By JOHN GOODMAN
Jack Lew is lucky he isn’t in prison. Were he representing a private pension fund and if he made the sort of statements he made in USA Today the other day, he might well be sharing a cell with Bernie Madoff.
So who is Jack Lew? And what did he say?
Lew is the Director of the federal Office of Management and Budget. About Social Security, he wrote: “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.” As a result of these investments, the Social Security trust fund will be able “to pay full benefits for the next 26 years.” Not only is this preposterous, Charles Krauthammer called it a “breathtaking fraud.”
Before dissecting Lew, let’s consider why Bernie Madoff is in the hoosegow. Madoff told investors he was investing their funds in real assets, when in fact he was not. He secretly used their funds for personal consumption and to pay off other investors. Either figuratively or imaginatively, Madoff wrote IOUs to himself, all backed by the full faith and credit of Bernie Madoff. Maybe in the beginning he fully intended to pay off. But that’s beside the point. Inducing people to give you money with this sort of lie is criminal fraud. It’s against the law.
Like most government-sponsored retirement programs in the world today, our Social Security system is pay-as-you-go. All payroll tax revenues are spent — the very minute, the very hour, the very day they are received by the U.S. Treasury. Most of these revenues are spent on benefits for current retirees. Any additional amount is spent in other ways.
But there is no funding of future benefits. No money is being stashed away in bank vaults. No investments are made in real assets.
Most pay-as-you-go systems do not have trust funds, since there are no investments for the trust funds to make. In the U.S., we have trust funds — but they serve an accounting function, not a financial function. For example, the trust funds do not collect taxes. Nor do they disburse benefits. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury.
The trust funds do not buy bonds. That’s because they do not buy anything. But they do create special pieces of paper which are misnamed “government bonds.” They are misnamed because — unlike other bonds — these bonds were never bought or sold. They are literally IOUs the government writes to itself. For Social Security, they are created on a typewriter. For Medicare, they are created electronically.
Technically, the trust fund bonds represent the cumulative surplus (payroll tax collections minus benefit payments). But these bonds are only important for accounting purposes. They are like bookkeeping entries, without any market value. The annual reports of the Social Security trustees list the yields and maturity dates of these bonds. But the special-issue bonds are not the same as the bonds held by the public. They are not part of the official outstanding debt of the U.S. government. They cannot be sold on Wall Street or to any foreign investors. And they cannot be used to pay benefits.
The technical issuer of the bonds (the U.S. Treasury) and the holder of the bonds (the Social Security trust fund) are both agencies of the U.S. government. Moreover every asset of the trust fund is a liability of the Treasury. Summing over both government agencies, the balance is zero.
For Social Security, the trust fund’s special issue bonds are paper certificates held in government filing cabinets in Parkersburg, W.Va. If a fire were to burn down the building tomorrow, or if thieves were to take the filing cabinets away, there would be no harmful consequences for retirees. Similarly, if the trust funds themselves were simply abolished, real economic activity would be unaffected. The government would not be relieved of any of its existing obligations or commitments. Or, as the late economist Robert Eisner suggested — with the stroke of a pen, we could double or even triple the number of IOUs the trust fund holds. Eisner’s idea would allow us to dispense with artificial crises (“trust fund running out of money!!”) and address the real problem: How is the Treasury going to pay the government’s bills?
John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.
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TARP was not to bail out banks. It was to bail out FDIC. The problem with insurance, is when claim values exceeds premiums collected, the claims can not be paid. It becomes insolvent.
Excellent article that demystifies alot, but I’m still mystified by one aspect …
So the surplus gets converted into US Treasury bonds, which have no value because there is no “market” for them, so clearly the money goes to things that are most certainly NOT in the public sphere.
But where, then? And for what is the money used? Is this one of those things where we know the fix is in, but its useless to even question WHAT the fix is because we will never get an answer?
A scary thought.
It doesn’t surprise me that the pegan fan club would follow the wealthy liars and criminals for the luxury of their approval. The Fan Club of seiving,loathing, narrasistic zombies supporting their pegan ????????gods???
When your done stealing the clothes off our backs ,sending our chidren to work in factories for pennies on the dollar,eliminating Higher education, and workers becoming indebtured servants from excessive burdens of a Flawed Ideaology.
Oh, those “poor” people made of the Finest Marble and architectual wonders need every tax break possible because they are Broke? Really?
I have not seen any corporation ever suffer from poor judgement or the inability to pay? Like the bankers and wall street who were bailed out for criminal Behavior! Even though these poor pillars that hold up the multi-million dollar infrastructure of Business. Still showed their uncompassionate and unethical ,if not criminal Behavior from Falsely foreclosuring on home owners. Oh Please, you think that it is their right to renage in contributing tax Dollars and still expecting to be bailed out with tax dollars?
Oh , Please! these folks just need to pull their heads out of their anus. The facts are the conservative Bible Thumpers have lost their way from being the followers of the word . It appears that their path has strayed from the followers of Christ and compassion for your fellow man to Followers of corporate welfare,Money and enslaving our fellow man.
Their are NO EXCUSES NOT TO CONTRIBUTE TO THIS COUNTRY REGARDLESS OF WEALTH!!!!!!!!!!!! Don’t expect THE MIDDLE CLASS TO SUPPORT YOUR FAT ASSES:BECAUSE IT CANNOT BE DONE!! Corporations in this COUNTRY; failing to contribute is “UNPATRIOTIC!!!!!”.
Yes! I HAVE QUESTIONED YOUR PATRIOTISM!!!!!!!!!!!!
Barry – I wouldn’t mind something that resembled the 1986 tax code revision where you cleaned alot of the corporate welfare/pork that has been added since then in the forms of various credits/accelerated writedowns/etc but that isn’t what is being pushed though. Just largely a much lower corporate tax credit with the same copious amounts of pork.
The big issue too that is almost completely missed is the real issue/drive to push income derived for rents (e.g., capital gains/divindends) to nothing. Its a mantra right now in the GOP party. No one I have seen how has any real clout is pushing a ‘flat tax’ that recognizes all sources of income at a standard rate. No way do I expect them to go along with a plan that recognize this at substantially much higher income tax rates.
Ryan’s plan calls for this. Grover Norquist is pushing hard for this and so are several keys House/Senate members in DC who are ‘go-to’ guys on financial related issues including Toomey.
Some people just never learn, or they refuse to ever admit.
New York billionaire Tom Golisano is taking his big bucks elsewhere.
Furious over a new “millionaire’s tax” that could cost him an extra $1 million this year, the Rochester-area resident and three-time gubernatorial candidate says he’s fleeing the state for Florida’s Gulf Coast.
More than 1.5 million state residents left for other parts of the United States from 2000 to 2008, according to the report from the Empire Center for New York State Policy. It was the biggest out-of-state migration in the country. …
What’s worse is that the families fleeing New York are being replaced by lower-income newcomers, who consequently pay less in taxes.
Bono relocated his music bizz from Ireland to the Netherlands to shelter from taxes etc.
At least that’s the implication of a new analysis of wealthy folks’ movements into and out of New Jersey from 1999 through 2008. In all, the state suffered a $70 billion net outflow in wealth from 2004 through 2008,
MORE THAN 40 years ago, the Beatles followed Maharishi Mahesh Yogi to India in search of a spiritual haven. Three years ago, U2 followed him, in search of a tax haven.
(By the time the Maharishi faded from mortal life in February 2006, he was living at his Dutch estate, presiding over a business empire worth more than a man who scorned money could be bothered to count. He’d moved to Holland in 1990 for tax purposes. Or, rather, no-tax purposes.)
The assumption that international investors and rich folks here in the U.S. have nowhere else to put their money and would continue to invest in the U.S. economy regardless of tax rates is too simplistic. The key to getting the United State’s fiscal house in order is reforming entitlement spending; not siphoning off more of the economy to sustain programs that are clearly unsustainable in their present form. It’s somewhat disappointing also to think that any serious analyst thinks we can a) tax our way out of this predicament, and b) that the most expeditious way to do that is taxing the rich.
If they can’t get the votes to raise the debt ceiling they can’t sell normal bonds to cover them. If they can’t find buyers they can’t sell more bonds. It’s a very inliquid asset with considerable risk not being disclosed. Maddoff offered the same deal, he promised to pay it back with future borrowing or earnings, which is great as long as there are future earningsor borrowing.
” we need to raise taxes on the rich (which includes John, Barry and even me–but for sure the Koch brothers)”
If you where the Kock brothers why stay around for that? Their are some very nice and warm places south of here that would love to have them.
http://www.youtube.com/watch?v=661pi6K-8WQ&feature=player_embedded
When their money runs out in a year or two then what Matt?
In spite of the accounting fiction (fraud), the Social Security program is still a bad deal. Even if everything worked as promised, young workers can expect a negative rate of return on their payroll tax investments. Of course, the payroll tax is not an investment. It is a tax. And that’s the problem. It takes money out of the economy that could be invested in growth, and instead invests it in government—leaving IOUs (debt) for future generations to pay.
And I can’t quit laughing at Matthew Holt’s comments — as if more taxes will restore the government’s crumbling financial footing. Congress is the problem, not a lack of taxes. From Medicare to defense to the recent budget fiasco, Congress caused the problem in the first place. Giving them more money to fix a problem of their own making is like passing out cigarettes to help people quit smoking. It won’t work. Congress needs to be reined in, and that means taking away power, not giving them more.
The reason people argue the Trust Fund does not really exist is because the Treasury bonds it holds are claims on future tax revenues that future taxpayers will have to make good on. By spending Social Security tax receipts today and replacing them with bonds, the government is essentially shifting the bill for today’s consumption and foisting it on future generations who have little say in the matter.
According to the Social Security trustees report, the amount necessary to restore the actuarial balance of OASDI over the next 74 years is equivalent to 0.6% of GNP, or 1.8% of payroll, not a great burden; however, this assumes the trust fund surplus assets that have already been paid in are honored. Mr. Goodman implies that since the government has already spent those funds, it doesn’t have to honor them, because it never issued any bonds. His piece is the opening round of what we will be hearing from political ideologues of his ilk. He has the chutzpah to cite Charles Krauthammer, one of Bush’s brigade of warmongers that saw no problem pissing away our national treasure, which we now find out, according to them included our Social Security funds. I guess in his lust for war it’s something he forgot to tell us. Talk about fraud.
Scum raises to the top of this ponzi scheme that Republican Hacks are attempting to lay out on the working class. Grand Larcency of the American Dream and America’s Sovernity sold to the highest Bidder. A unwarranted attack on seniors and hardworking Ameircans who have paid their Way. Yet the KGB neo conservative stink tank has mobilized a giant of free thinkers will eventually put them in their place.
It seems absurb that so few believe that they can run the masses and steal payroll contributions from every day Americans. Set Granny and grandpa into the streets because the neo Cons believe that when you retire the Grave is the most useful place you belong. Medicare would not have exsisted if it were not the cherry picking underwriters of The Private Insurance paying exotic prices that frames a program with super High Premiums and deductables with few services.
These Neo “Con jobs” don’t give a flip about Seniors ,Social Security,and/ or medicare ,medicaid.
The” Con Job” is their only interests is to watch others suffer and be exploited. Scum rises to the top as continue to wage class war on the elderly and the vulnerable. Hiding behind the cloak of Christ Followers; they wield the blade of rightious indignation and slew their friends and neighbors for a promises of wealth from corporate sponsors. Following Christ or Filthy Luchre? The latter is the Tea Parties unprincipled minigated,disengenoius and spiteful pettiness the wishes ill will on their neighbors .
They think of themselves as the avenging angels but their Matra has them disposed to the vises of the Devils Domain. Greed ,Gluntoney,jealiousy,hatred, deceit, Lies and deceptions are not the teachings of the word!!! Rather the ritiual of worshiping Pegan gods and stealing from the church.
This crusade is not of God and should not be construed as a christian crusade. These are human emotions of self centered followers of money without the social skills to interact and the grace to perform as a member of the human race.
“We the people, wind up paying the corporate share one way or another.”
Yes we do, but I’d rather not pay it twice, once when embedded in product pricing and then again as a loss in tax collections. Also, this gives the large corporations that employ armies of attorneys and accountants an unfair advantage when compared to smaller companies trying to enter those same markets.
“and GE and Google and all the corporations engaged in money-laundering schemes”
Margalit – There are many people in the academic and financial world that believe corporations don’t pay taxes in the traditional sense. Rather, the largest companies that are most sophisticated about product pricing build them into their pricing structure as another cost of doing business like labor and materials. In 1986, for example, the corporate tax rate was reduced from 52% to 35%. During the next two years or so, companies generally competed away the tax rate reduction in the form of more service, lower prices or lower price increases that would have occurred otherwise. The end result two years out was that the aggregate return on capital and on equity for the S&P 500 companies was no higher than it was before the rate cut adjusted for where we were in the economic cycle.
People think that if corporations pay more in taxes, they can pay less. We the people, wind up paying the corporate share one way or another. Personally, I like it better when taxes are as visible and transparent as possible so people better understand the cost of government. We can decide collectively how much government, including social benefit programs, we want, but let’s at least be honest about how we pay for it by making taxes transparent. Right now, too many people want more from government than they are willing to pay for. While there is some room to raise taxes on high income people, including myself, it won’t come close to squaring the circle. The broad middle class is where the money is.
If I were predict, I think federal taxation might look something like this five years from now:
1. Social Security payroll taxes apply to wages up to $175-$200K (vs. $106,800 today) or whatever amount results in applying the tax to 90% of all wages which gets it back to where it was in the late 1980’s and early 1990’s.
2. Tax reform reduces the top marginal rate to between 25% and 28%. Most deductions, including the mortgage interest deduction and the tax preference for employer provided health insurance are phased out. Capital gains and qualified dividends will be taxed as ordinary income. The income tax will only apply to gross income in excess of $50K.
3. A significant gasoline or broad carbon tax will be phased in.
4. A 5%-6% Value Added Tax (VAT) will be implemented with exemptions similar to those that apply in Europe.
5. The total federal tax burden will rise from its historic post World War II average of 18% of GDP to 21% but still well below the current federal spending level of 24% of GDP.
When you look at the population of the US by age it produces something close to a pyramid. (I know, unfortunate association with pyramid scheme) That means that, given small changes in immigration and birth rates there are plenty of people to pay into social security to keep it solvent. Alarmists are always pointing in horror to the baby boomers and how they’ll bankrupt the system. But the first boomers are now 65. In 20 years most of them will be dead. No need to pay social security. There is the boomer echo which is reaching its peak earning years during the time when the baby boomers pass from retired to dead. If people want to kill social security because they don’t like government social programs at least argue from a position of honesty. Arguing that social security is bankrupting the country is just fear mongering for the purposes of pushing ideology.
“And Barry do you REALLY believe that if the “Trust Fund” is “empty” in 2037, the government will shut up shop and allow its seniors to starve in the streets?”
Matthew – Of course not. However, I do expect that any fix would be implemented decades in advance of reaching that point in order to give people time to adjust with respect to both their benefit expectations and the amount they can save to offset any reduction in benefits vs. prior law. This was how it was done in 1983 when the increase in the retirement age didn’t even start to be phased in until 20 years after the legislation passed and won’t be fully phased in until 2027. Payroll taxes were raised in several stages over eight years following the new law. As for raising taxes generally, the best way to do that is to follow the approach used in 1986 – broaden the base, lower the top rates, and treat all income, including capital gains and qualified dividends, alike for tax purposes.
“we need to raise taxes on the rich (which includes John, Barry and even me–but for sure the Koch brothers)”
… and GE and Google and all the corporations engaged in money-laundering schemes….
John as usual misses a minor point. If Bernie Maddoff runs out of money he has problems getting people to give him more of it. If the US Government wants to spend more money, it can either borrow it, or tax its population. International investors don’t really have any other place to go and the population has to pay taxes much as they (especially John’s incredibly wealthy Republican benefactors) don’t like it– despite their incredibly successful attempts to lower the amount of the economy that goes to the government. Which of course is the result of the systematic attempt by the top 1% (or actually top 1/10th of 1%) to defund the government and drive us into deficit spending for the last 30 years.
And Barry do you REALLY believe that if the “Trust Fund” is “empty” in 2037, the government will shut up shop and allow its seniors to starve in the streets? Rhetorical BS.
Which is why we need to get government on a sound financial footing, and why WITH DEFERENCE TO THE ACTUAL STATE OF THE ECONOMY (i.e. not right now), we need to raise taxes on the rich (which includes John, Barry and even me–but for sure the Koch brothers) and why we need to get Medicare and ALL health spending under control, and to slash defense spending.
None of which John and his cronies have any interest in doing at all….
John –
While I agree with you post, I remember a number of years back, when Alan Greenspan was still the Federal Reserve Chairman, he was asked at a Congressional hearing if he thought the special purpose Treasury bonds in the Social Security Trust Fund should be viewed as real assets. He said that they should be. In this context, the full faith and credit of the U.S. Treasury means that regular Treasury bonds, notes, and bills will be sold to public investors, both foreign and domestic, as needed to redeem the Trust Fund bonds plus interest. When this happens, the public debt will increase and the Trust Fund accounting balance will shrink. The main reason that the Trust Fund balance is important is that the Social Security Administration is not authorized to pay benefits except to the extent that there is a sufficient balance in the Trust Fund to offset the benefits paid, at least in an accounting sense. Once the Trust Fund balance reaches zero, only FICA taxes coming in during the current year will be available to pay Social Security benefits. Those taxes would cover an estimated 78% of promised benefits in 2037 when the accounting balance in the Trust Fund is expected to reach zero.
Let Madoff out of jail and bring him to DC to manage the Government’s Ponzi scheme. He is the man!