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A lock box full of dusty promises

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By Jim Flynn

Some wag observed recently that the way we’re running the federal budget, in a few years all we’ll be able to afford is a nation of senior citizens on Social Security, protected by the best army and navy in history. Not funny.

President Franklin Roosevelt signed the Social Security Act (SS) in 1935. The program required payment of one cent per dollar up to a maximum contribution of $30 each for employee and employer. The first benefit recipient started to receive a monthly check of $22.54 in 1940.

The first tax increase became necessary in 1950.  Just six years later, in 1956, a disability benefit at any age was added, without any tax increase. Was that a paid entitlement or a freebee benefit designed to get votes for members of Congress?

In 1961 early retirement at age 62 was added, with no increase in the FICA tax, another case of Congress trolling for votes in anticipation of the next election.

By 1975, monthly Social Security benefits were lagging behind inflation, so Congress voted annual cost-of-living adjustments (COLAs), without any tax increase to pay for them. Incumbent members of Congress were very popular in the fall election. 

In just two years, the political generosity of the 1975 COLA adjustment bumped into fiscal reality. In 1977, the SS benefit formula had to be changed. Taxes were raised because of a shortfall. Twenty years of making promises it might not be able to keep were catching up with Congress.

So in 1977, Congress appointed a separate, independent national commission (the Greenspan Commission) to consider “fundamental, long-term changes in the entire Social Security system.” 

In 1981, the Greenspan Commission told Congress there was “a short term problem, ” probably the understatement of the century.

The Greenspan Commission findings resulted in significant 1983 amendments to the SS Act – a graduated increase in the retirement age, inclusion of federal employees, taxation of benefits, and a goal to build up the “Trust Fund” reserves.

From time to time, there has been discussion about whether there is a “Trust Fund.” In reality there are three funds, but that’s unimportant. What’s important is what is and isn’t in the funds.

Because of the 1983 amendments, contributions have exceeded benefits by substantial amounts. All the excess FICA taxes have been spent by Congress. In return the U.S. Treasury has given the funds “special issue” IOUs.

For a time there was silly talk about a “lock ox,” where all the IOUs were supposedly kept. A persistent reporter finally tracked it down – a filing cabinet at SS Administration headquarters. In the filing cabinet was a ledger in which entries were made of amounts Treasury owes the SS funds for money taken and spent by Congress. No T-bills, no promissory notes, no IOUs.

To quiet the concern created by discovery of the lock box deception, Treasury now provides paper securities, meaningless promises between branches of the same government. Congress still controls who gets what annually.

In addition to studies funded by Congress, every White House administration has appointed a four-year study and report of Social Security, as required by law. The key conclusion every year is “The boomers are coming!”

There are some quick fixes – raise the salary cap, cut inflation adjustments, and change the spousal benefit. Because of the state of the economy, there will be no COLAs for the next three years, which will slow down the outflow temporarily.

Studies have produced all sorts of plans to fix the system, but Congress becomes dyslexic at the thought. They’ll do anything to put off coming to grips with promises the nation can no longer afford. Of course, their primary concern is that those who fool around with SS don’t get re-elected.

Right now, unemployment is affecting SS income. Next year’s expected surplus of $85 billion will be just $3 billion. Payouts will exceed income in 2016, several years sooner than anticipated. And the IOUs will run out by 2037.

If Congress does nothing between now and 2016, their alternatives to redeem the IOUs in the trust funds are to increase FICA taxes substantially, borrow real money, or print more dollars. The current Congress may have the courage to raise taxes, but our guess is the 2016 Congress will wimp out, print more money, and hope for an economic miracle. 

Jim Flynn was formerly a corporate counsel, served in military intelligence during the Korean War and once aspired to be a newspaper columnist.