Half-truths can be as deceptive as outright lies. The Democrats are using a half-truth in their propaganda campaign to block President Bush's effort to reform Social Security. Unless the other half is explained, the prospects for reform are bleak.
The half-truth is that the so-called Social Security trust fund is flush with real assets. It is true that Social Security has assets beyond its current receipts. Those assets are government bonds. A bond is a debt instrument, guaranteeing its holder the right to be paid. Think of it as an account receivable, whose payment is guaranteed by the full faith and credit of the United States. So, if we stop our analysis here, we are led to believe that there are enormous assets set aside that are earmarked for the payment of Social Security benefits for that time in the future when payroll tax receipts will be insufficient to fund benefits.
But to comprehend the full picture, we must understand the significance of the fact that the government is guaranteeing payment of the bonds – and how these bonds were created in the first place.
Historically, the ratio of payroll taxpayers to beneficiaries was such that payroll tax receipts far exceeded Social Security benefits. But instead of putting this surplus money aside in a trust fund to finance benefits down the road (when current payroll taxes will fall short of benefits paid out), the government used it to pay for big-government programs it otherwise couldn't afford. In exchange, the government issued bonds – promises to repay the money in the future.
It may sound comforting that the government guarantees the bonds, but it is misleading because money doesn't appear out of thin air, even government money. The money must come from somewhere. No matter how you cut it, the money will come from general-revenue taxpayers, the same people who have already been taxed on this money (as payroll taxpayers). It's one gigantic shell game because the Social Security assets (the bonds) are offset by an equal government liability.
Let's consider a private-sector analogy. Assume that an individual owned two separate corporations and that one of them borrowed all of the funds of the other (in exchange for bonds). The owner could claim that both corporations were robust with assets and that he was rich. Unless we understood that the bonds would have to be paid off with assets from this person's other corporation, we would have a distorted view of the individual's wealth.
The assets of one of his corporations (the bonds) are negated by the liability of the other, just like the Social Security bonds are offset by an equal liability that will be born by the general revenue taxpayers. And, the general revenue taxpayers are the same people as the payroll taxpayers.
So, yes, Social Security bonds are assets held for the benefit of Social Security recipients. But when you consider the liability side of the ledger, these assets are shown to be illusory because the bonds can only be paid off by increases in taxes (payroll or otherwise), reductions in Social Security benefits or other government services, or further government borrowing. The people will be paying themselves back in one form or another.
It would be different if the Social Security bonds were to be paid not by the government, but by third parties. Then their payment would not constitute a depletion of government assets. That would be the case had the government invested these surplus funds, instead of greedily and irresponsibly throwing them down the rat hole of government largesse.
The time is rapidly approaching when Social Security Benefits will exceed payroll-tax collections (2016). Shortly thereafter (2038), the interest on the bonds will be depleted also and, absent major structural reform, the government will have to pay off its own bonds. And taxpayers, as usual, will be left holding the bag.
President Bush, his bipartisan Social Security reform commission and most congressional Republicans want to do something to avert that result. They want to allow taxpayers to set aside part of their payroll taxes into private accounts – which will be invested in assets that can be redeemed without punishing future taxpayers.
Democratic leaders are trying to mislead us when they imply that Social Security assets are like other assets. If they admitted the rest of the story, they would have no legitimate reason to oppose bipartisan reform.