What happened to the trust fund?

Economist and author Allen W. Smith, Ph.D., argues that the biggest obstacle to getting clear debate on the Social Security problem is the misinformation that continues to be spread by the AARP and others who argue that the trust fund holds real assets. "It is amazing how many people, including some Social Security experts, still just don't get it!" Smith said. "Weisbrot and Baker continue to spread the myth that, 'The Social Security trust fund will have more than $3.7 trillion in today's dollars in 2018.' Unless there is a change in policy, the trust fund will not have even $1 of real assets in 2018!" (Related article: Bush's proposal for privatization of Social Security)

Smith points out that David Walker, Comptroller General of the Government Accounting Office (GAO), while speaking at a Washington luncheon, co-hosted by Centrists.Org and the Alliance for Worker Retirement Security on January 21, 2005, said, "The left hand owes the right hand, and that has legal, political and moral significance. But it doesn't have any economic significance whatsoever. There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down." "If the Comptroller General of the GAO says there is 'nothing of real value' in the trust fund, then there is nothing of real value," Smith said. "So what happened to the $3.7 trillion that so many people believe will be in the trust fund in 2018, or the $1.6 trillion that is supposed to already be in the trust fund today? The government has 'borrowed' it and made no provision for repayment of this debt." (Related article: How Social Security works and is it in trouble?)

Not so fast, says Ronald Lee, director of University of California Berkeley's Center for the Demography and Economics of Aging. He thinks that despite the accounting magic that everyone seems to use to justify their positions, "We can fix the system through incremental steps. We do not require radical reform. Now, we might or might not go the route of privatization for other reasons, and there are reasons on both sides of that. But so far as the size of the crisis or imbalance is concerned, I think it can be redressed by changing the rules here and there and keeping it basically the way it is now. For example, we could raise the normal retirement age. We could raise the threshold at which earnings are no longer taxed. We could index benefit levels in such a way that they are less generous." (Related article: Personal retirement accounts will not solve the problems of Social Security)

The Social Security surplus generated by the 1983 payroll tax increase was supposed to be used to pay down the public debt. This would have been accomplished by purchasing regular marketable Treasury bonds in the financial markets. If this had been done, the trust fund would contain real assets and it would be able to pay full benefits until 2042. However, Smith maintains that President George H.W. Bush began using the money as if it were general revenue, and non-marketable special issue government securities were issued. Smith says that President Clinton continued this practice, so every cent of the Social Security surplus that flowed in under both Bush Senior and Clinton was spent. This misuse of Social Security funds became a major campaign issue in 2000, and both George W. Bush and Al Gore pledged to end the looting. President Bush repeatedly promised not to touch the Social Security money. Finally, in his first State of the Union address, delivered on February 27, 2001, Bush said, "To make sure the retirement savings of America's seniors are not diverted to any other program, my budget protects all $2.6 trillion of the Social Security surplus for Social Security, and for Social Security alone." (Related article: Bush's real agenda for privatization of Social Security)

In casting their votes in the 2000 election, the American people, whether they voted for Gore or for Bush, were voting for a candidate who had solemnly pledged repeatedly that no Social Security money would be used for non-Social Security purposes. Smith argues that George W. Bush violated both that pledge and federal law when he spent every dollar of the $509 billion in Social Security surplus that was generated during his first term. "He continues to violate his pledge, and the law, each and every day as he spends the approximately $400 million in Social Security surplus that becomes available on a daily basis," said Smith. (Related article: Why Bush wants to privatize Social Security?)

Smith argues that the Bush privatization proposal is a Trojan horse to distract attention away from the looting of Social Security money. According to Smith, "Bush and Greenspan know that the government will face a major financial crisis beginning in 2018 when Social Security begins to run deficits, and the public discovers that there is nothing of value in the trust fund." Smith believes that "given the fact that Bush acknowledged the looting problem during the 2000 campaign, and made a solemn promise to the American people to end the practice, his misuse of Social Security money is a serious breach of the public trust," and Smith suggests that historians may refer to Bush's misuse of Social Security funds as "Bush's Watergate."

So why is Bush so bent on privatization of Social Security. It is all about rewarding those who helped Bush get reelected - the campaign contributors, in this case, from the financial services industry. Alan Auerbach, a University of California Berkeley professor of economics, who served in the early 1990s as deputy chief of staff for the U.S. Joint Committee on Taxation, which advised Congress on tax policy, seems to know the answer. "Wall Street stands to gain because they'll be managing the accounts; although they're very quiet about it because they don't view themselves as standing to gain by going public and saying privatization is really good because [they'll] get all this money. The securities industry will have more money passing through its hands. That's not necessarily a bad thing. It depends on what the rates are that it charges. If it's run efficiently, there isn't necessarily anything wrong with that," he says. (Related article: New business opportunities from privatization of Social Security)

The fact that Social Security privatization is a giveaway to the Wall Street firms is becoming pretty obvious from the silence in the financial community. While CEOs have in general endorsed the idea of privatization (though not a single CEO would speak on record), Wall Street is quietly waiting to get rich. New York State Attorney General Eliot Spitzer is someone who knows a lot about Wall Street and how it is a center of robbing individual investors, says, "You have an administration that failed to protect investors. Failed to protect them. And yet they are the administration that is saying take the safety net that we have and invest it in a system that was fundamentally broken before others stepped in to try to save it. On the one hand, they are saying the system does not need to be fixed, there was nothing wrong with it, they fought against the changes that we wanted, and then they say, 'Take your savings and put it into that very system.' Where would we be if those who are retiring had had their money in Enron and Worldcom?"

Recommended article: Bush uses propaganda to mislead Americans