A reader of this blog, Roy Dent, has written a book called "FOOL'S GOLD, Social Security/Medicare Trust Funds: How Politicians Have Deceived America." For those of you who are interested in learning more about the book or buying it, please visit:
http://www.authorhouse.com/BookStore/ItemDetail~bookid~29730.aspx

The following is the result of an e-mail conversation I had with Mr. Dent after he commented on a recent piece of mine about Social Security. I hope that with people like Mr. Dent (and me) out there trying to educate people about the disaster that Social Security really is, we may be able to restart the public debate on the issue and eventually create enough grass roots political pressure to make some serious and fundamental changes in the system.

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Guest article by Roy V. Dent

Ross,

Thanks for responding.

Let me first quickly address your point about what gives Congress the right to spend any and all actual Social Security cash surpluses. The Supreme Court, in the 1960 case of "Flemming v. Nestor," did not actually rule that the Congress can spend the money. That authority, and in fact the requirement for Congress to spend the money is, and always has been, stipulated in the Social Security Act. The Treasury is required, by the Social Security Act, to "invest" any and all cash surpluses in "special, non-negotiable" U.S. Treasury bonds. What that means is that, via some clever, but not very complicated accounting entries, any surpluses are commingled with all other Treasury general fund income and spent on routine federal outlays (or used to retire public debt, as was the case in the years 1998-2001). The two Social Security "trust funds" are merely accounting ledgers used to keep track of Treasury income (FICA taxes) earmarked for the purpose of making Social Security benefit payments. What the Supreme Court actually ruled was that workers have no legally binding contractual rights to their Social Security benefits. Those benefits can therefore be cut, or even eliminated entirely, by any Congress, at any time.

Now let me attempt to explain why almost all of the much ballyhooed very large Social Security surpluses simply do not exist, except as theoretical apparitions. I cover all of this in my book, "FOOL'S GOLD, Social Security/Medicare Trust Funds: How Politicians Have Deceived America." I devoted chapters three and four to explaining exactly how it is all done. Every thinking person in America needs to read it. Everything I say, and every figure I use, comes either from the GAO, CBO, OMB, U.S. Treasury Reports, or Social Security/Medicare Trustees Reports. I have simply connected the dots and brought the cloudy picture into focus. It is a picture that even Dennis Hastert has said he does not see because he cannot fathom the "mysteries" of Social Security trust fund accounting. That really is a crying shame! The people pontificating about "fixing" things do not even know how they work.

For my explanation here I will be using figures from the "Final Monthly Treasury Statement of Receipts and Outlays of the United States Government." This particular Report covers FY 2005, through September, 2005. You can access this on the web at:
www.fms.treas.gov/mts/mts0905.pdf.

In order to explain how the accounting charade of huge Social Security surpluses is promulgated, I need to clarify what you said in the second sentence of your response. You said you "thought that FICA tax payments still substantially exceeded payouts, and that Congress just spent the extra." That one sentence is the key to understanding the entire riddle of trust fund accounting. Once you assume that the "surpluses" consist only of excess FICA taxes, they have you right where they want you. I have read your writings on this subject, and know that you understand that trust fund "interest" receipts from the Treasury are just intragovernmental smoke and mirrors. However, unless you understand the accounting aspects of this charade a bit more, you will still wind up believing that the Treasury actually spends this money when it "pays" interest to the trust funds. The reason I wrote a book on all of this is that the political plot line needs to be fleshed out in order to really understand it all. All of that having been said, let me attempt to give a "Reader's Digest" condensed version of the mind-numbing “number crunching” involved.

All the numbers I use here come from the previously cited Treasury Report for FY 2005. Social Security surpluses each year consist of four separate financial components. They are: (1) The excess of FICA taxes received by the Treasury minus benefit outlays/operating expenses. The FICA taxes are those received from the public at large, e.g., 6.2 percent of every dollar earned by employees, and the matching 6.2 percent from employers. This DOES NOT include any matching amounts paid by the "government-as-employer." In FY 2005, the Treasury received $577.475 billion in Social Security (off-budget) FICA taxes (page 5 of the referenced Treasury Report). The combined OASI and DI trust funds reflected Treasury outlays (Social Security benefit payments/expenses) totaling $523.360 billion last year (page 18 of the Treasury Report). The result was a $54.115 billion cash surplus of FICA income over benefits/expenses. I will have more on this momentarily.

(2) The second component of each year's surplus is the "interest" the "on-budget" portion of the Treasury (general fund) theoretically pays to the SS trust funds. You already understand the fiction of this, although you possibly do not know the accounting gimmickry they use to make it appear that the "on-budget" portion of the Treasury (general fund) actually "pays" the money to the trust funds, and then "borrows" the same amount back. In reality, the whole thing consists of two accounting entries, with no money moving at all. However, the trust funds do wind up with "special, non-negotiable" Treasury bonds in the applicable amount. In FY 2005, the total interest credited to the combined trust funds was $91.836 billion (see page 19 of the Treasury Report). This money simply does not exist, except at the point of an accountant's pencil. How, then, can it be said that Congress "raided" the surplus and spent it? It did not happen, because the $91 billion was never paid by the government to itself (trust funds). I go over how the accounting mechanics are done in my book, chapter 4. I simply cannot repeat it all here.

(3) The third surplus component consists of the "Taxes on Social Security benefits" that are "credited" to the Social Security trust funds. In 1983, the SS program was almost insolvent (only a matter of a couple of months left). Many structural changes were made in the program, one of which was to, for the first time, begin taxing SS benefits. These additional taxes are INCOME taxes, not FICA taxes. Congress simply elected to "credit" them to the trust funds each year. What does that mean? It means that these additional taxes come into the Treasury as INCOME taxes, and are routinely spent, just as are all other Income taxes. Congress could just as easily designate a given percentage of corporate taxes to be "credited" to the SS trust funds. Why did they elect to credit the "Taxes on SS Benefits" to the trust funds? Income taxes are not a part of the Social Security revenue stream. However, politicians obviously felt that they could convince us that, since they were now taxing Social Security benefits, these taxes could be considered part of the Social Security revenue stream. It worked, didn't it?!!! It was merely a way get additional "bonds" into the trust fund asset bases, and the accounting is handled exactly the same way as the phony "interest" payments that result in additional "bonds" being added to the asset bases. Why is it important to build up the trust fund "asset bases?" Because these bonds will be used as "reserve spending authority" in the coming years when FICA taxes are less than benefit outlay/expenses. Why is that important? Because Congress can spend the additional deficit amounts (by "cashing in" bonds to the Treasury), and will not have to pass additional spending legislation each year. (The 2006 Medicare Trustees Report, released May 1, 2006, has a good discourse on some of this in its Appendix E, beginning on page 179.)

If we look on page 17 of the Treasury Report, we see under the Heading "Social Security Administration," the first sub-heading of "Payments to social security trust funds." The amount shown is $16.519 billion. This is the amount of "Taxes on SS benefits" that was credited to the trust funds in FY 2005. I prove it in my book with other quotes from other documents, but for now you must just accept what this number is. The money was spent, because it was part of Income taxes the Treasury received. They are NOT part of FICA. Again, Congress only "credits" the trust funds with these amounts to further bloat the trust fund asset bases. It does the SS program no good whatsoever. In fact, whether SS trust funds even exist or not is a superfluous, non-relevant factor in our future. We will not have any Social Security money saved for the future, with or without them.

Look at the last sub-heading under the "Social Security Administration" area, entitled "Intrabudgetary transactions, off-budget." The number shown is (-)$16.517 billion. This is where they acknowledge that the money was not actually paid to the trust funds by the Treasury's "on-budget" account (general fund).

(4)The fourth, and final, component of each year's SS surplus is the money the federal government ostensibly (but not really) pays to the trust funds in its capacity as an employer. On page 18 of the Treasury Report, we can see that the total amount "paid" was $$10.941 billion in FY 2005. Where would the government get the money to pay employer taxes? The government is not a business that makes a product. It takes in various forms of taxes and spends them all every year. Any amounts of FICA taxes the government might theoretically pay must be paid using Income taxes received, or Corporate taxes received, etc. The government does not pay FICA taxes to itself (trust funds). It does, however, make accounting entries stating that it does, but then makes offsetting negative entries for the same amounts. Again, just as with the "interest" and "Tax on SS Benefits" components of the annual surpluses, no money moves, but the trust funds wind up getting credited with another $10.941 billion worth of "bonds." Again, these bonds will be used in the future as "reserve spending authority" by politicians who designed this accounting sham to cover their butts in the future once the SS deficit spending begins.

Well, there is the "digest" version. When we add all four components of the purported FY 2005 SS surplus together, we come up with a total of $173.409 billion. How much of this was the actual FICA cash surplus? It was $54.115 billion. However, the story does not stop here.

In 1979, Congress passed a law that instituted the Earned Income Tax Credit (EITC). The reason was that they wanted to alleviate the regressive aspects of the FICA tax and thereby give benefits to the working poor. That is exactly what the EITC program does. It is only labeled a tax credit to fit it into the income tax filing system. Using the "tax credit" methodology, the Treasury returns either all or a significant portion of FICA tax payments to low-income workers each year. The Treasury received $54.115 billion in excess SS FICA taxes in FY 2005. As we see on page 14 of the Treasury Report, under the caption of "Internal Revenue Service" and sub-caption of "Payment where earned income credit exceeds liability for tax," the Treasury sent "refund" checks totaling $34.559 billion to low income workers in FY 2005. This constituted the return of $34.559 billion of FICA taxes that had originally come into the Treasury. The result was an actual SS cash FICA tax surplus of $19.556 billion in FY 2005.

The smoke and mirror components of the surplus (component parts 2, 3, and 4) totaled $119.294 billion in FY 2005. They were not spent, because they only exist at the head of an accountant's pencil, and as "bonds" in the "asset bases" of the trust funds. We cannot, as a country, figure out the solution until we define the scope of the SS problem. The big surplus numbers do not "mask" general fund spending! For the most part, they just do not exist. The bottom line is that we are going to "hit the wall" sooner than we think. The money presently being counted as trust fund income "credits" (components 3 and 4) must start coming out of the general fund as soon as the actual FICA tax cash surpluses decline to zero. As things look now, this will occur prior to the year 2017.

I hope this at least partially answers your question. I account for every penny that has ever gone into/out of both the Social Security and Medicare programs since their inception in my book. I also cover the national debt, what it is and is not, and many other facets of the entitlement morass. I do not believe there is a person in America who knows this subject better than me. I have put in the time and effort, and paid my dues, in order to make that statement. Have a great day.

Roy V. Dent