Paul L. Caron

Thursday, July 28, 2011

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.

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Are you kidding? The oldster community, and their proxy are huge Obama supporters and Democrats. They consistently demand their due from the government at the expense of the young. You need to take a closer look and not just assume "old people" are Republicans or Conservatives. Besides, you are surprised about all this? Heck, I'm 51 and have known for 30 years it's unlikely I'll get anything of value out of SS, where have you been? Under a rock?

Posted by: RC | Jul 29, 2011 7:52:22 AM

jmharper fails to realize that Social Security has been, and always will be a Ponzi scheme. That's the way is was designed. Current workers pay benefits for retirees. You have no vesting on any of the taxes you paid into the system, and the federal government can END the system tomorrow and you are SOL.

Posted by: Dr. K | Jul 29, 2011 4:59:36 AM

"Backed by the full faith and credit of the US" Basically saying that they replaced our money with IOUs that are just as good as money. Just like any investment, they promise to pay you that money back, but, in this case, they have been so fiscally irresponsible that they may not be able to back those bonds. There should be enough going into the Trust fund to cover the outlays to SSA though so i agree, it's deplorable scare tactics.

Posted by: Ryan | Jul 29, 2011 4:44:20 AM

I'm sorry, but I just can't look upon the $68.6 billion in the SS trust fund at the end of 2010 as either a "surplus" or "earnings" on "investments" (this is the kind of thinking that gave us the Clinton "surplus"). It's interest that we owe ourselves because we've had to raid that trust fund to meet our general budget and debt service obligations. Now that SS is taking in less than it's paying out, we no longer have that option meaning we'll have to go public for more borrowing plus we'll have to start making good on those special issue bonds. With interest. No problem.

Your argument is basically the same the Democrats make when they claim SS is fully funded until 2035 (or there abouts). It is not "funded" until and unless we make good on those bonds.

Posted by: SukieTawdry | Jul 28, 2011 9:51:43 PM

Can Obama order Treasury to collect payroll taxes as usual but not provide them to the SSA?

If he can, and I understand this all correctly, the SSA would be forced to make all its payments from the redemption of trust fund bonds. Seniors would still get their checks, but the trust fund would burn away, and since this would represent retired debt, Treasury could sell new bonds to match the SSA outgo and effectively ignore the debt ceiling for, I figure, 3-4 years before the trust fund is drained.

Posted by: jms | Jul 28, 2011 7:00:48 PM

I see. The Social Security trustees can liquidate the deposits I made into the system in order to pay the current fossils. This will go along with their completely unfunded prescription drug benefit that I also will get to pay for.

Its good to know that Republican contituencies MUST be allowed to continue their fantasy life where the only justifiable federal expenditures are for them.

Posted by: jimharper | Jul 28, 2011 5:27:50 PM

I love the liberal "Ryan gutted Medicare" myth ...
Ryans plan doesn't touch Medicare until 2022 (i.e. if you are in it now you will never see any difference) ... Obamacare cut 500 billion from Medicare starting in 2014 ... that means in 2014 CURRENT Medicare recipiants will see changes ...

ignorance is a poor excuse for stupidity but I have to assume its the liberals default position ...

Posted by: Jeff | Jul 28, 2011 2:09:52 PM

we are not on a gold standard ... we print money or more accurately the Tresury just says there is more money in circulation ... poof like magic its exists ...

Posted by: Jeff | Jul 28, 2011 2:07:01 PM

the Treasury cannot bounce a check ... if they write a check its good ... they magically print new dollars if their account doesn't hold enough ...

How do you think they bought over a trillion dollars in bonds during QE1 and QE2 ?

Posted by: Jeff | Jul 28, 2011 2:03:56 PM

In response to jmike, yes, the bonds by law are backed by the full faith and credit of the US. Because the bonds are already part of the debt subject to the debt ceiling, redeeming them and issuing replacement bonds to the public does not cause the debt ceiling to be exceeded. The money obtained from the public when the replacement bonds are sold can be used to replace the money used to redeem the bonds.

The law prohibits such redemption of trust fund bonds except as needed to pay social security costs. Thus this can't be done to provide net funds for other programs. But it can be done at very little cost to provide money to pay soc sec benefits.

In fact, my initial thought was that the special issue bonds could be swapped for marketable bonds, as you suggest, which the soc sec trustees then could sell to raise the needed funds. That could be done. The trust funds have held marketable bonds in the past. But doing so requires some additional complexity, it seems, as opposed to redeeming bonds and selling new ones to the public. The end result is identical: (1) the soc sec trust funds hold fewer bonds; (2) the public holds more; (3) the sale of new bonds provides the funds, directly or indirectly,for payment of soc sec benefits.

Posted by: Mark Scarberry | Jul 28, 2011 1:27:56 PM

These arguments are rather pointless, aren't they?

As "jmike" has noted, the outgoing checks are for cash which must be found.

If the current members of the executive branch want to maintain "full faith and credit" they have to act like it and they haven't and don't even seem to care.

I do take the authors' point that exchanging SS promissory notes for T-bills is allowed within a debt ceiling but that the Administration would STILL want to borrow and spend on some other purpose.

Posted by: whitehall | Jul 28, 2011 1:21:47 PM

Too funny to see the right wing nutters bashing Obama over Social Security while they tried to ax Medicare in the Ryan Plan earlier this spring.

Fact is, Social Security has been commingled with the general funds for a long time. If Treasury doesn't have the cash, there will be no SS checks sent out. Obama was speaking the truth.

Posted by: Anonymous | Jul 28, 2011 12:39:07 PM

He doesn't care about the law - just rhetoric and inciting riots in order to get his way. Me thinks that all he is doing is attempting to incite a group that has lots of time to make phone calls and write letters....then there's the sympathy/anger group that gets all worked up because it believes Republicans are trying to starve poor sweet little grandma. BO makes the herd nervous and let's his minions in the MSM spook it into a stampede.

Posted by: AT | Jul 28, 2011 12:19:43 PM

If Obama wants "shared sacrifice," let him start by cutting off his own paycheck. At least the seniors have earned theirs.

Posted by: Woody | Jul 28, 2011 11:52:43 AM

If these special-issue "bonds," supposedly backed by the full faith & credit of the US (is there language to that effect on the debt instruments?) amount to something more than an intra-governmental accounting device, then why not swap them for marketable T-bills? The authors miss the point that the holder of this paper is not permitted to assign or convey it, and has no legal recourse that I know of to enforce payment. With all the talk now occurring about default upon the Treasury's real commercial paper, I do not understand how the authors can value this stuff equally to or more highly than any other US indebtedness. Of course we should not default, but that's a moral position, not a political one.

Posted by: Jim Shuey | Jul 28, 2011 11:31:30 AM

Having Social Security reserves doesn't mean anything if the cash balance isn't in the Treasury. Those government bonds can't be redeemed if Treasury doesn't have the balance to redeem them.

Posted by: jmike | Jul 28, 2011 11:31:15 AM