Why Does Everyone Lie about Social Security?

Americans hate bad news. We crave the polyannish existence that has wars, famine and financial catastrophe always occur “over there” and not in our backyard. As a result, we have lots of people who would like to keep the public in their cerebral haze. Rulers everywhere know that if you keep the public from getting greatly dissatisfied, they avoid revolution.

I recall in the 1980s a study by a Stanford University professor, Michael Boskin, that being a young worker contributing to social security, I would earn a negative 3.5% annually on those funds.  Since most people cannot work a financial calculator, they don’t know this information.  The reason that young people will get less from social security than they put in is because their contributions go right back out to people who are already retired and receiving payments.
“What,” you choke?  “Someone is getting MY money?”

Yes.  Your money is not in any separate account.  What you contribute this week gets paid out to Mr. Smith or Ms. Harrison, both age 62 or older, collecting social security benefits. In just a minute I will prove this to you because we won’t have any lies in this post.

Almost daily, the press offers stories of Social Security solvency or insolvency. Why is it that the stories differ in their opinions on whether Social Security is solvent or not?

The first reason has to do with people who simply lie.  Reporters repeat information that others tell them. The information givers, and often reporters, don’t look at the facts. Politicians and others in influential positions to protect (e.g. AARP management) have incentive to lie for political reasons. Or, the information providers look at the facts,  don’t understand what the facts say, and then make public statements that are inaccurate.

Next, we have an accounting issue which I promise to explain without putting you to sleep.  Based on this accounting issue, there is this “Trust Fund” that has no cash in it.  Take the following example.
You are head of the Jones family.  You are worried about your son Frank who is in debt and continues to go deeper in debt.  Your other son, Stuart, wants to alleviate the pressure that Frank feels from you.  So Stuart lends Frank some money so that he can pay down his debts.  Now, when you look at Frank’s finances, his financial situation is better than before.

However, when you look at Frank and Stewart’s debt situation combined, you see that nothing has improved and in fact from your standpoint, having concern for the entire Jones family, the financial situation continues to erode.

In the above example, the head of the family is the American public.  The American public is worried about the total amount of government debt.  Frank, is the Social Security Administration.  The Social Security Administration on a cash basis, pays out more in benefits than it takes in from payroll taxes. It keeps going deeper in debt. That is a fact and I’ve included the table below directly from the Social Security Administration website that shows they paid out $33 billion more than they received in 2011.

Now, in order to hide the Social Security administration spending more than it takes in, the federal government, in the above example, Stewart, gives the Social Security Administration money to cover its excessive expenditures.

As the American public, does this is now make you feel any better?  Does it make you feel better that the books of the Social Security Administration show a positive balance in the trust fund yet in fact, the trust fund is made up of debt of the US government?

You now have a better understanding of the debate of Social Security solvency.  In fact, Social Security is insolvent on a cash flow basis.  That means that Social Security distributes more money each year than it collects.  How long could you do that with your family budget?  When you go to the supermarket with no cash, do they still give you food when you tell them, “but I have money in my trust fund!”

As you see, the fact that Social Security gets tons of money from the federal government does not help the issue of solvency from your standpoint as a member of the American public.  So politicians and those with vested interests will continue to construe the facts however they like for their own ends.  You now know the truth and can look up that truth any time you want for free on the Social Security Administration website and look for the table you see below: http://www.ssa.gov/oact/tr/2012/II_B_cyoper.html#96807,

In 2011, net payroll tax contributions accounted for 70 percent of total trust fund income. Net payroll tax contributions consist of taxes paid by employees, employers, and the self-employed on earnings
covered by Social Security. In 2011, approximately 13 percent of OASDI Trust Fund income
came from reimbursements from the General Fund of the Treasury. This act specified general fund reimbursement for temporary reductions in revenue due to reduced payroll tax rates for employees and for self-employed workers.

Author’s note–the situation is actually worse than the $33 billion excess cash outflow.  Do you see the $114.4 billion of interest income above?  That is money borrowed by your government in order to pay social security interest on US treasury obligations in the trust fund.  So the actual cash deficit for the social security system was $148.1 billion when you look at it from the standpoint of Mr. Jones.