The Truth About Social Security

Like many many taxpaying citizens of the United States I have often lamented on the insolvency of the social security system.  I have believed politicians and news pundits as they deride retirement benefits as more “entitlement” spending the government can’t afford.  It is often asserted that on some ominous date in the future social security will run out of money to meet its obligations to retired Americans and their dependents.  However, after recognizing that all these doom and gloom assertions about social security are made by the very politicians who turn around and engage in the very worse form of reckless spending, I decided to look into exactly how social security actually works. 

Social security is managed by two insurance funds operated by the department of treasury.  The Old Age and Survivor Insurance Fund (OASI) and the Disability Insurance Fund (DI) both collect monthly payroll taxes in order to make beneficiary payments.  By law, these funds are required to invest these monies in non-marketable interest-bearing treasury bonds, or, Special Issue (SI) bonds.  To meet monthly beneficiary obligations, the funds in turn cash in on past SI bonds to make the payments.  Below is a table taken from ssa.gov detailing transactions for the month of January 2012.

Investment transactions of the OASI and DI Trust Funds, calendar year 2012
[In thousands]

Transaction month Type of security Transaction Interest rate Maturity year Issue month Amount
Jan SI certificates Acquire 1.500 2012 Jan 2012 $74,661,581
Jan SI certificates Redeem 1.500 2012 Jan 2012 45,964,235
Jan SI certificates Redeem 1.750 2012 Dec 2011 18,030,411

(source: http://www.ssa.gov/cgi-bin/transactions.cgi)

 

As you can see,  the trust funds collectively purchased more bonds than were needed to meet beneficiary obligations for the month of January.  A trend that would continue throughout the year allowing the funds to acquire nearly 55 billion dollars worth of assets by the end of fiscal year 2012 and after meeting all if its beneficiary obligations and administrative costs.  Below is another table showing the total transactions of both investment funds for the whole calendar year of 2012.

Investment transactions of the OASI and DI Trust Funds, calendar year 2012
[In thousands]

Activity

Type of security

OASI Trust Fund

DI Trust Fund

OASI and DI Trust Funds, combined

Held at end of 2011

SI bonds

$2,461,883,083

$148,421,006

$2,610,304,089

SI certificates

63,015,398

5,575,386

68,590,784

Marketable bonds

0

0

0

Total

2,524,898,481

153,996,392

2,678,894,873

Acquisitions in 2012

SI bonds

266,942,676

6,530,150

273,472,826

SI certificates

685,103,317

107,083,614

792,186,931

Marketable bonds

0

0

0

Total

952,045,993

113,613,764

1,065,659,757

Dispositions in 2012

SI bonds

179,065,578

37,252,597

216,318,175

SI certificates

687,606,865

107,556,009

795,162,874

Marketable bonds

0

0

0

Total

866,672,443

144,808,606

1,011,481,049

Held at end of 2012

SI bonds

2,549,760,181

117,698,559

2,667,458,740

SI certificates

60,511,850

5,102,991

65,614,841

Total

2,610,272,031

122,801,550

2,733,073,581

(source: http://www.ssa.gov/cgi-bin/transactions.cgi)

 

As you can see, even though securities held by the DI fund decreased, total securities held by both OASI and DI increased in the fiscal year of 2012 by some 54 billion dollars bringing total assets held by social security insurance funds to over 2.7 trillion dollars!  Although the losses reported by the DI Fund is cause for alarm and will be the subject of future posts, overall, the social security funds which pay out retirement benefits seem to be in pretty good shape.   As a matter of fact, with the exception of a few years, this has been the trend since the inception social security in 1937. 

So the cold truth about social security is not that it is out of money per se,  but that it accrues more money than it doles out in benefits and then loans the rest to the general fund of the treasury so that congress can spend it on whatever it wants.  In fact, at 2.7 trillion dollars, the government owes social security taxpayers more than it owes China! As a whole, American taxpayers have more invested in government debt than any other entity except the Federal Reserve.  As taxpayers, to protect our investments, we need to demand fiscal responsibility and an end to irresponsible deficit spending so that the government can meet its responsibilities to us. 

Yet the chorus we hear from Washington is that to be fiscally responsible we need to cut spending on social security and raise the retirement age, or cut benefits, or, god forbid, raise FICA taxes.  When in reality, the only money the government spends on social security is the interest it has to pay from borrowing money from the social security funds in order to pay for its own reckless spending!

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About ai2c

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