Yes, Social Security really is going bust

by Joel McDurmon

Gary North writes,

I want to talk about the inevitable bankruptcy of the Social Security system. I have made this case publicly for 35 years.

The beginning of the bankruptcy began in fiscal year 2010. Early in that year, I produced a 90-minute video predicting that this would happen before the end of the fiscal year.

There are those who deny that the system is going bust. We find on the Internet articles by people who still believe in the Social Security system. They go to readers and tell them that anyone who says that the Social Security system is going bankrupt is misleading them. They come in the name of truth, justice, and the American way, pointing the finger at those of us who are very specific about the nature of Social Security’s financing, and who are also very specific that the system not only will go bankrupt, it has already begun to go bankrupt statistically, meaning from the point of view of standard economic analysis.

There is a continual stream of these articles. They have four or five points, always the same, and all of them are wrong. They are so blatantly wrong that it astounds me that anybody writing such articles could believe what he is writing.

This leads to a question: Is the writer simply a liar, or is he just an economic ignoramus? There is no middle position on this. Either the person is deliberately attempting to deceive naïve readers, or else he is a man who has himself been deceived by other defenders of Social Security. He understands so little about economics, as well as accounting standards, that he believes the lies that have been told in public by other defenders of the Social Security system.

At the heart of every defensive of Social Security’s actuarial solvency is a series of lies. It is difficult to know who started the lie, but if you follow the lies, you always get back to the truth, and the truth is admitted by the Trustees of the Social Security trust fund.

WHAT DO THE TRUSTEES SAY?

Always demand from the person who tells you that Social Security is not going bankrupt that he show why the Trustees of the program are lying. Because, if what he says is true, then the Trustees are lying. It is always a bad position to be in when you accuse the directors of the program you are attempting to defend as being nothing but systematic liars. Yet that is what defenders of Social Security are implicitly saying, because what they are saying is categorically refuted by what the trustees have said.

So, I begin with the official statements of the Trustees of the Social Security trust fund. You must judge all defenses of Social Security written by journalists in terms of what the Trustees have said about the solvency of the program. Don’t just take my word for it. Take the Trustees’ word for it.

THE TRUST FUND’S DEFICIT

Here is the assessment by the Trustees in their 2012 Annual Report. They tell us that the program is producing a deficit.

In 2011, Social Security’s cost continued to exceed both the program’s tax income and its non-interest income, a trend that the Trustees project to continue throughout the short-range period and beyond. The 2011 deficit of tax income relative to cost was $148 billion, and the projected 2012 deficit is $165 billion. The sizes of these deficits are largely due to a temporary reduction in the Social Security payroll tax for 2011 and 2012. The legislation establishing the payroll tax reduction also provided for transfers from the General Fund of the Treasury to the trust funds to “replicate to the extent possible” revenues that would have occurred in the absence of the payroll tax reduction. Including these general revenue reimbursements, the 2011 deficit of non-interest income relative to cost was $45 billion, and the projected 2012 deficit is $53 billion (page 2).

Where did the money come from to offset the deficit? The Trustees were quite clear: “transfers from the General Fund of the Treasury to the trust funds .”

The Department of the Treasury invests trust fund assets in interest-bearing securities of the U.S. Government. In 2011, the combined trust fund assets earned interest at an effective annual rate of 4.4 percent (pages 6-7).

This means that the U.S. government pays all interest payments received by the trust fund. The trust fund has no other source of income except these: (1) FICA taxes, (2) interest payments from the U.S. government, and (3) sale of government-issued nonmarketable IOU’s in the trust fund back to the government, which alone can legally redeem them, and which then must come up with the money to redeem them.

Assets of the trust funds provide a reserve to pay benefits whenever total program cost exceeds income. Trust fund assets increased by $69.0 billion in 2011 because total income to the combined funds, including interest earned on trust fund assets, exceeded total expenditures.

The question is this: How much money was paid by the government to the trust fund? We learn the answer on page 2.

Total income was $805 billion, which consisted of $691 billion in non-interest income and $114 billion in interest earnings.

The General Fund paid $114b in interest. The trust fund grew by $69 billion, which means that the pile of IOUs issued by the government grew by $69 billion. This also means that there would have been a $45 billion deficit ($114b minus $69b) if the General Fund had not kicked in $114 billion. So, if it were not for the money paid by the General Fund as interest — whose rate is set by the Treasury, not by the free market — the trust fund would be in an accounting deficit. This was admitted by the Trustees.

Annual OASDI cost exceeded non-interest income in 2010 for the first time since 1983. The Trustees project that cost will continue to exceed non-interest income throughout the 75-year valuation period (page 10).

Did you get that? Without interest payments from the government, the trust fund will be in negative cash flow for the next 75 years.

The Trustees say there is no immediate problem for the trust fund, as long as the government keeps paying interest. But there will be a problem.

Nevertheless, total trust fund income, including interest income, is more than is necessary to cover costs through 2020, so trust fund assets continue to grow. Beginning in 2021, cost exceeds total income and combined OASI and DI Trust Fund assets diminish until they become exhausted in 2033 (page 10).

Did you get that? Exhausted. That is another word for “bankrupt.”

Then what will happen? . . . .