The Fraud of the Social Security ‘Trust Fund’ Exposed by a Most Unlikely Source

by Don Boudreaux on July 16, 2011

in Country Problems, Myths and Fallacies, Other People's Money, Politics, Social Security, Video

Today’s Wall Street Journal exposes the lie that is the so-called “Social Security Trust Fund” – and further reveals the disgraceful flippancy with which politicians and their go-fers mislead the public about it.  Here’s a slice:

President Obama famously played to grandma’s Social Security fears this week, saying in an interview about the debt-ceiling talks that “I cannot guarantee that those checks go out on August 3 if we haven’t resolved this issue because there may simply not be the money in the coffers to do it.”

To which a friend of ours replied, whatever happened to the trust fund?

That’s the fund that, according to our politicians, is holding all those Social Security taxes that workers pay. Why can’t Congress or Mr. Obama dip into that $2.6 trillion cash hoard to pay benefits until this debt-limit business gets sorted out? After all, as White House budget director Jack Lew put it in a February USA Today op-ed, “Social Security benefits are entirely self-financing.”

Not quite. As everyone in Washington knows, the trust fund contains not cash but IOUs. Payroll taxes don’t go to some vault in Fort Knox, and they certainly aren’t invested. When Social Security runs a surplus, Congress spends the money immediately on something else and then the government claims its owes a debt to itself. Where the money will come from to pay these IOUs is anybody’s guess—though Mr. Obama is hoping it will be higher taxes.

Trust fund balances only exist in “a bookkeeping sense,” as Bill Clinton’s budget director put it in 1999.

Ignoring the question of whether or not failure to raise Uncle Sam’s current statutorily set debt ceiling will oblige him to default on paying creditors (or, what is a different thing, to reduce his spending), clearly and unquestionably fraudulent (or inexcusably reckless) are the many claims made over the years that the bonds in the Social Security ‘trust fund’ are real wealth held by the Social Security Administration, thus protecting it and its beneficiaries from any fiscal problems that might beset Uncle Sam.

An I.O.U. that you write to yourself and that you yourself hold might be a useful accounting device, but it is not wealth.  Unfortunately, many politicians and bureaucrats enamored with Social Security lie (the word is not too strong) repeatedly about the nature of these bonds and what they imply about the solvency of Social Security.

Here’s more of what Pres. Obama’s Director of OMB, Jacob “Jack” Lew, wrote this past Spring in the pages of USA Today about the ‘trust fund’:

Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.

When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due. We have just as much obligation to pay back those bonds with interest as we do to any other bondholders. The trust fund is the backbone of an important compact: that a lifetime of work will ensure dignity in retirement.

Mr. Lew is either a liar or he is incompetent at understanding even the most basic tasks and features of bookkeeping, finance, and clear thinking.  His own boss earlier this week inadvertently gave strong evidence to this effect.

See here.

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ettubloge July 16, 2011 at 8:00 am

I have a college fund set up for my kids. Each month I deposit a note stating I am obligated to pay so much in the future. I have placed a total of $50,000 worth of these promises in the “lock box”. My plan is to increase my contribution soon so that when they start college there will be a total of $400,000 promise-to-pay notes in the trust fund.

Don Boudreaux July 16, 2011 at 8:03 am

But let yourself be convinced by Mr. Lew’s reasoning and you’ll then not be so modest. Rather than deposit a total of $400,000 in I.O.U.s to yourself, you’ll add several zeros – the sky’s the limit – to this figure! Then after paying a full ride for your kids at the Ivy League schools of their choice, you’ll have plenty wealth remaining to buy each child a French chateau and yourself, say, the continent of North America.

Martin Brock July 16, 2011 at 8:57 am

Fair warning, I don’t promise to pay. If your promise-to-pay notes seem to promise my payment, you could be disappointed.

All of my children are in college currently, all using trust fund receipts, a prepaid tuition fund bailed out by the Alabama legislature following the “crisis”. I contributed to this fund for decades prior to the crisis, and it went belly up just as my kids were starting college, but we aren’t yet so far down the insolvency road that the legislature couldn’t persuade educational resources and their financiers to accept still more promises to pay imposed on future taxpayers.

So I’m getting my bailout. You might think that you should therefore have your bailout when the time comes, but the world doesn’t work this way. Ultimately, there just aren’t enough real resources to keep all of the promises. Eventually, the can can’t be kicked any further down the road, because the road inclines upward, and the can comes tumbling back faster and faster with every kick.

We’ve already passed the trough in this road, and the steepness of the incline increases by the day. The payroll tax surplus peaked in 2008, and it has now disappeared entirely, several years ahead of schedule. The imbalance in the Social System is not unique. Countless similar systems, public and private, experience similar imbalances at this time. Demographics is destiny.

Tim July 16, 2011 at 12:31 pm


I mean no personal disrespect; however, you clearly demonstrate why it will not be possible to curtain government spending absent a major financial crisis. Because everyone was forced to pay into the system, everyone expects benefits and will never accept any politician telling them reasonably that there simply is no money. As you said….they will expect to be bailed out. Which brings me to an unfortunate tendency in Don’s writing. To think that the Social Security lie is solely or even chiefly peddled by Democrats and that Republicans would somehow be more responsible is ridiculous. Republicans have no more stomach for telling Grandma she can’t have her SS than are any Democrat.

Dan J July 16, 2011 at 4:04 pm

And, any increases in taxation to pay for ‘restoring’ the SS to full funding, would not mean money being restored, but just more ‘revenue’ for funding other projects.

Martin Brock July 16, 2011 at 6:40 pm

If the government cannot curtail spending without a major financial crisis, then we’ll have the major financial crisis, and we haven’t had it yet. Everyone expects the state to keep its promises and even to keep “private sector” promises, all on the backs of taxpayers, but it can’t.

I don’t believe that the SS lie is solely or even chiefly peddled by Democrats. The “reform” ultimately proffered by Bushniks six years ago was even worse. Basically, for most people, these proposals would have created “private accounts” filled with TIPS, but TIPS are just more entitlement to tax revenue.

And SS is only the tip of an iceberg. Only a few years ago, SS “reformers” waxed apocalyptic about a three trillion shortfall in the SS pension scheme over seventy-five years. TARP and QE1&2 weren’t even on the radar screen then. Now, we’ve added as much to the national debt in less that three years, with trillion dollar annual deficits as far as the eye can see.

Most people aren’t even aware of the bailout of my kids’ college tuition trust fund. The liability of taxpayers and other rent payers is practically incalculable.

Chucklehead July 17, 2011 at 2:20 am

Empires fall because the cost of maintaining them exceeds the benefit. Are we there yet?

Dan J July 17, 2011 at 3:31 pm

Democrats have racked up a bill in giving entitlements away to buy votes and in subsidizing their biggest special interest donors. Republicans have, in turn, racked up huge debts in the subsidization of special interest donors of their own. 2 parties, buying votes, by means of tax code. Alexander Hamilton was wrong, a limit to taxation was needed.

Bill July 16, 2011 at 9:57 am

Along the lines of your comment, here is one of the most effective pieces I’ve read.

Krishnan July 16, 2011 at 8:04 am

Perhaps this “debt limit” crisis may serve to open the eyes of the many who still believe that social security is in a “lock box” and is being “invested” for the “future”.

Social Security makes Bernie Madoff look like an amateur – yet Madoff is in jail while those that perpetrate and continue to perpetrate this fraud remain feeding at the public trough while the country is being strangled.

I hope we have indeed reached a tipping point – that there are now sufficient numbers of voters who know the fraud that is Social Security and the fraud that is “Government”.

Randy July 16, 2011 at 8:13 am

Re; Liars.

Megan McArdle nailed this one awhile back in a post in which she described the behavior of executives of corporations on the edge. They parrot the company line right up to the final press release. Everything is fine. Its always been fine and it always will be fine. They simply cannot abandon the paradigm.

I think the best analogy for the current state of affairs is that of a person who is unexpectedly laid off. We’ll go through the stages of grief, and then we’ll adapt. And my expectation is that the end result will be better than the current state of affairs. How could it not be? At present we are carrying an enormous amount of dead weight – and we have an opportunity to throw it off.

Scott G July 16, 2011 at 8:49 am

I give this post a B. B for better than I could do, but not one of your best.

Your lead sentence (starting with “Ignoring the question of…”) after the main quote is too long and convoluted in my opinion. It’s somewhat Hayekian actually (in writing style).

Your most important sentence describing what Social Security isn’t, doesn’t contain a close enough tie to the word Social Security: “An I.O.U. that you write to yourself and that you yourself hold might be a useful accounting device, but it is not wealth.” That’s a helpful sentence, but I had to go back and scan the whole post to find it. It’s not prominent enough.

In this post you’re trying to fight lies with truths. If it’s more effective and easier for people to understand, why not try fighting lies with partial truths? This quote from Hayek ( can be interpreted as justification for teaching economics using fiction (a type of partial truth), in which one trades accuracy for effect. I know it seems wrong to do this, however if you look closely at your customers and do some marketing research, you might find that they prefer a little less accuracy if the effect is much greater. By effect I mean the entertainment value, the persuasive factor, the clarity and most importantly the liberty and wealth it brings them.

After all this criticism, I still have to thank you for writing this letter, and I’ll admit just this once that parts of Studio Hayek are modeled after Cafe Hayek (not the other way around), though my Google analytics leads me to believe that one of the authors of Cafe Hayek is stealing ideas from Studio Hayek, but that might be a partial truth.

Scott G July 16, 2011 at 9:18 am


Just out of curiosity, has the GMU economics program seen an increase in demand for its services over the past few years? I wonder to what magnitude Cafe Hayek, Econlog, Econtalk and Econstories have on the demand for traditional GMU economics teaching services (in which students pay to learn from professors in a classroom). As part of your salary negotiations each year, do you try to prove that Cafe Hayek has increased the demand for traditional GMU economics teaching services?

I realize these are somewhat awkward questions, but I’m hoping that I can stimulate some more innovation in the economics profession by pointing out that by advertising one’s services on the web, by giving away blog posts and short videos, economists can become more sought after by paying customers. Jim Otteson’s Marketplace of Life book shot up to to $36 from $7 in June and July (after his Econtalk podcast and four of his videos were posted a LearnLiberty in June and July).

I think I read recently that apps (for Apple products) that are initially given away for free, produce more profit than apps that are initial sold at a non-zero price.

Krishnan July 16, 2011 at 10:03 am

(I am not Don)(!) – but I imagine that the impact of education and information exchange does not show up immediately – the rot that we are dealing with will take a long time to clean out, unfortunately – what IS important is the consistency of the message – about the free market, about trade, about comparative advantage, about what “wealth” is and so on … Till very recently, it was not possible for such messages to be created – yes, there are many books and articles extolling the virtues of the free market and all that – but they tended to circulate amongst a few … The internet has truly changed the dynamics – now provides a way to put these ideas out and hope that it takes hold – Oh yes, the loonies will ALSO do what they can to muddy the waters and play their game of how simply printing money by the Government is the way to prosperity and that trade restrictions are good for an economy and so on …

cafehayek will have to win the battle of ideas – Liberty Fund is doing all of us a favor by supporting econtalk and such blogs – I have no doubt that free market and free people ideas will win the war, even as we lose many battles time to time – Today, it seems the battles have come to the US – and even as many parts of the world have woken up to the idea of how free markets/free economies/free peoples can create wealth, we have today, in the US, a real battle against the very ideas and principles that have created so much wealth for us and the world

Scott G July 16, 2011 at 11:17 pm

Well said Krishnan. I like your description of the rot that needs to be cleaned out and the belief that the free market will win the war. I agree with you.

W.E. Heasley July 16, 2011 at 9:02 am

Excellent post!

Of the 72,000 checks Mr. Obama will not be able to send out, a portion are Social Security checks. Of those checks representing Social Security checks, since a cash flow problem has occurred for the government, then why not tap the “trust fund” temporarily as a stop gap and allow the checks to be printed and paid by the “trust fund”.


Funny how one entity being its own debtor and simultaneously its own creditor works out poorly

Chucklehead July 17, 2011 at 2:22 am

Where are the keys to that damn lock-box. Al, do you still have them?

tarran July 16, 2011 at 9:03 am

Incidentally, the Clinton era government (both Republicans & Democrats) engaged in the Enron style accounting fraud of booking loans as income. Count the tax revenue transferred from the SS account into the U.S. govt’s general account as a loan and suddenly the balance sheet looks terrible.

Daniel Richard Grayson July 16, 2011 at 10:08 am


If the social security trust fund contains T-bills, and cash is needed for benefits, then the T-bills can be redeemed, reducing the national debt. If, on the other hand, the treasury doesn’t have the cash on hand to cover the redemption (the expected case), it can borrow the money from someone else. So the net effect will be no change in the national debt. If I’m not wrong about that (let me know if I am), it seems that the debt limit need not be increased to pay social security benefits.


vidyohs July 16, 2011 at 10:28 am

DRG, I believe I see a problem with your logic.

What is the difference between a Federal Reserve Note (FRNs) that is created out of thin air and has no value in and of itself – supposedly backed by the good faith of the USAS, and a T-Bill (a piece of paper created out of thin air) having no value in and of itself – supposedly backed by the good faith of the USA and redeemable in FRNs?

You have nothing chasing nothing and redeemable in nothing.

vikingvista July 16, 2011 at 5:32 pm

“supposedly backed by the good faith of the USAS”

“Supposedly” is the operating word. The only sense that FRNs are backed by the Federal government, is that they will accept payment of taxes in them. There is no other commitment or promise with FRNs, which are not debt instruments. FRN’s are no burden to the Federal government.

T-bills, on the other hand, are an explicit commitment by the government, and therefore a burden to it if it choses to keep those promises.

But it isn’t true that FRNs are nothing. Your butcher, baker, and candlestick maker value them independent of the FRN’s relationship to the government. The efficiency of money trades over barter makes money, even fiat money, valuable.

vidyohs July 16, 2011 at 6:09 pm

VV, El Senor, no my butcher, baker, and candlestick maker do not value FRNS independent of the government, any value they assign to them is because of their faith and belief in that government.

The FRNs in and of themselves are worthless. They are pieces of paper, no more and no less. They do not have the backing of precious metals or anything else of tangible value. If the government defaults and you are holding paper…….ha ha ha… lose.

The T-Bills are also pieces of paper and are thus just as valueless as the FRNs. Any value assigned to them (promises don’t matter) are as a result of the good faith and belief in the government. If the government defaults and you are holding their paper……ha ha ha…….you lose.

Therefore, you have nothing chasing nothing, backed by nothing and ultimately redeemable in nothing…….without the fulfillment of the promise.

BTW this: “But it isn’t true that FRNs are nothing. Your butcher, baker, and candlestick maker value them independent of the FRN’s relationship to the government” just shocks me coming out of your fingers. You know better.

And this: “The efficiency of money trades over barter makes money, even fiat money, valuable.” has some truth to it but only in as long as that faith and belief remains that the FRN itself will be redeemable in tangible goods (gold, wheat, oil) of some sort.

Gil July 17, 2011 at 2:20 am

If people use gold and silver coins as currency then what backs the coins?

Chucklehead July 17, 2011 at 11:59 am

The coins back themselves with their own intrinsic value of precious metal which can not be created out of thin air.

vikingvista July 17, 2011 at 1:14 pm

“any value they assign to [FRNSs] is because of their faith and belief in that government.”

Faith and belief that the government will do what? (Please answer this, it is key to your misunderstanding).

If there is any faith in the government, it would only be that it won’t take some positive action to make you and me not want USDs–like massive inflation, or the massive violent suppression of economic activity, or the abrupt dismantling of all security and law enforcement services. The government doesn’t do ANYTHING to give USDs value. On the contrary, they use USDs, BECAUSE USDs have value.

“The FRNs in and of themselves are worthless. … If the government defaults and you are holding paper…….ha ha ha… lose.”

So you believe FRNs have value because the government doesn’t default on t-bills? You think the only reason anyone collects dollars is to buy t-bills? Since t-bills will only ever return FRNs, don’t you think that reasoning is circular?

Sure, t-bills are very popular purchase (thanks to US policitians), and removing interest in that purchase would likely remove some demand for FRNs, but not all. It would likely not even have any effect on the FR-Treasury debt-inflation scheme, since it would merely remove the pretense of debt and inflate directly, the old fashioned way.

No, vid. If the gov defaults, t-bills may become worthless, but since government default needn’t have any effect on private commerce, FRNs will retain some value. Of course, there may be other events related to default–like war or massive civil unrest or massive inflation, which could destroy commerce and the FRN, but it won’t be default per se.

FRNs aren’t JUST pieces of paper (or the digital equivalents). They are pieces of paper with a long and widely accepted tradition of being a medium of exchange, stemming from the days when they were redeemable by their issuer in a valuable commodity.

vikingvista July 17, 2011 at 1:38 pm


You’re asking why people value gold and silver. Outside of their use in money, they are valued for their use in making things. However, they have additional value in their use as money, because money has value AS money.

There is value in a medium of exchange that some people on this discussion don’t seem to realize.

Pom-Pom July 16, 2011 at 10:57 pm

I wonder why any gov securities in the SS “trust fund” contains can’t be sold on the open market. Of course then the actual interest on them would have to be paid. It seems little different than issuing new debt.

Maybe I don’t understand it.

Daniel Richard Grayson July 18, 2011 at 5:48 am

They could be. I think you do understand it.

Bill July 16, 2011 at 10:15 am

I wonder if Harry Reid ever has second thoughts about any of the statements he’s made regarding Social Security?

rjs July 16, 2011 at 10:16 am

saying the 2.4 trillion in the trust fund is worthless because it holds treasury IOUs is analogous to saying that the trillion in teasuries that china holds are worthless IOUs as well…either we pay our debts or we dont….

Don Boudreaux July 16, 2011 at 10:26 am


Every debt instrument is at risk of being defaulted upon, of course. But that fact is fundamentally different from the observation that debt instruments held by the same institution that issued those instruments are not assets (or, if you prefer, are assets exactly and necessarily exactly counterbalanced on the holders’ book by the debt these assets represent; the net increase in the institution’s solvency or assets or wealth is zero regardless of the volume of such debt instruments).

vikingvista July 16, 2011 at 3:48 pm

You once created a cartoon video about this. Do you have a link handy?

Don Boudreaux July 16, 2011 at 3:55 pm

It’s in the post above.

vikingvista July 16, 2011 at 6:00 pm

Thx. Missed it first time.

Gil July 17, 2011 at 2:24 am

I fail to see the difference other than it’s safer to default on a bunch of oldies than to tick off China.

MTB July 16, 2011 at 10:33 am


Write yourself a check with your right hand and pass it to your left hand. Did your wealth increase?

Now write yourself a check with your right hand and give it to China? Notice the difference?

If you’d like, I can draw up some T-accounts for you ;)

Jim July 16, 2011 at 1:21 pm


Exactly. This is very simple accounting. Also, constructing a future liability without investing, based on a Ponzi scheme, is illegal for very good reason.

dsylexic July 16, 2011 at 10:35 am

your iou to me is my asset and your liability.your iou to yourself is self delusion unless you think your uncle/taxpayer can help you out.

Don Lloyd July 16, 2011 at 10:35 am

All the accusations about the Social Security Trust Fund being an utter fraud are completely true, but in another sense it doesn’t matter at all.

What if the SSTF actually accumulated money, or something that can be converted to and from money, like gold?

Independent of what the contents actually consist of, in any future year in which payroll taxes fall short of benefit payout requirement mandates, the shortfall will be made up for by distributions from the SSTF, as long as it is not yet exhausted.

But what does this really mean? It means that beneficiaries see their potential purchasing power restored to the level that would have ensued if the payroll taxes had been sufficient to make the mandated benefit payments all by themselves.

OK, now let’s say somebody makes a big mistake in the future. Instead of distributing actual money from the SSTF, they accidentally distribute newly printed Federal Reserve Notes sitting idle in a Treasury warehouse.

The result : price inflation, as the new money chases goods and services all over the economy beginning with those goods and services most demanded by the SS beneficiaries.

But this differs from the normal shortfall distribution from the SSTF exactly how?

Answer : not at all. The price inflation results from an increased effective demand for goods and services meeting an unchanged supply. Newly printed money and SSTF money are both equally effective in restoring the purchasing power of the beneficiaries, allowing them to bid up the prices of what they need.

Neither the idle piles of newly printed money in the Treasury warehouse, nor the idle balances of actual money in the SSTF have any economic effect whatsoever, so which one may be used to make up the shortfall is also a case of utter indifference.

So it turns out that setting payroll tax rates above current requirements to accumulate actual money in the SSTF in an attempt to prefund future mandates would have been a complete waste of time and money, as just printing new money at the time of shortfall in the future would have worked exactly as well in the future. NOT that this would be a desirable solution!

Accumulating actual money in the SSTF from current payroll tax surpluses is exactly equivalent to burning the surplus tax money now and printing new money to replace it in the future.

However, this has the minor? problem of destroying money today which could have otherwise been invested in enterprises which produced an enhanced supply of goods and services over the entire future, improving the standard of living of most everybody.

In this light, the Congress borrowing the payroll tax surplus and spending it doesn’t look so bad, as the surplus is not destroyed. All you have to do is believe that the Congressional spending will result in a higher future supply of goods and services than leaving the surplus in the paychecks of the workers in the first place. If you believe that, there is likely no help for you.

The real problem is that SS is a defined benefit program. All defined benefit programs fail, given enough time. Prefunding cannot work over time. The real problem is a future shortage of goods and services, not a shortage of purchasing power.

The only way a trust fund might work would be to fill it with canned cat food and medical robots, actual goods to distribute in the future. But even that, why would anyone assume that it would be cheaper to buy and store goods today rather than just produce them from scratch in a presumably more productive future?

Note that accumulating some kind of high return investment in the SSTF solves nothing. There is nothing that will give a higher rate of return than new money made out of thin air.

The battle will be between workers and beneficiaries as they each try to bid away a limited supply of goods and services from the other.

Regards, Don

Jim July 16, 2011 at 11:01 am

I beg to differ with this post. Creating a fund and investing it would return an ROI. In no sane world does one pay 12% from their paycheck for 40+ years and get paid back with purposefully devalued currency.

Don Lloyd July 16, 2011 at 1:45 pm


But the ROI within the trust fund doesn’t matter. All that seems to matter at first glance is whether the trust fund is exhausted or not. If it is not exhausted, then the payout is set by the mandate for the benefits relative to the payroll tax receipts (the shortfall), even if the trust fund balance were a million times larger. If the trust fund IS exhausted, then just fill it with newly printed money costlessly produced out of thin air. No muss, no fuss.

Regards, Don

vidyohs July 16, 2011 at 10:38 am

But Don, you neglect to point out that the lies about the SS Trust Fund are just follow on lies occurring naturally as the result of the original lie that the SS program is mandatory.

What the hell, the public buys one lie, of course they buy the other, and the liars know that.

vidyohs July 16, 2011 at 12:20 pm

BTW, to all and sundry,

If there are those who doubt the veracity of this “the original lie that the SS program is mandatory”, provide me with a fax number and I will happily fax my letter from the SSA that tells the truth.


Dr. T July 16, 2011 at 7:40 pm

Social Security pay deductions have been mandatory (except for certain government workers) for decades. If you are employed by a business, you cannot opt out of Social Security. If you are self-employed, you are required to make Social Security payments. When you retire, you can choose to not apply for Social Security benefits. That’s the only opt-out.

vidyohs July 16, 2011 at 9:37 pm

Nice solid conventional wisdom answer.

Now do you want to have the letter faxed to you or not? See what the SSA says about the program?

vidyohs July 17, 2011 at 11:11 am

Additionally Dr. T., though you are typically a sharp commenter here at the Cafe, you completely missed the whole point of my post and the entire point of the truth about the SSA.

Opting out (though you’re also wrong about that as well) was not the point. The point is that there is no mandate for anyone to opt in, otherwise known as voluntarily applying for a SSN. No SSN no participation in the program because everything works off that number.

Now the situation is dire to be sure, when everyone believes the lie and is terrified about challenging that lie in court. However, let one wealthy fellow on a crusade do so on behalf of his children, take the challenge of the SSA to court with a good team of attorneys and the American people just could be freed from the tyranny of the big lie about the SSA.

The beginning of the end for the SSA is for people to know the truth that it is a voluntary program, and I know the truth. Now you do. What are you going to do about it?

Mesa Econoguy July 16, 2011 at 12:55 pm

Ok, this is real simple: there is no lockbox or trust fund. Nada. Zilch. Gar nichts.

Remember, these are the same fools who can’t stay within a debt limit, much less set one…

In my case, not only does the government steal from my paycheck, they force me to accept inferior returns. Double taxation.

As an investment professional, it’s insulting that I can’t achieve 10% return MINIMUM (with my own money) and am forced to accept 1%.

So our family is planning as though Socialist Insecurity doesn’t exist, because it doesn’t.

vikingvista July 16, 2011 at 1:48 pm

“there is no lockbox”

Fox Business yesterday ran old video of George W Bush opening an approximately 4 foot tall beige steel filing cabinet with large combination locks on each drawer. Inside were binders containing sheets of paper. One sheet was taken out and revealed, reportedly, to be a Treasury bill.

That’s right. There apparently is a literal lock box, and it really is full of IOUs.

Mesa Econoguy July 17, 2011 at 2:01 pm

Here is what’s in those drawers:

There are two general types of such securities:

special issues—securities available only to the trust funds; and
public issues—securities available to the public (marketable securities).

Note that category 1 is available only to the Socialist Insecurity “trust funds” – I.e. they don’t trade. In my mind that makes them effectively worthless.

Both of these are backed by the full faith and credit of the US Gov’t. As we are witnessing, that is not worth very much nowadays….

vikingvista July 17, 2011 at 10:19 pm

“Socialist Insecurity”

You should’ve copyrighted it, Mesa, ’cause I’m now stealing it royalty free.

Gil July 17, 2011 at 2:35 am

How isn’t S.S. simply a case of working people paying taxes to support retirees who in turn will retire and live off the taxes of the working people of the future?

Jim July 16, 2011 at 10:58 am

I’ve been waiting for the MSM to mention that Obama let his party line slip ever since his presser. However, the only way SS checks do not keep going out is if Obama stops them; current cash flow is more than enough to pay SS.

href=”″<From the Treasury department

An I.O.U. that you write to yourself and that you yourself hold might be a useful accounting device, but it is not wealth.

This sentence should read: An I.O.U. that you write to yourself and that you yourself hold is considered fraud.

Also, issuing ever more short term debt to cover long term liabilities is also illegal (and stupid) in private practice.

Jim July 16, 2011 at 11:04 am

Copy the link enclosed in quotations to see the graph on Treasury cash flows.

Sorry I somehow screwed up the link.

Gil July 17, 2011 at 2:41 am

Why is an “I.O.U. that you write to yourself and that you yourself hold is fraud”? At least in the sense that you put money away in a safe then write yourself an I.O.U. that the money you saved will stay there for the next 30 – 40 years? Hence those who are looking for taxpayer-funded S.S. retirement argue they’ve being taxes over their working lives.

vikingvista July 16, 2011 at 1:54 pm

Part of the fraud you didn’t mention:

Using the SSTF to purchase $2.6 trillion of Treasuries lowers the Treasury rates, enabling the Federal government to borrow even more.

Without the SS scheme, people would be saving at least part of those funds in a an enormously wide and dynamic spectrum of investments, following market signals.

SS is, in part, a scheme forcing those investments into Treasuries. It is the US Federal government requiring each and every wage earner in the country to buy huge amounts of US Treasuries. It is a mammoth scheme of forced financing of the government only second in scale to the creation of a central bank.

Jim July 16, 2011 at 5:29 pm

Without the Fed, the government would have had to stop running on debt decades ago.

vikingvista July 16, 2011 at 5:40 pm

True, the Fed is the major reason for the growth of government spending and debt. But passing a law mandating every working citizen to buy trillions of dollars of T-bills certainly helps extend the government debt machine.

the grizzled fractalist July 16, 2011 at 3:08 pm

All 14 trillions US debt obligations can be categorized in the same fashion as social security IOU’s..

It all electronic and paper promises. Easy to prioritize which IOU’s have the citizen’s preference to honor.

After all its not a private money system; it’s the US citizen’s monetary and debt system. They elect the politicians who make the rules; they just need to elect the right politicians.

For a few years the People have ear marked taxes for social security. With the exception of Medicare, no other taxes have been earmarked to pay off other system IOU’s or entitlements.

Maybe one of those guys who lost his job at Lehman’s could collateralize those other IOU’s as complex 3rd order derivative debt obligations, ie, debt obligations that are derivatives of the really rich suckers who opine that US citizen’s are going to pay the IOU’s back before the citizens pay themselves for their 30-40 years of labor and defined contributions.

How about that. 12 trillions dollar IOU’s of reprioritized by the citizens to ‘the lock and sealed box.’… the biggest bait and switch scam on the rich elite in history.

That would bring some jobs to the USA.

The Other Tim July 16, 2011 at 4:16 pm

Ok, I agree with the statement that the trust fund is an accounting trick and that IOUs written to oneself are not assets. However, I don’t see why this would prevent Obama from seeing to it that SS checks go out, for this reason:

If the SS administration lent their money to the treasury and got IOUs in return, then part of the national debt consists of debt to SS. Obama is objecting that he can’t fund SS without increasing the debt limit. However, to whatever extent SS cashes in these IOUs for money, shouldn’t the national debt decrease dollar for dollar, allowing the government to go out and get new debt in order to get new money with which to pay off the old debt to SS?

In other words, why isn’t paying for social security like refinancing your home mortgage with a different bank? You get new loans from a new bank and use the money to pay off the old loan, allowing the old bank (i.e., social security) to get all the money you owed them without actually increasing net indebtedness. A debt ceiling hike is only necessary to get more overall debt, not to get new debt with which to pay off the old debt.

Or is there some arcane rule buried in the law that prevents this from happening?

Pom-Pom July 16, 2011 at 11:14 pm

I think as long as the securities stay in SSTF, then they don’t function as debt, because any interest is simply internal accounting, with no requirement to fund that interest.

However, if the securities were sold on the open market for cash, then I think it would be just like newly issued and real debt, because the interest would actually need to be paid.

That is, unless the FED is the buyer of the securities on the “open market.”

The Other Tim July 17, 2011 at 3:46 pm

Yes, but for purposes of the debt ceiling, aren’t loans made by SS part of that debt?

Pom-Pom July 17, 2011 at 5:41 pm

Yes. But when held by SS, they are just ioi’s (lol, not I owe you’s), so they count for the ceiling, but yet are not “real debt” in the sense that they actually need repayment*, or that any actual interest is paid. So they don’t function as debt, even though they get counted towards the ceiling. SS is pay-go, no matter how the bookkeeping works. (It could be different if the securities held could be sold.)

DB suggests below that all new securities sold to SS by the general government are special in that they are non-transferrable (can’t be sold on the open market). He also said that they are short-term, and thus revolve often. This may well mean that any older securities are washed out, and no securities held by the SSTF can be sold on the open market.

* It doesn’t need to be functionally repaid. As old ones come due, they get “paid” at the same instant newly issued ones take their place, resulting in no net debt change. The new pays for the old. Again it works out to internal bookkeeping.

The Other Tim July 17, 2011 at 9:08 pm

Which means, from a purely legal perspective, even though the trust fund is merely an accounting trick, why can’t government simply use another accounting trick to circumvent the debt limit by refinancing the debt to SS?

I don’t agree that we should, but I see no legal reason the current debt limit prevents the government from paying out SS checks.

Pom-Pom July 17, 2011 at 9:55 pm

In theory, I suppose they could. (If I understand you, effectively remove the “non-transferable” constraint by new instruments.) They would only need to pass the law. But that means getting it by the same people who are currently rejecting issuing more “real” debt.

I actually think they will probably increase the current ceiling; the question is when and what is the particular deal.

The only advantage (to them) of doing it a sneaky way is… well it would be sneaky.

rhhardin July 16, 2011 at 4:57 pm

I’d suggest that SS is safe if we want it to be safe, which will happen when the retirement age is raised so that there are enough workers willing to support the then-fewer retirees.

It’s not an IOU problem.

The government couldn’t have a lockbox even if it wanted to. When taxes are paid in, they have to be spent or used to buy back debt so as to immediately return them to the economy. Otherwise the money supply will fall.

vikingvista July 16, 2011 at 5:58 pm

Money has to go somewhere. Private pension funds invest conservatively and only offer pensions commensurate with the expected returns. If a private pension fund were instead to loan 100% of its income to one its own massively indebted non-invested parent company, rating agencies might look askance.

rhhardin July 16, 2011 at 8:16 pm

Money doesn’t have to go somewhere. That’s the problem.

Putting it in a lockbox, or putting it in a mattress, takes it out of circulation and the money supply falls.

Social security has the general stabilizer that the retirement age can be changed at any time to balance income and expenses.

Think of it as being entitled to a certain number of average years of retirement, rather than a certain retirement age, an age which will rise as lifetimes rise.

vikingvista July 18, 2011 at 5:29 am

Of course, you’re right, one can simply lock away dollars. But transient periods of severe regime uncertainty notwithstanding, that is not a wise way to preserve one’s wealth. So, to not commit investment malpractice, yes, money must be invested somewhere. This would be the case even for a non-inflating commodity money, because of the important principle of diversification. Which, BTW, is unconscionably violated by investing 100% of the funds into T-bills.

boulderonmyshoulder July 16, 2011 at 6:20 pm

The argument offered by The Other Tim seems to make a lot of sense. When SS needs additional money to pay current recipients, they simply cash in some of their notes with the Treasury. Treasury is then free to raise that money by selling new debt to the public. However the total statutory debt has not increased because the SS portion of the statutory debt is reduced by exactly the amount of the new debt. It seems to me congress could pass a law allowing the SS debt to be exchanged for real debt, which can be used to pay bills for years to come. It would buy a lot of time for congress to figure out a way to reach agreement on spending and taxes without increasing the statutory debt limit one cent.

muirgeo July 16, 2011 at 6:44 pm

The lie is on your side Don. The very basic thing the American public needs to know is that they, out of their own paychecks, have funded $2.6 trillion dollars more into social security then social security recipients have takien out.

Then they just need to know that the excess was spent to balance the huge deficits from Ronald Reagans tax cuts. And that money from their social security was used to gund wars, medicare part D and the banking bailout ect….

At this point Medicare and Social Security have no contributed ONE penny to the debt. All the lies and confusion and mis-information comes from people like yourself sowing confusion for the general public when the matter is as simple as I explained.

The fact is the welathy have lobbied and stolen the fund from the rest of the hardworking citizens of this country and people like you have been front men and racketeers sewing confusion to benifit the Koch brothers and your other paymasters.

Greg Webb July 16, 2011 at 7:02 pm

George, I have no doubt that you believe what you say. But, you are coming across as the typical unhinged statist to those living in the rational world. I also noticed that you did not provide any objective, verifiable evidence to support your prevarications. That, however, is not surprising since your statements are false.

muirgeo July 17, 2011 at 10:28 pm


That you and John and others do not know these numbers is very scary. But indeed thanks for making my point.

Now that you know the facts what do you think of Don’s explaination of social security…. pretty misleading huh….

John Papola July 16, 2011 at 9:20 pm

That’s weird, because I thought that Ronald Reagan actually raised payroll taxes, which Social Security defenders claim are the only taxes which go to paying benefits. I also seem to recall that more broadly the US government has seen tax “revenues” increase steadily over the past 30 years, keeping within the same range as a percentage of GDP that has held since WWII.

I also didn’t realize that untaxed income of people who already pay a higher tax rate than everyone else is actually the government’s property. You have a definition of “stolen” which is quite unfamiliar to me. What percentage of government spending goes to the wealthy, again? I’m having a real hard time figuring out how you’ve arrived at this set of events given even the most simple facts.

Chucklehead July 17, 2011 at 2:49 am

Let me translate for you:
Success is evil and must be punished. It makes all the unsuccessful feel bad, so we must equalize results. Everyone should get a trophy, so as not to mar self-esteem. Never mind that the rich have served society by providing what society need, which is how they became rich in the first place. As long as one Paris Hilton exists, all wealthy must be taxed to prevent future trust fund brats. The loss of future production, wealth, and jobs will be unseen, so why should we care.
Finally, if Reagan had never been born, everything would be sunshine and lollipops. For future translations, get the Obama-speech app.

Randy July 17, 2011 at 10:10 am

It all comes down to that thing about “full faith and trust”, and I find it ironic that the politicians seem to believe that their desire to raise taxes will have a positive impact on my “full faith and trust”. I mean, its obvious, isn’t it, that the reason they want to raise taxes is because they cannot be trusted.

Rick W. July 16, 2011 at 8:44 pm

I personally think the income cap of $107,000 needs to be adjusted to keep up with inflation.
As it sits now, the employee and employer stop paying into SSI after this amount and that is not fair for the persons who do not surpass that level.
Bottom line it would go a long way to make SSI solvent and will not raise taxes on the lower incomes.
I’m sure people will argue that raising the cap is an income tax increase, but it is a tax break for the upper incomes and employers who can afford it.
Fair is fair the tax rate should apply to the smaller incomes the same way as the wealthy’s income from employment.
Thank you for allowing my comment. Rick W.

The Other Tim July 16, 2011 at 10:27 pm

Payouts scale to pay-ins. The size of an SS check is based on how much you payed in over the 30 (I think?) highest-earning years of your career. You stop paying SS on income over a certain limit because you aren’t able to increase your payout any higher.

Now, legally, SS is not a retirement account, it’s welfare, so yes, there’s no reason there *has* to be a cap on the amount of money you pay into it. Government could theoretically eliminate the cap, make you pay more in, and not give you larger benefits. But the optics of this would be very bad for SS supporters, because SS probably either would be greatly reduced or eliminated altogether if most Americans were aware that they actually have no legal right to SS money. Why pay for other people’s retirements when government could theoretically just eliminate the program before it gets to be time for other people to pay for your retirements? That money could be spent many better ways, like, perhaps, saving for your own retirement.

On another note, that tax increase would certainly *not* not raise income taxes on lower incomes. Income taxes aren’t taxes on persons, they’re taxes on the earning of income. Income is earned via trade. Trades involve two parties. Thus, income taxes always fall on two parties: the one who earns income, and the one who provides income. Provided the elasticity of supply and elasticity of demand are similarly-sloped when we analyze whatever services cause the rich to earn their income on a supply and demand graph, half of all his taxes are being paid by his “employer.”

Let’s say someone invents a super-food that eradicates hunger for the billion poorest human beings. Let’s say he earns several million dollars charging said billion poorest human beings. Any taxes on those profits are split between the millionaire and the billion poorest people on earth, with the heavier burden falling on whichever of the two, supply or demand, has the steepest slope.

The Other Tim July 16, 2011 at 10:29 pm
vikingvista July 18, 2011 at 5:38 am

“Trades involve two parties. Thus, income taxes always fall on two parties”

Yes, very good point. It is failure to understand this principle that leads many people to falsely claim that “only consumers pay business taxes”. In fact, a tax levied on a business is paid by both the business and its customers, with the tax distribution determined by the elasticities.

Cody July 17, 2011 at 1:08 am

This discussions seems a little confused. A question might be in order. What is the current federal US debt?

Answer – per – is just over 14 trillion, or about 98% of GDP. A worryingly high number, as I’m sure we all agree. But that 14 trillion includes “intragovernmental holdings”, ie, the debt in the trust fund. Debt held by the public (ie, everything else) is a hair under 10 trillion.

So. Is the debt really 14 trillion – 98% of GDP? If that 4.5 trillion held by the trust funds is REALLY a liability of the US government, then it (by definition) must be an asset to someone else. Who? The trust funds, obviously. :-)

So you get two alternate pictures:

1) The federal government is struggling under a debt burden of almost 100% of GDP. It has been running huge deficits for years as it racked up this liability, including in the Clinton years (there was no “Clinton surplus” as total debt increased every single year). Luckily (but by no means coincidentally) Social Security is doing just fine, as it holds over two trillion dollars in assets, as a direct result of the large surpluses it ran in the past (and the flip side of the coin, the large deficits the Treasury ran).

2) The federal government is not especially indebted at only around 60% of GDP. It has been running moderate deficits for some years, as well as some small surpluses during the Clinton years. Sadly (but by no means coindientally) Social Security is broke, holding no assets beyond worthless IOUs.

You can pick either option, but you have to pick the WHOLE option. If the US has 14 trillion in debt, then someone else has 14 trillion in assets, and over 2 trillion of assets are being held by the SSA. If debt held by trust funds don’t count as assets, then they don’t count as liabilities, and the national debt is under 10 trillion.

As for whether or not the US can pay Social Security checks after hitting the debt ceiling…obviously it can. The SSA hands it’s bonds in to the Treasury in exchange for cash, which the Treasury obtains by selling new bonds to the public. The Treasury simultaneously tears up the bonds it receives from the SSA, keeping the total debt under the debt ceiling. It’s the same process used to roll over maturing bonds – the Treasury pays off bond holders with cash obtained by selling new bonds. For accounting purproses we pretend the redemption and sale happen simultaneously, and the debt ceiling is satisfied. Obama is claiming otherwise either out of ignorance or (more likely) in an attempt to scaremonger.

Pom-Pom July 17, 2011 at 3:40 pm

Do you know if US securities held by the FED are also considered “Intragovernmental?” I ask because that too does not need to be “paid back.”

Pom-Pom July 17, 2011 at 3:50 pm

A little research says holdings by the FED are not counted as intragovernmental. Since I pick option 2, and say the holdings by the FED will generally go up, and never more than transiently down, that too gets subtracted from the “apparent” debt.

A.J. Lenze July 17, 2011 at 9:34 am

I just thought of a great solution to America’s current debt problems. Let’s institute a billionaires’ tax, but it will be a little different than the higher taxes on the rich that the left tout. Instead, institute a flat $100 per person per week tax on every American. This will bring in about $30 billion per week or $1.5 trillion in a year, which is about our budget deficit. Budget balanced!

Now you may be asking, why would people agree to this tax and why did I call it a billionaires’ tax? That’s the beauty of this “solution”. Every person that pays this tax will be awarded $1 billion in ten years. About $50,000 in taxes for $1 billion – what a great deal! I can’t believe that no one’s thought of this amazing solution.

kyle8 July 17, 2011 at 9:48 am

I had a lot of respect for the late Congressman Jack Kemp. He was mostly a free market type. But I can never forgive him for being a party to the creation of this gigantic fraud. He was one of the leaders in the 1980′s who was supposed to “fix” the Social Security problem and they came up with this dishonest scheme.

vidyohs July 17, 2011 at 11:06 am

As Reagan’s cabinet sec over HUD, he also over saw the largest expansion of spending in HUD ever seen. Not the fiscal conservative at all.

ArrowSmith July 17, 2011 at 1:03 pm

“creative accounting” is wonderful when Obama does it, but evil when a private corporation engages in it.

DB July 17, 2011 at 2:10 pm

Once upon a time, the social security administrator bought plain old ordinary treasuries with the revenues from social security taxes that were not needed that year to pay benefits. If that were still the case, the social security administrator could liquidate – i.e., sell – the treasuries and be sitting on a big, fat pile of cash. It could even reinvest that cash in a diversified portfolio and presto, we’d have a (partially) funded social security system.

Alas, a few years back the treasury stopped selling regular treasuries to social security and now sells only non-transferable treasuries. The social security administrator can’t sell them. They thus have zero market value, and are no more than an unenforceable IOU from one part of the government to another.

Pom-Pom July 17, 2011 at 3:36 pm

Thanks, you answered one of my questions, as I was not sure why they couldn’t be sold on the open market. (Do you have a cite for the particular legislation? I try to bookmark that stuff.)

You said they stopped a few years back. Are there older ones that could be sold, or were they all washed to non-transferrable?

DB July 17, 2011 at 4:38 pm

Pom-Pom- I’m not an expert, but I did check the social security administrator web site a couple of weeks ago (sorry I no longer have the link) which is where I got this information. SS buys relatively short term treasuries – not 30-year bonds – so the turnover is constant, and I believe that currently all of the treasuries held by SS are the “special” ones that are non-transferable. I don’t know whether the changeover was legislative or administrative discretion.

Pom-Pom July 17, 2011 at 5:44 pm

Thanks. That helps a lot. It gives the technical detail that explains why these transfers are nothing more than bookkeeping entries.

Sarah Miller July 20, 2011 at 11:52 pm

These articles by columist David Lawrence Dewey are the most fact based articles I have read pertaining to the social security problem, the jobs we have lost and why. He provides the facts and the truth. Everyone should read them.

Hello Washington Politicians…
Putting People Back To Work Will Resolve Deficit
and Save Social Security and Medicare
The Facts You Need To Know America

The Banking Meltdown – The Cause
Carter, Reagan, Bush, Clinton and another Bush…
Deregulati­on and the Slippery Road to Poisoned Assets

Dewey warned people in 2004 of what was coming concerning the financial meltdown.

The Truth About the Jobs Losses and More to Follow

He warned people again in 2008:

Job Loss Hits Records Highs

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