02/20/2011The biggest theft of investment assets was not done by Bernard Madoff. It was done by the Congress of the United States. It was not done by Democrats alone, nor was it done by Republicans alone. It was a concert of malignant bipartisanship.
The subject here is the well-deserved distrust we have for our elected representatives. Until that trust is restored it is unlikely we will fix the problem of ballooning government debt.
This column is not about politics. It is about our collective personal finances. It is about the most important source of income most Americans have when they retire, Social Security. Here's the story.
Only three weeks ago the Congressional Budget Office released a report telling us that Social Security would operate at a deficit indefinitely.
This isn't how it was supposed to be. Social Security was reformed in 1984. After running as a pay-as-you-go program for its first half-century, the employment tax was increased enough so that it would produce a growing surplus for Social Security. The program, we were told, was sound until 2060.
Well, not quite. It is 2011, not 2060.
Workers from 1984 onwards paid more employment taxes than were necessary to pay retirement and disability benefits. Our excess money was to be invested to build a real trust fund. The accumulated assets in the fund would be there to help cover the surge in benefit payments when the baby boomers started to retire. That would be about now.
The extra money we paid in during those years wasn't a minor sum. Accumulated with interest, it amounts to $2.6 trillion. Every dime was "invested" in U.S. Treasury obligations. So what happened to the actual money?
It was spent.
While Democrats worked to increase spending, Republicans worked to reduce taxes. Both were successful. The malignant result is that our retirement money was used to support other government spending.
Now Social Security needs cash to pay promised benefits. This is not how it looks on the books. The Social Security Trustees Report for 2010, for instance, estimates that the program will cost $729.6 billion this year. Income for the year is estimated to be $840.8 billion, including $118.1 billion of "interest" on trust fund assets. That sounds like a healthy surplus -- $111.2 billion. Indeed, total income for the program is projected to exceed costs until sometime between 2020 and 2025.
What's the problem?
The interest income is funny money. It is not cash. It is a book entry, an IOU from the Treasury. On a cash basis -- taxes in, benefit checks out -- the program is in deficit. When Social Security asks the Treasury for actual cash, the Treasury won't have it.
So where can the Treasury get the cash? It can borrow it from someone else -- like China. Or it can ask the Federal Reserve to expand the program of "quantitative easing" and print money. Worse, it will be doing this year after year because the trust fund, functionally, is a fraud. Every dime of the $2.6 trillion of contributions and credited interest will have to be borrowed, printed or raised in new taxes.
Having taken our money under false pretenses for a quarter-century, both parties are now discussing ways to reduce future benefits. So workers were overtaxed for all those years. Then they will suffer a back-door tax -- a tax that won't be called a tax -- when their future benefits are cut.
Anyone who worked during the last 25 years could have invested his or her excess contributions to create real income security. I estimate that the Congress of the United States owes the average worker nearly $18,000. A worker at the top of the wage scale would be owed $43,000. (My calculations assume that the extra tax money from both the employee and employer portions of the employment tax was invested to earn the yield of a five-year Treasury note.)
This is not chicken feed. For each worker it is about three years and four months of the employment taxes they currently pay.
I believe that until this stolen money is returned, we have no reason to trust anyone who holds public office. Anyone. Either party. This isn't about politics. It is about trust.
Do I speak for you? Let me know, either way. Send a note to email@example.com. Put "That's how I feel" or "You're wrong" in the subject line.
SIDEBAR: SHOW US THE MONEY!
Here are concrete steps Congress should take to make things right.
First, members of the Congress of the United States need to make a formal apology to the American people. Failure to do so will be an indication that they still don't get it, regardless of party. We need to see some genuine remorse at what they have been doing for 25 years.
Second, to show their sincerity, they need to make reparations to workers, providing each worker with a refund of all excess payments, with accumulated interest. The refund would be in the form of a marketable U.S. Treasury Inflation Protected Security obligation. It could be saved for retirement, used to pay down consumer debt, or sold and spent willy-nilly. However it is used, the total transfer -- about $2.6 trillion -- will be a fraction of the trillions more committed in the ongoing bailout of our irresponsible financial institutions.
Third, put Social Security on a genuine pay-as-you-go basis, with rolling adjustments to the employment tax. This would reassure present and future retirees and stand as an annual renewal of the compact between generations made in 1935. It's the only way we will get what we pay for.
HOW MUCH THE AVERAGE WORKER LOST TO THE EMPLOYMENT TAX OVERCHARGE
This table is based on the Average Wage Index used by the Social Security Trustees and calculates the amount of excess employment taxes paid each year (employer and employee portions) and the interest this money would have earned invested at the yield of the five-year Constant Maturity Treasury Index.
Year Surplus Paid In Interest Year End Cumulative
1984 $51.23 $3.14 $54.37
1985 $89.34 $10.02 $153.73
1986 $128.99 $15.93 $298.65
1987 $177.85 $30.77 $507.28
1988 $326.88 $56.88 $891.04
1989 $382.10 $91.98 $1,365.12
1990 $441.94 $132.76 $1,939.81
1991 $325.12 $154.94 $2,419.88
1992 $255.52 $157.70 $2,833.10
1993 $195.20 $150.64 $3,178.94
1994 $256.68 $221.26 $3,656.88
1995 $244.38 $241.10 $4,142.36
1996 $296.59 $265.16 $4,704.11
1997 $398.50 $304.99 $5,407.60
1998 $499.51 $291.35 $6,198.47
1999 $658.31 $362.28 $7,219.07
2000 $737.73 $467.42 $8,424.21
2001 $721.41 $400.59 $9,546.22
2002 $666.45 $377.39 $10,590.06
2003 $552.24 $322.73 $11,465.03
2004 $554.21 $402.76 $12,421.99
2005 $616.69 $515.58 $13,554.26
2006 $678.81 $659.95 $14,893.02
2007 $626.00 $673.63 $16,192.65
2008 $505.86 $460.48 $17,158.98
2009 $55.42 $378.11 $17,592.51
2010 $-- $339.54 $17,932.04
Sources: Social Security Trustees Report, Federal Reserve, author calculations
On the Web:
The CNN Bailout Tracker: http://money.cnn.com/news/storysupplement/economy/bailouttracker/
Social Security Trustees Report (Table VI.F7): http://www.ssa.gov/oact/tr/2010/VI_OASDHI_dollars.html#180555
News on the CBO Report: http://news.yahoo.com/s/ap/us_social_security
Questions about personal finance and investments may be sent by e-mail to firstname.lastname@example.org. Please visit my Web site at www.scottburns.com to comment on any of my articles, find referenced Web links or to discuss personal finance topics on my forums. Questions of general interest will be answered in future columns and on the website.
Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.