How Your Social Security Money Was Stolen – Where Did the $2.5 Trillion Surplus Go?
July 19th, 2011
Introduction by David DeGraw, Reports by Dr. Allen Smith
With cuts to Social Security on the way, and Obama’s recent comments saying that he cannot guarantee that Social Security checks will go out if the debt ceiling doesn’t get raised, it’s time to take a closer look at why politicians are pushing to cut this vital program.
The Social Security Trust Fund should currently have $2.5 trillion in surplus. So how is it that these checks could stop being issued if the debt ceiling isn’t raised? Economics professor Dr. Allen Smith, author of The Looting of Social Security: How The Government is Draining America’s Retirement Account, has been reporting on the theft of Social Security funds for years. As he sums it up:
“The government’s $2.5 trillion debt to Social Security is the real reason that so many politicians want to cut benefits. They are trying to find a way to avoid having to repay the looted money…. Given the fact that much of the surplus revenue from the 1983 payroll tax hike ended up in the pockets of the super rich in the form of income tax cuts, I propose a special tax on this group of taxpayers to recoup the missing Social Security money. The government used revenue from the Social Security payroll tax hike to fund tax cuts for the rich because that was where the money was. I think the government should recover the ‘embezzled’ money by taxing the rich.”Here are reports by Dr. Allen Smith that we have featured over the past two years:
I: It’s Time to Tap the Empty Social Security Trust FundI: It’s Time to Tap the Empty Social Security Trust Fund
II: The Social Security Fraud Has Finally Been Exposed
III: How Ronald Reagan and Alan Greenspan Pulled off one of the Greatest Frauds Ever Perpetrated against the American People
IV: Obama and the Social Security Time Bomb
V: Censored Social Security Book Back in Print
AP writer, Stephen Ohlemacher, sent shock waves throughout the nation this week with his story, “Social Security to start cashing Uncle Sam’s IOUs.” Social Security has been running large surpluses ever since the enactment of the 1983 payroll tax hike, and was projected to continue running surpluses until at least 2016. Instead, Ohlemacher reports that the cost of Social Security benefits will exceed payroll tax revenue by approximately $29 billion this year, because of the severe recession which has reduced payroll tax revenue at the very time that many unemployed Americans have been forced to retire early.
What it all boils down to is that, in order to pay full benefits this year, Social Security will have to come up with an extra $29 billion to supplement the inadequate payroll tax revenue. Where will that money come from? It will have to come from increased taxes or from borrowed money. “Wait a minute!” some readers will say. Hasn’t Social Security been receiving surplus revenue ever since the 1983 payroll tax hike? Isn’t there supposed to be approximately $2.5 trillion in the Social Security trust fund? The answer to both questions is yes. But there is a problem. Every dollar of that surplus Social Security revenue has already been spent by the government. Much of it went to fund wars in Afghanistan and Iraq. The rest has been spent on other government programs.
The American people were not supposed to find out about the great Social Security scam for another six years, and the government was hoping to continue to receive surplus money from the Social Security contributions of working Americans for at least that long. But the inevitable day of reckoning has come, six years sooner than anybody expected, because of the severe recession. And the government of the United States has been caught with its hand still in the empty Social Security cookie jar.
For more than a decade, I have been trying to expose the Social Security scam just like Harry Markopolos was trying to expose the Bernie Madoff scam. But nobody would listen. If anyone deserves credit for helping the government to keep its dirty secret for so long, that honor should go to the AARP and the NCPSSM. I have been members of both organizations for years and I have tried very hard to get their cooperation in exposing the fraud. But they have refused to have anything to do with me. Instead, they have continued to bombard their members and the public with misinformation.
They have argued that the trust fund is full of “good-as-gold” U.S. Treasury Bonds that could be used to pay full Social Security benefits until at least 2037 without any changes. In reaction to Olemacher’s AP story, Barbara Kennelly, president of the NCPSSM, responded with the following words, “Good luck to the politician who reneges on that debt. Those bonds are protected by the full faith and credit of the United States of America. They’re as solid as what we owe China and Japan.”
I believe Barbara Kennelly to be among the strongest and most honorable defenders of Social Security. I think she truly wants to save Social Security, as we now know it, which is the same goal that has motivated me to make so much effort for more than a decade. I have tried to convince Ms. Kennelly that I was trying to save Social Security by exposing the truth about the trust fund, but she wouldn’t even consider the possibility that the government has been looting the trust fund all these years. I requested the opportunity to discuss this issue with her, either in a face-to-face meeting, or through telephone conversations, in the hope that we could work together toward a common goal. She ignored my requests and refused to communicate with me in any way.
It has been clear for quite some time that the trust fund contained no real assets. David Walker, Comptroller General of the GAO, stated on January 21, 2005, “There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.” On April 5, 2005, President George W. Bush finally acknowledged the empty trust fund by saying, “There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.”
If there was any doubt remaining, with regard to whether or not the trust fund contains any real assets, that doubt should have been removed by the following words in the 2009 Social Security Trustees Report:
Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.There is nothing ambiguous about the above words. They make it clear that the government does not receive any cash income from the alleged interest payments on the trust fund IOUs. The interest payments are made in the form of additional worthless IOUs. The government cannot sell the IOUs because they are not marketable and have no cash value. The IOUs simply represent a debt of one branch of the government (the Treasury Department) to another branch of government (Social Security). They cancel each other out.
The Social Security surplus revenue should have been saved and invested in public-issue, marketable Treasury bonds. These bonds are “good as gold” and default-proof. They are the kind of U.S. Treasury bonds that are owned by China and Japan, Bill Gates, pension funds, and every other serious investor that owns Treasuries. If the Social Security surplus had been invested in public-issue marketable Treasury bonds, as it could have been, and should have been, Barbara Kennelly would be correct in saying that the Social Security holdings are “as solid as what we owe China and Japan.”
Unfortunately not a single dollar of the surplus Social Security revenue was saved or invested in anything. It was all spent, and, once money is spent, there is nothing left to invest.
The government cannot, and will not, ever default on any of its public issue, marketable Treasury bonds because of the panic it would create in world markets and the damage it would do to the nation’s worldwide credibility. But Congress has the legal authority to default on its debt to Social Security, and, if it should do so, the outside world would probably view it primarily as an internal matter between the United States Government and its citizens. One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so.
In a 1960 ruling by the United States Supreme Court, the court ruled that nobody has a “contractual earned right“ to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security.
Early on, some did not take the language seriously because they thought it was probably unconstitutional. However, in 1960, in the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.” As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.
II: The Social Security Fraud Has Finally Been Exposed
On December 13, 2010, the highly respected Kansas City Star, winner of eight Pulitzer Prizes, published an editorial entitled, “The myth of the Social Security trust fund,” which included the following statement:
A lot of people speak of those IOUs as if they can be pulled out and exchanged for money to pay benefit checks. They can’t. As the Clinton administration budget of 2000 explained, the securities in the Trust Fund ‘do not consist of real economic assets that can be drawn down in the future to fund benefits. Those special-issue bonds can only be redeemed by raising taxes, cutting spending elsewhere, or borrowing — exactly what the government would have to do if the Trust Fund didn’t exist. The Trust Fund, said the Clinton budget message, ‘does not, by itself, have any impact on the Government’s ability to pay benefits.On December 20, distinguished business columnist, Allan Sloan, seven-time winner of the prestigious Loeb award, business journalism’s highest honor, called the trust fund “a mirage” in his Washington Post column. In the column, titled, “New tax law reveals the mirage of the Social Security trust fund,” Sloan wrote:
My problem with the trust fund is that it’s a snare and a delusion for people who think that it makes Social Security financially sound. It doesn’t do that, because having government IOUs in a government trust fund doesn’t make it any easier for the government to cover Social Security’s cash shortfalls than it would be if there were no trust fund.These are not new revelations. I have spent the past decade relentlessly trying to expose the Social Security fraud, and prominent government officials were screaming out the warnings two decades ago.
On October 13, 1989, Senator Ernest Hollings of SC stood on the Senate floor and warned, “…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund…in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”
The Kansas City Star editorial and Allan Sloan’s Washington Post column seem to have stunned the AARP and the NCPSSM into silence. These organization have repeatedly claimed that the Social Security surplus is invested in U.S. Treasury bonds just like those held by the Chinese government. They have battled my efforts to get this same message out for a decade, but they seem to have had the wind knocked out of them by the Star and Allan Sloan. So far, they have made no attempt to rebut either of the two articles. The AARP and the NCPSSM have been claiming for years that the trust fund holds enough assets to pay full Social Security benefits until at least 2037, when, in fact, in the words of the Kansas City Star, it has no “real economic assets that can be drawn down in the future to fund benefits.”
The Kansas City Star and Allan Sloan have exposed the trust fund myth so clearly that I think the national debate will now turn to how and why the United States government violated both the public trust and federal law for a quarter-century in a way that caused a major transfer of income from the lower and middle class to the richest of all Americans. By imposing a hefty increase in the regressive payroll tax in 1983, and then using a large portion of the new revenue to offset the lost revenue resulting from the unaffordable income tax cuts that went primarily to the richest Americans, the United States government engineered a major transfer of income from the lower and middle classes to the richest of all Americans.
So where does that leave Social Security? The approximately $2.5 trillion in surplus revenue, generated by the 1983 payroll tax hike, rightly belongs to the Social Security trust fund and to American workers who paid the extra taxes. But the money is all gone — “borrowed” or “stolen” by the federal government and spent for general government operations. None of the money was saved or invested in anything, so the trust fund contains no real economic assets with which to supplement the payroll tax which will become inadequate to pay full benefits after 2015.
I believe it is time for the public to demand, in a very strong way, that the government make arrangements to repay its debt to Social Security. It is futile for the AARP and the NCPSSM to continue to insist that Social Security is in fine shape and has enough assets to pay full benefits until 2037. This just isn’t true. What the organizations need to do now is put political pressure on the government to move quickly to enact legislation that would require the repayment of the looted money, as it is needed, over the next 27 years. There is no way that the government could possibly come up with the $2.5 trillion in the near future, given the budget crisis. But it can make a legal commitment to repay the money in installments. Will that happen? Not without major political pressure from the majority of Americans. The AARP and the NCPSSM have frittered away the past ten years when the problem could have been resolved. If the looting could have been stopped when I first began actively urging such action in 2000, the trust fund would today hold approximately $1.5 trillion (the amount looted during the past 10 years) in “good-as-gold” real assets. Instead, it holds no real economic assets.
The reason I don’t believe the government will honor its debt to Social Security without major political pressure is that it does not legally have to repay the money. The government certainly has a moral obligation to do so, but, because of a 1960 U.S. Supreme Court ruling, it has an out. In the case of Fleming v. Nestor, the Court ruled that nobody has a “contractual earned right” to Social Security benefits. This ruling was based on Section 1104 of the 1935 Social Security Act which specifically states, “The right to alter, amend, or repeal any provision of this ACT is hereby reserved to the Congress.” Based on this strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security.
Many people argue that the government could not default on its debt to Social Security because of the effect such action would have on financial markets and the nation’s public image. If the government held the same kind of real bonds that are traded on world markets, this would be true. Public-issue, marketable U.S. Treasury bonds are default-proof, and that is the kind of bonds that the Social Security surplus revenue was supposed to be invested in. If this had been done, Social Security would be in fine shape today. But, instead of using the surplus Social Security revenue to buy such bonds in the open market, the government chose to spend the money and issue IOUs to replace the spent money. These IOUs are non-marketable and could not be sold to anyone, even for a penny on the dollar. The government has the legal authority to declare these IOUs null and void. Since these IOUs are not traded, such action would have little effect on financial markets, and foreign governments would probably consider such action as an internal matter between the American government and its citizens.
The Social Security trust fund does not hold any real economic assets that can be drawn down to pay future benefits. That is an indisputable fact today, and it has been true ever since the 1983 payroll tax hike was enacted. Every dollar of the $2.5 trillion in surplus revenue, generated by the payroll tax hike, has been spent on programs unrelated to Social Security, leaving nothing to save or invest.
A few United States Senators tried to sound the alarm two decades ago, and I have dedicated the past ten years of my life to trying to alert the public to the awful truth about the Social Security trust fund. For more than a quarter of a century, the United States government, under five presidents, has hoodwinked the American public into believing their Social Security contributions would be used for future Social Security benefits when, in fact, all of the surplus Social Security revenue was used to fund such things as tax cuts for the rich, two wars, and other government programs.
Today, thanks to the efforts of the editorial board of the Kansas City Star, and thanks to the courage and competence of Allan Sloan and a few other journalists, the big bad secret is finally out, and I think it is too late to get this cat back in the bag.
III: How Ronald Reagan and Alan Greenspan Pulled off one of the Greatest Frauds Ever Perpetrated against the American People
Ronald Reagan and Alan Greenspan pulled off one of the greatest frauds ever perpetrated against the American people in the history of this great nation, and the underlying scam is still alive and well, more than a quarter century later. It represents the very foundation upon which the economic malpractice that led the nation to the great economic collapse of 2008 was built. Ronald Reagan was a cunning politician, but he didn’t know much about economics. Alan Greenspan was an economist, who had no reluctance to work with a politician on a plan that would further the cause of the right-wing goals that both he and President Reagan shared….
Exactly what Reagan did, with the help of Alan Greenspan. Consider the following sequence of events:
1) President Reagan appointed Greenspan as chairman of the 1982 National Commission on Social Security Reform (aka The Greenspan Commission)IV: Obama and the Social Security Time Bomb
2) The Greenspan Commission recommended a major payroll tax hike to generate Social Security surpluses for the next 30 years, in order to build up a large reserve in the trust fund that could be drawn down during the years after Social Security began running deficits.
3) The 1983 Social Security amendments enacted hefty increases in the payroll tax in order to generate large future surpluses.
4) As soon as the first surpluses began to role in, in 1985, the money was put into the general revenue fund and spent on other government programs. None of the surplus was saved or invested in anything. The surplus Social Security revenue, that was paid by working Americans, was used to replace the lost revenue from Reagan’s big income tax cuts that went primarily to the rich.
5) In 1987, President Reagan nominated Greenspan as the successor to Paul Volker as chairman of the Federal Reserve Board. Greenspan continued as Fed Chairman until January 31, 2006. (One can only speculate on whether the coveted Fed Chairmanship represented, at least in part, a payback for Greenspan’s role in initiating the Social Security surplus revenue.)
6) In 1990, Senator Daniel Patrick Moynihan of New York, a member of the Greenspan Commission, and one of the strongest advocates the the 1983 legislation, became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike. Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot. President Bush would have no part of repealing the payroll tax hike. The “read-my-lips-no-new-taxes” president was not about to give up his huge slush fund.
The 1983 Social Security “fix” required the baby boomers to pay much higher payroll taxes so that they would prepay most of the cost of their own benefits. The higher taxes would generate Social Security surpluses for approximately 30 years, which were supposed to be saved and invested to build up a large reserve in the trust fund. Then, when the baby boomers began to retire in about 2010, the accumulated surpluses from the previous three decades would gradually be drawn down and used to supplement the payroll tax revenue, which was expected to become inadequate to pay full benefits by about 2015. The 1983 Social Security legislation laid the foundation for the greatest fraud ever perpetrated against the American people by their government. The $2.54 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, has all been “borrowed” or “stolen” by the government and used to fund tax cuts for the rich, wars, and other government programs.
President Obama is the fifth president to participate in the great Social Security scam, but he has the dubious distinction of being the president, on whose watch, the Social Security time bomb, activated 25 years ago by President Reagan, will run out of time. All of the previous administrations knew that spending Social Security revenue, as if it were general revenue, was wrong and was a violation of both federal law and the public trust. But, they all had the luxury of knowing that the raided Social Security money would not be needed to pay benefits while they were still in office. However, President Obama learned early in his presidency that, unless the government ended the raiding and began repaying the money that had already been raided, Social Security would face a major financial crisis during his presidency.
Beginning in 2015, and every year after that, payroll tax revenue will be insufficient to pay full benefits. This was known in 1983 when the Social Security “fix” was enacted. The plan was to draw down the large reserve that is supposed to be in the trust fund and use that money to supplement payroll tax revenue so that full benefits could be paid until 2037. But that money has already been spent, so the government will have to come up with the money again to repay the $2.54 trillion that it embezzled. This might be manageable in the early years, when the difference between benefit costs and payroll tax revenue is minimal. But, each year, the amount of money needed to replace the looted money gets bigger and bigger. For example, Social Security will run a deficit of approximately $41.4 billion in 2010. But in 2020, the Social Security deficit will have grown to $101.4 billion. Five years later, in 2025, the Social Security shortfall will be $274.6 billion. In 2035, the government would have to come up with an astronomical $621.9 billion in order to pay full Social Security benefits.
When President Obama first saw these numbers, he must have almost gone into a state of shock. His predecessors left him with a lot of problems that can plainly be seen by the public—two wars, a collapsed economy, and a gigantic deficit and debt. But the embezzlement of the Social Security trust fund money was done without public knowledge, and it is doubtful that Obama knew anything about it prior to becoming a United States Senator, and he may have not known about it until he entered the White House. President Obama cannot just kick the can farther down the road as his four predecessors have done. He must find a way to raise the money to repay the government’s debt to Social Security, or cut Social Security benefits so the money will not have to be repaid.
Embezzlement is a crime, and every participant (all the presidents and members of Congress who supported the practice) knew they were committing a crime against the American people as they used the people’s Social Security money as general revenue over the past 25 years. Some individuals, such as the late Senator Daniel Patrick Moynihan of New York, attempted to end the raiding 20 years ago. On September 27, 2000, I launched my decade-long campaign to expose the Social Security scam with an appearance on CNN News to discuss my then newly-published book, The Alleged Budget Surplus, Social Security, and Voodoo Economics. For the past 10 years, I have been warning, as forcefully as I could, that a day of reckoning would come, at which time the government might consider defaulting on its huge Social Security debt. But nobody wanted to listen. That day of reckoning is now upon us.
V: Censored Social Security Book Back in Print
When my book, The Looting of Social Security: How The Government is Draining America’s Retirement Account, was published by a New York publisher in 2004, I thought my long battle to expose the truth about the Social Security trust fund was almost won. But that book met with foul play, and was removed from the market before many people had the opportunity to read it.
Early reviews revealed just how provocative the book was going to be. The Boston Globe reported, “… With dismal clarity, Smith lays out the step-by-step history of how a national pension plan was transformed into an outright shakedown of working people” and ALA Booklist said, “Smith has written a scathing account of massive fraud on the part of our nation’s leaders, who have plundered every cent of the Social Security Trust Fund surplus that was specifically earmarked for the retirement of the baby boomers.”
On February 26, 2004, I appeared on CNBC, to respond to Fed Chairman, Alan Greenspan, who had called for Social Security benefit cuts the previous day. I held my book in front of the camera and said, as forcefully as I could, “Alan Greenspan should be ashamed of himself for what he is not telling the American people.” I now believe that this public criticism of the Fed chairman may have been the final nail in the coffin of The Looting of Social Security, which was very critical of Greenspan’s role in making the looting of the trust fund possible.
A few weeks after my controversial appearance on CNBC, the book mysteriously disappeared from bookstores, nationwide, and was listed as “unavailable” by Amazon.com. I tried to get the rights to the book reverted back to me so I could publish my message elsewhere, but my publisher refused to surrender the rights. Thus the book was effectively killed off, and there was nothing I could do about it. I was unable to pinpoint exactly who was responsible for rendering the book “unavailable,” but a lot of people did not want the contents of the book to become public. Certainly, people in government, such as Alan Greenspan and Karl Rove, as well as many others in the Bush administration, would have wanted to prevent the book from becoming public knowledge, if they could find a way to do so.
Although the public knew nothing about it at the time, Greenspan’s February 25, 2004 call for Social Security benefit cuts was the opening salvo in an organized campaign to dismantle Social Security, as we now know it, once George W. Bush was safely elected to a second term. On August 27, 2004, Greenspan again spoke of cutting Social Security benefits during remarks at a symposium in Jackson Hole, Wyoming.
“As a nation, we owe it to our retirees to promise only the benefits that can be delivered,” Greenspan said. “If we have promised more than our economy has the power to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels.”
Almost immediately upon his re-election, President George W. Bush made public his plan to partially privatize Social Security. On November 4, 2004, Bush said, “Let me put it this way: I earned capital, political capital, and now I intend to spend it. It is my style…I’ve earned capital in this election— and I’m going to spend it for what I told the people I’d spend it on, which is — you’ve heard the agenda: Social Security and tax reform, moving this economy forward, education, fighting and winning the war on terror.”
Like other Americans, there is no way I could have known about the standby plan to privatize Social Security, which was already formulated at the time I appeared on CNBC and publicly challenged Alan Greenspan on Social Security. Therefore, I didn’t realize just how big the potential impact of widespread readership of my book could be on the future plans of the Bush administration. From the administration’s point of view, I’m sure that they were not going to allow my book, or a book by any other author, to sabotage their plan to privatize Social Security. The book was a threat, and the threat had to be dealt with.
What is far more puzzling to me, than the opposition to my book in 2004, is the current effort to discredit me, and the book. I was almost flabbergasted when I learned, just a few weeks ago, that a website that goes by the name of “Medicare and Medicare Programs” launched a smear campaign on September 22, 2010 against me and the book that has been off the market since 2004. You don’t believe me? Click on the following link and it will take you to that website. I tried to find out who owns this website and who is behind this effort, but I was unable to do so. Who is sponsoring this website, and what is their agenda? These things don’t just happen by chance. The five negative reviews, alleged by the website to have been submitted on September 22, 2010, are exact duplicates of “customer reviews” from Amazon.com that were posted in 2004 and 2005.
If the intent of this internet campaign was to stomp out the message of my book, now and forever, their actions have backfired on them. It was in reaction to this campaign that I decided not to allow them to kick a dead book without bringing the book back to life. When I finally regained the rights to “The Looting of Social Security” in 2008, I vowed to re-publish the book, when the time was right, under an arrangement that would guarantee that the book remained in print for as long as anyone wanted to read it.
The smear campaign on the internet has convinced me that the time is now right for the book to be resurrected. Therefore, I am pleased to announce that the book has just been published by Ironwood Publications, under the title, The Looting of Social Security, New release of the book they didn’t want you to read. The new book includes all of the content of the original book, along with a new forward written by Dr. Victor Stoltzfus, President Emeritus, Goshen College, and an afterword written by me that brings the book up to date. The book was officially released yesterday, November 1, 2010.
For an extensive archive of Dr. Allen Smith’s work, visit Dissident Voice.
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