according to the Congressional Budget Office and confirmed by Stephen G. Goss, chief actuary of the Social Security Administration.
Previously, the crossover point was expected around 2017, but the economic downturn accelerated it. The recent projections from the Social Security Administration anticipate permanent and growing deficits beginning around 2015.
Now let's examine the alternatives the U.S. Treasury has as the Social Security Administration presents the IOUs for payment.
First, the U.S. Treasury can petition Congress to provide it with more tax revenue by raising taxes on some or all of us.
If this appears circular to the reader, it is. Congress would be bribing us with our own money in the hope that we will not figure it out.
Second, the U.S. Treasury can issue a bond to a third party (say China's sovereign wealth fund) that accrues interest and matures at some date in the future.
Most of the burden falls on our children and grandchildren. To pay those off, they will have to sacrifice goods and services they would otherwise lavish on themselves or their children.
This problem is likely to get very large, very quickly.
As the baby boomer generation retires, the ratio of taxpayers to recipients will decline precipitously.
Currently there are 3.4 taxpayers for each recipient, and this ratio is expected to decline to just 2.1 around 2030. Further, life expectancy now greatly exceeds the retirement age.
Taken together, the tax burden on future generations will become quite onerous.
Yet too many of our politicians deny there is a problem. Based on the above, one can only conclude that they are either ignorant of the facts or assume that we are.
Christopher Gable lives in Altoona