Scaring Seniors With Social Security

Social Security historian Nancy Altman and my Pepperdine colleague Mark Scarberry have updated their original op-ed in light of President Obama’s Monday night speech to the nation, in which the President once again warned that Social Security checks might not go out on time if the debt ceiling is not raised. (Michael McConnell (Stanford) agrees that the President's "attempt to scare Social Security recipients is without legal foundation.")

Scaring Seniors With Social Security, by Nancy Altman & Mark Scarberry

In his Monday night speech to the nation, the President once again needlessly frightened seniors and others who depend on Social Security benefits. If the debt ceiling is not raised, he said, “we would not have enough money to pay all of our bills – bills that include monthly Social Security checks” among others.

In fact, as we have suggested elsewhere, the government bonds held by the Social Security trust funds, $2.7 trillion worth, provide the guarantee that benefit checks can go out in full and on time, whether or not the debt ceiling is raised.

Social Security’s trustees, in particular its Managing Trustee, Treasury Secretary Geithner, are entitled to demand that those bonds be redeemed – cashed in – by the Treasury to whatever extent is necessary to provide the money to pay benefits. Because the principal amount of those bonds is part of the debt that is subject to the $14.3 trillion debt ceiling, every dollar of principal paid to redeem the bonds creates room under the ceiling for the Treasury to borrow more money from the public. Enough could be borrowed back to replace all but a tiny fraction of a percent of the money used to redeem the bonds (all but the very small amount of interest that would have accrued since the semiannual interest was paid on June 30). In effect, the Social Security trust funds’ bonds would be replaced with bonds owed to the public. Nothing would be added to the total debt, and the trust funds’ bonds would be used for their intended purpose: to guarantee that benefits are paid.

There has been talk that Social Security is in trouble now, because Social Security employer and employee contributions are less than the cost of all benefits plus all administrative costs.  But those contributions are just one source of Social Security revenue. Although, as a result of the weak economy in 2010, contributions to Social Security were less than benefit payments, that shortfall was more than made up for by investment earnings.  In fact, according to the most recent Trustees Report to Congress, Social Security ran a $68.6 billion surplus during 2010. The trust funds’ holdings went up accordingly. Thus the Social Security trust funds held more assets at the end of 2010 than at the beginning.

The trustee of a private pension trust who refused to make pension payments, despite having ample trust assets, would rightly be held to account. Do the President and the Secretary believe that the $2.7 trillion in bonds held by the Social Security trust funds do not in fact stand behind the benefits that seniors and others are entitled by statute to receive? If the President and the Secretary refuse to use the bonds to let Social Security benefits be paid, they must explain why not. Are the bonds worthless? No; in fact they are obligations backed by the full faith and credit of the United States. Are there technical reasons? Any technical reasons can be overcome, if there is a will to do so.

It is not surprising that large numbers of Americans believe the Social Security trust funds have been raided.  Too many politicians refer to the bonds held in trust for American workers and their families as "just IOUs."  Too many politicians ominously caution that the trust fund assets have already been spent.  They fail to point out that whenever a corporation or government issues bonds, the understanding of both the lender and borrower is that the funds so raised will be spent, and then later repaid.

Whether the funds were spent wisely is another question.  Purchasers of bonds hope and assume that the funds will be invested to increase future revenue or used to pay down other debt; either course would make repayment of the bonds more certain. The authors are of different views about how the funds borrowed from Social Security should have been spent.  Both think that the federal government could have pursued different policies to foster a more robust economy and a financially stronger nation.  Nevertheless, the federal government has backed all of its obligations with the full faith and credit of the United States.  All should be repaid according to their legal terms, whether the owner of the government bonds is a pension trust, the Social Security trust funds, or anyone else.

In any event, this kind of irresponsible talk about “IOUs” – and about the possibility that Social Security benefits will not be paid – simply increases the cynicism of Americans toward their elected officials.  The President's failure to state clearly that Social Security has sufficient reserves to pay all benefits just feeds that cynicism.  Worse, it scares millions of Americans who depend on Social Security.  We find this deplorable, and so we say:

Mr. President, please stop needlessly scaring the millions who rely on Social Security benefits.

Nancy J. Altman co-chairs the Strengthen Social Security campaign, which consists of over 300 national and state organizations.  She is the author of The Battle for Social Security: From FDR's Vision to Bush's Gamble.

Mark S. Scarberry is a professor of law at Pepperdine University School of Law. He teaches and writes in the areas of bankruptcy law and constitutional law.  Some of his recent publications are available on his Social Science Research Network author page.