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The Fraud at the Heart of Social Security
Of Two Minds ^ | 1/17/2011 | Charles Hugh Smith

Posted on 01/17/2011 12:16:03 PM PST by FromLori

To understand the fraud at the heart of the Social Security Trust Fund, we start with a very simple fact: cash can only be spent once. There are two frauds at the very heart of the Social Security system, and I am going to describe and source them in detail. After spending a number of hours poring over public data from the Social Security Administration (SSA), The U.S. Treasury and the Congressional Budget Office (CBO), and additional hours searching the Web for other published analyses, I can state with some authority that there are no published analyses or accounts of Social Security which incorporate the actual outlays and receipts from fiscal year 2010 in a context which includes the Social Security Trust Fund.

In other words, all published analyses are based either on SSA or CBO estimates, not the actual numbers from the Treasury, and all media reports I could find are simply cut-and-paste repetitions of these estimates.

I cannot find a single source which provided any evidence of digging through the data and assembling a coherent picture of the Social Security system.

The media simply repeats "conclusions" published by "official sources" based on estimates, not facts. The laziness this implies is staggering. Meanwhile, pundits such as Paul Krugman and Robert Reich, however knowledgeable and talented they may be, have obviously never performed a single minute of original data collection and analysis of the voluminous public accounts available to anyone with a computer and web browser.

If this is the best our most prestigious pundits and media resources can manage, then we truly are in dire straits.

All claims that Social Security is "secure for decades" are based on bogus fantasy-estimates, as are claims that the Trust Fund is anything but a carefully contrived fraud. I am rather shocked--and I don't shock that easily--that it comes down to me, the classic independent-journalist "blogger in old blue jeans" to actually assemble the data and draw the simple common-sense conclusions which reveal Social Security as a fraud with two components: the bogus estimates, and the bogus Trust Fund.

Here are the primary source documents for all data presented here:

A SUMMARY OF THE 2010 ANNUAL REPORTS (Social Security Administration)

CBO'S 2010 LONG-TERM PROJECTIONS FOR SOCIAL SECURITY (Congressional Budget Office)

Federal Outlays by Function, fiscal 2010 (U.S. Treasury)

Receipts by Source, fiscal 2010 (U.S. Treasury)

Let's start with the CBO report, which begins with an excellent summary of the Social Security system:

Social Security is the federal government's largest single program. About 54 million people currently receive Social Security benefits. About 69 percent are retired workers, their spouses, and children and another 12 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19 percent are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits. Social Security's outlays in fiscal year 2010 totaled $706 billion, one-fifth of the federal budget; OASI payments accounted for 82 percent of those outlays and DI payments made up about 18 percent. Here are the exact numbers from the SSA:

FACT SHEET ON THE OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE PROGRAM 53,398,000 beneficiaries

For context, the Census Bureau estimates the population of the U.S. is 312 million. So about 17% of the population draws a check from Social Security.

As anyone who has ever drawn a paycheck in the above-ground economy knows, Social Security is funded by payroll taxes. Surpluses, if any, are placed in the Social Security Trust Fund, a useful accounting fiction which is comprised of two trust funds, one for each component of Social Security: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).

The trust funds run surpluses in that the amount paid in by current workers is more than the amount paid out to current beneficiaries. These surpluses are invested in special U.S. government securities, which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit. What this description fails to explain is the Social Security surplus is transferred to the Treasury to be spent, and in exchange for the cash the Treasury deposits special "non-marketable securities" in the Trust Fund: in essence, IOUs, not actual Treasury bonds.

This "debt" to Social Security is called "intragovernmental holdings," and it is included in the total national debt, as shown here in these Treasury documents:

total Federal debt

chart of Federal debt

Here is the exact total of Trust Fund holdings via the SSA: Trust Fund Data. As of December 2010, the Trust Fund held $2.6 trillion in various non-marketable securities.

For context, note that total household net wealth in the U.S. is $54.9 trillion, according to the latest Fed Flow of Funds (see page B100)

To understand the fraud at the heart of the Trust Fund, we start with a very simple fact: cash can only be spent once. As a thought experiment, let's assume the Social Security was an actual Trust Fund rather than a simulacrum fund. The actual Trust Fund would be larger version a PIMCO bond fund.

In other words, the Trust Fund would accumulate $1 trillion in cash surpluses and invest it in bonds--just like the PIMCO bond funds. Note the word cash. Employees and employers pay their Social Security taxes in cash, out of their cash earnings and receipts. The surpluses are also cash.

The Trust Fund would then buy bonds of various maturities and types with that cash. For the sake of our thought experiment, suppose the Trust Fund were free to invest its cash in securities from major central banks, including the U.S. Treasury.

The Trust Fund would hold marketable securities which could be liquidated at will in the vast global bond market. Recall that global financial wealth is on the order of $160 trillion (estimates are just that), with U.S. households holding about a third of that ($55 trillion). So the total Social Security Trust Fund of $2.6 trillion is not all that large on a global scale.

When Social Security outlays exceeded receipts (as they did in 2010--see below), then the Fund would sell bonds for cash. Note the word cash. The U.S. Treasury and U.S. taxpayers would have nothing to do with the Fund beyond paying in their payroll taxes in cash.

Now compare that real Trust Fund with the simulacrum one we have. In the bogus "Trust Fund," the cash has been siphoned off and spent on Federal government outlays. The Fund holds no cash. Instead, it has been given IOUs "backed by the full faith and credit of the United States," the non-marketable securities.

Now what happens when the Social Security system redeems $100 billion of those securities? the Treasury goes out and borrows the $100 billion on the global bond market, and taxpayers are on the hook for the debt and the interest on that freshly issued debt.

This isn't that difficult to understand, so let's go through it again:

In the real Trust Fund, taxpayers pay in their cash, and the surplus cash is invested in marketable bonds. That cash is then withdrawn later, as needed, via the sale of bonds purchased with the cash. Taxpayers (employees and employers) pay nothing above and beyond their payroll taxes to fund Social Security.

In the fraudulent "Trust Fund," taxpayers' Social Security taxes have been squandered on other Federal expenses, and they have to pay interest on Treasury debt which is borrowed to pay their SSA benefits. In other words, taxpayers pay twice: once via Social Security taxes, a substantial 12.4% of all wages, and then they pay again to borrow cash on the bond market to actually pay the Social Security benefits.

You can only spend cash once, and filling the drained coffers with borrowed money that accrues interest is making the taxpayers pay for their Social Security benefits twice over. In effect, the $2.6 trillion in "Trust Fund" bonds are simply markers for actual Treasury bonds which must be sold, and interest must be paid on. Taxpayers will have to pony up hundreds of billions of dollars to pay the interest on that $2.6 trillion in newly issued Treasury bonds.

Here's another thought experiment. In the fraudulent "Trust Fund" we now have, when the Social Security system outlays exceed its tax-receipts income, then the Treasury sells freshly minted bonds and transfers the cash to Social Security.

If we eliminated the fiction of the Trust Fund, then what happens? The exact same thing: when the Social Security system outlays exceed its tax-receipts income, then the Treasury sells freshly minted bonds and transfers the cash to Social Security.

Since nothing is different if the simulacrum Trust Fund exists or not, then clearly it is an accounting fraud. The bottom line is the cash was spent on non-Social Security programs, and the taxpayer is thus paying for his/her Social Security benefits twice over: once in cash payroll taxes, and again to pay the interest on the Treasury debt issued to replace the Social Security surplus cash that was spent.

The second half of the fraud is the bogus estimates which proclaim a false security that is simply not backed up by facts. I'm going to run through the numbers drawn from the SSA and the Treasury; you can verify them on the links listed at the start of this essay.

Here is the "official version" as stated in the report from the Social Security trustees in August 2010:

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037. Here are Trustees' estimates for when the system's outlays exceed its income:

First year outgo exceeds income excluding interest: 2015 First year outgo exceeds income including interest: 2025 Year trust funds are exhausted: 2037 Now here are the real numbers for fiscal year 2010, alongside the SSA's estimates.

From Federal Outlays by Function:

Social Security outlays were $706.7 billion for fiscal 2010. That represents an increase of 3.5 percent or $23.8 billion over fiscal 2009 outlays.

From ESTIMATED OPERATIONS OF TRUST FUNDS: Social Security estimate of 2010 expenditures:

$586 billion OASI 2010 $128 billion DI 2010 $714 billion total

Difference: $7 billion less than estimate

From Social Security Receipts 2010: $631.7 billion

$539,996,807,141.47 receipts OASI $91,691,109,662.47 receipts DI OASI Actual 2010: $540 billion OASI 2010 Estimate of SSA: $686 billion

DI Actual 2010: $91.6 billion DI 2010 Estimate of SSA: $105 billion

Actual receipts as per Treasury: $631.7 billion

Difference between outlays and receipts: $707 billion - $ 631 billion = $76 billion shortfall for 2010

The Treasury figures are for tax receipts, while the SSA figures include $100 billion in interest from the Treasury (for the non-marketable bonds) for the OASI fund and $10 billion in interest on the holdings of the DI fund. So we add $110 billion to the Treasury's tax receipts for a total of $741 billion:

Total receipts estimated by SSA in 2010: $791 billion

Tax receipts ($631B) plus interest income ($110B) in 2010: $741 billion

Difference: - $50 billion

So the SSA Trustees had estimated $41 billion deficit (excluding interest income) and reality turned out to be $76 billion--almost double their guesstimate. Their estimate of total revenues was too rich by $50 billion as well.

If the SSA blows the estimate for the fiscal year ending in October this badly in August of the same year, what faith can we plausibly place in their estimates of what will happen in 2025 and 2037? The SSA numbers published in the August 2010 report estimated that outlays would not exceed revenues (excluding interest income) until 2015--yet outlays already exceeded income by a staggering $76 billion in 2010.

Their estimates for "First year outgo exceeds income including interest" being 2025 are suspect, too, once you examine their insanely rosy expectations of future revenues. Recall that their revenue estimate for 2010 overshot reality by $50 billion.

SSA's estimate for 2011 income is $855 billion--fully $114 billion more than the actual income logged in 2010. But wait, it gets worse: According to the SSA, the system's income for 2009 was $807 billion ($698.2 billion in the OASI and $109.3 billion in the DI). Real income was $741 billion. That means SSA income registered a massive decline of $66 billion from 2009 to 2010.

So the reality is that tax receipts fell by over $60 billion from 2009 to 2010, and they fell short of SSA estimates by $50 billion. The gap between actual tax receipts and outlays in 2010 was a monumental $76 billion.

Since the SSA's estimate for outlays was quite accurate ($714 billion estimated, $707 billion in reality), then we can take their estimate for 2011 outlays as solid: $742 billion.

Notice that is almost exactly the $741 billion revenue and interest income logged in 2010. the slightest dip in revenues and the slightest increase in outlays would mean that outlays would exceed total income in 2011, not 2025 as estimated by the SSA Trustees.

The consequences of these numbers are gargantuan. Outlays are increasing 3.5% a year or more, while receipts plummeted by 8% from 2009 to 2010, supposedly a "recovery" year in which the economy grew by over 2% per annum.

Relying on these pie-in-the-sky estimates to judge the system "secure and solvent until 2037" is a massive fraud. I invite you to study all the data presented above, and pore over the source documents at length. You will be forced to conclude the following:

1. The estimates are so far off from reality, even those looking a mere one year ahead, that they are useless if not outright dangerous/fraudulent.

2. The Social Security system's outlays are rising far faster than previous estimates and the economy as a whole as Baby Boomers retire at 62 rather than hang around to 66 to collect their full benefits.

3. The Social Security system's income is cratering, with no evidence to support the notion that the "recovering" economy is generating higher SSA receipts. Indeed, the data is conclusive: SSA income fell by a massive $66 billion decline in just one year, 2009 to 2010.

4. The Trust Fund is an accounting fiction, as its disappearance would make no change in the reality that the Treasury has to borrow money on the global bond market to fund Social Security's growing shortfalls between receipts and outlays.

The bogus Trust Fund and absurdly optimistic estimates constitute two fundamental frauds at the heart of the Social Security system. Forget the delusional propaganda estimates and look at the actual Treasury data for outlays and receipts. The system is not "secure;" it ran a $76 billion deficit in 2010, and it is on track to run a deficit in 2011 that it was not supposed to reach until 2025.

Wake up, America, and look at the data, not fantasies.


TOPICS: Business/Economy; Government; Miscellaneous; News/Current Events
KEYWORDS: debt; economy; fraud; lockbox; ponzi; socialsecurity; sosh

1 posted on 01/17/2011 12:16:05 PM PST by FromLori
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To: FromLori

There are various ways to ‘band-aide’ this up and keep sliding by but the heart of the matter is that it’s not a pension program and never was designed as such. Yet, if you asked a 1,000 Americans...the vast majority would tell you it’s your state-designed pension program.


2 posted on 01/17/2011 12:20:56 PM PST by pepsionice
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To: FromLori
Fact 1: Your U.S. Congress and Senate Persons have been SPENDING your Social Security Excesses and Replacing them with IOUs they will never pay. There is no Social Security Trust Fund.

Fact 2: Social Security went bust last year, as a record number filed for Social Security rather than re-enter the job market. There were no Social Security COLAs in 2009 and 2010. (They System is Bust)

Fact 3: Barney Frank and his friends were looking into taking your IRAs and putting it into Social Security so they could take IOUs against it. Thank God the Shellacking stopped this for now.

3 posted on 01/17/2011 12:24:17 PM PST by sr4402
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To: pepsionice

the latest leftist media meme is that illegal aliens and more of them will help ‘save’ sosh security.


4 posted on 01/17/2011 12:29:00 PM PST by WOBBLY BOB ( "I don't want the majority if we don't stand for something"- Jim Demint)
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To: sr4402

I think most on site know that but how about paying twice because of the interest?

I’m all for it ending as long as they cut my husband and myself a check for the years each we were forced to pay in BTW we had nothing to do with them stealing it from the fund. It was bad enough we had to pay for all the programs for others all those years to not get back our own money would be outright theft.


5 posted on 01/17/2011 12:33:45 PM PST by FromLori (FromLori">)
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To: FromLori

It is just not that complicated. We were over taxed. They spent the difference. Now we have to many benefit collectors and not enough benefit payers.


6 posted on 01/17/2011 12:34:48 PM PST by DManA
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To: FromLori

I have been screaming about this very fact since I was in my twenties and nobody listened. It is easier to stick your head in the sand and pretend everything is OK.


7 posted on 01/17/2011 12:35:21 PM PST by w1andsodidwe (How can you tell when the President is lying? When his lips move, of course.)
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To: Bullish; CJ Wolf; houeto; Quix; B4Ranch; Whenifhow; Silentgypsy; blam; FromLori; Lurker; ...
The-Greatest-Degeneration ping.

"Economic Holocaust" ping.

Increasing volume ping list watching the slow motion Economic Holocaust.

FReepmail me if you want on or off
The Comedian's "Economic Holocaust" ping list...


Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

8 posted on 01/17/2011 12:37:48 PM PST by The Comedian ("Extremism in the defense of liberty is no vice" - B. Goldwater)
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To: DManA

Make that DOUBLE taxed..

“In the fraudulent “Trust Fund,” taxpayers’ Social Security taxes have been squandered on other Federal expenses, and they have to pay interest on Treasury debt which is borrowed to pay their SSA benefits. In other words, taxpayers pay twice: once via Social Security taxes, a substantial 12.4% of all wages, and then they pay again to borrow cash on the bond market to actually pay the Social Security benefits.”


9 posted on 01/17/2011 12:43:47 PM PST by FromLori (FromLori">)
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To: The Comedian
What's in store for America's retirees (Fancy Feast?)
10 posted on 01/17/2011 12:45:32 PM PST by FromLori (FromLori">)
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To: FromLori

Ignore the bonds. They are the macguffin in the story.


11 posted on 01/17/2011 12:47:42 PM PST by DManA
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To: FromLori

The SS emperor wears no clothes.


12 posted on 01/17/2011 12:50:00 PM PST by RoadTest (Religion is no substitute for the relationship God wants with you.)
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To: FromLori
cut my husband and myself a check for the years each we were forced to pay in

Yeah, but the money's gone, Lori.

No one under 60 is going to see any significant fraction of what they paid in.

Time to cut our losses and move on.

13 posted on 01/17/2011 12:56:48 PM PST by Notary Sojac (We have had three central banks in America's history: two of them failed and so will this one....)
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To: FromLori

I give this information to friends, family and acquaintances on occasion. I have found that for the most part, they would rather believe in the tooth fairy. Amazing.


14 posted on 01/17/2011 12:57:48 PM PST by Wicket (God bless and protect our troops and God bless America)
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To: Notary Sojac

We’re close to that age right now and we’re talking about almost a quarter of a million dollars we paid in between us and that’s not counting any interest we could have earned. Sure it’s gone but that’s not our fault they stole it and used it. As long as our government can kick out money for bank bailouts and big farm subsidy’s for ethanol as well as all the other socialist programs we also were forced to contribute to through the years they can pay us back.


15 posted on 01/17/2011 1:06:19 PM PST by FromLori (FromLori">)
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To: FromLori

Nice article; nice breakdown; nice explanations...

But....

Point # 1:

If the vast majority of the people don’t know what’s happening, they’ll continue to believe that their SS benefits will be there at retirement age.

Point # 2:

Though the writer of the article went to great pains to explain thoroughly what was happening with SS, the fact remains that, even as written, most people would get lost in trying to follow the numbers and the twists and turns of how money flows through government machinations. Thus, a much clearer and easy to follow article would be needed to get the people “informed” and out of the dark.


16 posted on 01/17/2011 1:17:22 PM PST by adorno
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To: adorno
Thus, a much clearer and easy to follow article would be needed to get the people “informed” and out of the dark.

How about:

1. The SS trust fund was loaned to the US government.

2. The US government is $11 trillion in debt.

3. You can't get blood from a turnip.

17 posted on 01/17/2011 1:24:18 PM PST by SeeSac
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To: FromLori

Send this analysis to Rep. Paul Ryan.

Perhaps his office can make up some simple charts to stick in front of all the politicians that have stolen our SS cash for years!


18 posted on 01/17/2011 1:38:10 PM PST by Noob1999 (Loose Lips Sink Ships)
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To: FromLori

My left pocket is paying my right pocket 5% on money it borrows and I’ll be able to retire on those earnings when I get older.


19 posted on 01/17/2011 1:39:11 PM PST by AmusedBystander (Republicans may have helped drive the economy into the ditch, but Obama is driving it off the cliff.)
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To: SeeSac
How about:

1. The SS trust fund was loaned to the US government.

2. The US government is $11 trillion in debt.

3. You can't get blood from a turnip.


Nice, but still evasive.

But, your "simplified" retort started out with "SS trust fund", and most people would be lost right there. Then there's the matter of $11 trillion (it's really 14 trillion now) and most people wouldn't even begin to understand what the number means nor what the national debt means. Then, there's that "blood from a turnip" thing, and, most people would be asking about the relevance to the real matter of SS going broke and probably not getting their benefits when their time to retire arrives.

Remember that, most people aren't as clued in as you and I might be.
20 posted on 01/17/2011 1:55:23 PM PST by adorno
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To: FromLori

People, and I mean congressmen/women who caused this situation should be going to jail.


21 posted on 01/17/2011 2:43:04 PM PST by New Jersey Realist (Congress doesn't care a damn about "we the people")
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To: FromLori
FromLori said: "Sure it’s gone but that’s not our fault they stole it and used it. "

Well, if you voted for liberals to continue spending the "Trust Fund" during your productive years, then it is your fault.

If you voted for those who would have eliminated the excess spending, then it may not be your fault, but the media is going to see to it that you get the blame when the checks stop arriving. The multitude of the "entitled" will be told that the mean, old conservatives are threatening to starve them rather than raise taxes to pay these "obligations".

One way or another, you will be found responsible.

22 posted on 01/17/2011 4:13:35 PM PST by William Tell
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To: FromLori
I think most on site know that but how about paying twice because of the interest?

There is no interest gained in Social Security as there is no Social Security Trust Fund. We actually loose interest on it due to inflation.

we had nothing to do with them stealing it from the fund.

The Congress Critters have been pilfering the Security Security excesses through IOUs just as I said. It is just about outright theft!

23 posted on 01/18/2011 4:35:07 AM PST by sr4402
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