How Congress 'Extends the Life' of Social Security

On April 22, the trustees for Social Security issued their annual reports, and the situation for the huge transfer program is unsustainable, the same as it’s been for years. The government tells us yet again that the program is running out of money. The danger here is that Americans have been hearing these dire predictions for so long now that they’ll no longer take them seriously.

April 23 on Fox News’ Special Report, Bret Baier reported on the trustees’ reports and discussed them with his panel. Panelist Charles Hurt opined that the financial difficulties of the big transfer programs are a “slow-rolling catastrophe,” and added this: “The fact remains that they're going insolvent.” If Social Security were a private sector enterprise, it’d long ago have been declared insolvent.

Although no link was provided, Baier surely got his information from the Social Security Administration’s A Summary of the 2019 Annual Reports or from Treasury’s April 22 press release, both of which say: “Social Security’s total cost is projected to exceed its total income (including interest) in 2020 for the first time since 1982, and to remain higher throughout the projection period.” What we should note here is the parenthetical “including interest.”

What the quote is referring to is OASDI, i.e. the combined trust fund operations of both Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). But the program for old timers (OASI) is already under water in that income from its dedicated tax, the payroll tax, isn’t enough to pay benefits.

To confirm that refer to Table II.B1. -- Summary of 2018 Trust Fund Financial Operations (which is also on page 6 of the full report put out on April 22). The table shows that OASI had a shortfall in 2018 of -$22.4B. But look more closely, do a little math, and we see that income from the payroll tax was $715.9B while benefits were $844.9B, which makes for a shortfall of -$129B.

What’s interesting about the shortfall is that most of it, $80.7B, is made up for by “Interest.” That would be the interest credited to the “special issue securities” the SSA received when past payroll tax surpluses were forked over to the General Fund. But notice that the amounts under “Reimbursement from General Fund of the Treasury” are so miniscule that they rate only a footnote.

What’s odd about the funding of SS benefits with interest is that it suggests that the interest earned on the payroll tax surpluses is kept separately from those surpluses. (When you write a check, do you tell the bank to leave your deposits alone and to take the funds only from the accrued interest?) Though OASI has been cash-flow negative since 2010, its trust fund continues to grow, all due to interest.

Click on the SSA’s Annual Statistical Supplement, 2018 and look at Table 4.A1, it’s the first table and it goes back to 1937. What we see is that even at Social Security’s inception, “Net interest” was a source of receipts. And except for 1984 and ’85, “Net interest” has always been a larger source of SS receipts than has “Reimbursements from the general fund of the Treasury.”

Other than the 1980s, when the payroll tax wasn’t bringing in enough revenue to pay benefits, the only time the table shows Reimbursements getting up near the level of Interest is in 2011 and ’12, the years of the “payroll tax holiday.” But even then, Interest provided more revenue than did Reimbursements.

Using the Supplement’s Excel spreadsheet (see the upper right-hand corner), when we sum “Net payroll tax contributions” from 1937 through 2017, we get a total of $15,489,558M, while summing “Benefit payments” gives us a total of $15,099,094M. My computer’s calculator says that’s a difference of $390,464M, which was the surplus run over the 81-year history of Social Security.

That $390B surplus over the life of the program is chickenfeed when compared to the size of the OASI trust fund, which is all the way over in the right-most column. At the end of 2017, the trust fund was valued at more than $2.8T. When we subtract the $390B surplus, we’re left with a remainder of more than $2.4T. So the total “value” of the OASI trust fund is more than $2.4T more than the total surplus over 81 years. What would that $2.4T be if not interest?

But we’re not through with interest. Look back at the Receipts side of the ledger and if we sum “Net interest,” we get $2,001,853M, another $2T of interest. So it appears that SS has received more than $4T of interest, half of which was credited to the OASI trust fund and half of which was used to pay SS benefits.

Here’s what folks need to be understand about Social Security: the huge surpluses generated by the 1983 reforms are gone. Congress spent the surpluses in the years they were produced. Because the surpluses maxed out at just over $1T, Congress would have had to tax or borrow that much more. The surpluses were effectively a slush fund for Congress to spend on whatever Congress wanted, like buying votes with “free stuff.”

Congress extends the life of Social Security by depending on the sale of new debt and by tapping into other taxes, like the income tax. And the way that Congress accomplished their extension of the system is… interest. Not only that, but the interest rates “earned” by their nonexistent trust fund are quite handsome, especially considering how low other rates have been.

Consider this: rather than their trust fund scheme, what if Congress back in 1983 had instead used the SS surpluses to buy commercial real estate? Congress would have been able to purchase one trillion-dollars-worth of prime properties, all of which could be producing rents which could be used to buy yet more income-producing properties and to pay Social Security benefits. Payroll taxes could then be cut. If you find that attractive, sorry, it’s too late now as the payroll tax isn’t producing surpluses anymore. Indeed, at the current rate of spending, the OASI portion of the payroll tax will have run a lifetime deficit sometime in 2021. We’ll then be running on fumes, i.e… interest.

The worst thing about Social Security is that we don’t have any control over spending. To get control over spending, Congress should put the system on a budget. And the way to do that is to operate solely off of payroll taxes. Congress would need to decide to cut benefits, raise the payroll tax, or both. We’d then have a true pay-as-you-go system. If we did this for all the programs that have their own dedicated taxes, such as Medicare, we could end the “unified budget” system that Congress has operated under for the last 50 years.

The above idea would entail leaving the so-called trust fund “on the table.” But Democrats would wail that we can’t just walk away from the $2.8T OASI trust fund, think of the trillions in interest it’s “earned.” Such people are too addled (or dishonest) to represent you.

It’s bad enough that the taxpayer must pay twice, i.e. when he pays the payroll tax and then again when he pays income taxes that are “reimbursed” back to the SSA to pay for benefits. But it seems he’s paying a third time when he pays interest on Congress’ bogus trust fund.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.