MYTH: No Trust Fund

Let's start with basics. The Social Security system has no trust fund. No lock box. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65. The system is pay-as-you-go. The money goes to support that year's Social Security recipients. What's left over is "loaned" to the federal Treasury. And gets entirely spent. It vanishes. In return, a piece of paper gets deposited in a vault in West Virginia saying that the left hand of the government owes money to the right hand of the government. (Charles Krauthammer, "2042?" Town Hall, 2/18/05)

REALITY

Over and over and over again, conservative commentators cling to this flimsy fantasy that Social Security is broke. Trillions of dollars -- It vanishes? Really, Krauthammer. Here's a newsflash: when you deposit your fat paycheck from the Heritage Foundation, your bank doesn't put a bunch of gold bars in a vault, ready for your retrieval when you pay your bar tab. Oh yeah, and the Easter Bunny? Just a guy in a suit.

The Trust Fund is held in Treasury bonds, backed by the government. These bonds are just as reliable as dollar bills, but they're better, since they earn interest. You might think it's a fine thing for the United States to default on its financial obligations, but those of us who aren't drinking the Enron President's Kool-Aid think otherwise.

MYTH: Transition costs aren't real

The trillion dollar totals that Democrats cite as "transition costs" are actually the amount the government is borrowing to pay current Social Security benefits combined with the massive debt already owed to the so-called Social Security "Trust Fund."

"We hear a lot about transition costs," Arizona State University professor Edward Prescott, 2004 winner of the Bank of Sweden Nobel Prize in Economics, said. "But I'm going to use some economic jargon, not 'political accounting' jargon. "There are no transition costs," Prescott said at the Cato Institute Feb, 9. "Re-labeling debt is not a cost."

Lawrence Hunter, senior research fellow with the Institute for Policy Innovation, told the Cybercast News Service that he agrees with Prescott. "There are no transition costs," Hunter said. "There's simply a cash flow crunch that exists and if Congress chooses to borrow the money to alleviate that, it has done nothing more than replace one form of debt ... with another. It's refinanced the debt."

[...] Prescott added that the federal government is being less than honest when it calls the money it has borrowed from current FICA taxpayers to pay retired workers' benefits an asset rather than a liability.

[...] The so-called "transition costs" are, according to Hunter, really just the money Congress has to find elsewhere to pay for current Social Security benefits, the other programs it has been funding with FICA tax revenues and the amount already borrowed from the Social Security "Trust Fund." ("Social Security 'transition costs' a myth, economists say," CNS News, 2/21/05)

REALITY

This single article from "Cybercast News Service" (formerly called "Conservative News Service") may set the record for the amount of confusing and bogus assertions in one piece. The two conservatives cited are actually talking about completely different things. Mr. Hunter is under the mistaken impression that "transition costs" refer to the projected future shortfall of Social Security under pessimistic economic growth. In fact, the transition costs are the result of phasing out the current system -- since most of the payroll taxes taken in today go towards current retirees, if you redirect part of these taxes to private accounts, there is less money to pay grandma's benefit check. This is a structural gap that, under the president's plan, will cost $4.9 trillion in the first twenty years alone. By contrast, the pessimistic shortfall is $3.7 trillion over the next 75 years, and the White House has admitted that private accounts will not reduce this projected shortfall. These are two separate matters, but like the president, Mr. Hunter wants you to get them confused.

Meanwhile, to add to this farce, nutty Professor Prescott (who apparently knows what the gap is) makes the claim that borrowing trillions to phase out Social Security in favor of private accounts is merely "relabeling debt." This is indeed "political accounting jargon" -- political in the sense that it assumes an anti-government political ideology, and accounting in the sense of Anderson and Enron, moving "liabilities" around on paper whenever convenient. By asserting that Social Security is "borrowing" money from today's workers to pay for today's retirees, he is abnegating the entire concept of Social Security. SS is not a typical "investment" that a worker makes; rather, the worker is explicitly paying for the retiree's benefits, in exchange for membership in a society where the elderly (including himself, in a few years) do not live in abject poverty. Social Security is not an investment scheme (yet, knock on wood), it is a social insurance program.

As for the claim that a shift to private accounts will reduce our society's future "liabilities" for retirement security, Prescott can only accomplish this by ignoring the real value and purpose of Social Security as a risk-free guarantee of adequate conditions for all seniors. As economist Hal Varian put it: "It is important to remember that if the stock market drops precipitously, there would be millions of voters nearing retirement who had investments in equities. This means that there would be a lot of pressure for a bailout. If you think that the political system could withstand such pressures, think about how we got Social Security in the first place." Simply having one 21st-century president heartlessly cut guaranteed support does not mean we can be so cruel when, in the future, the going gets tough.

MYTH: Original Social Security law called for private accounts

The next big lie is from the same Social Security pamphlet: "Beginning November 24, 1936, the United States government will set up a Social Security account for you. ... The checks will come to you as a right." First, there's no Social Security account containing your money... (Walter E. Williams, "Social Security deceit," Town Hall, 2/23/05)

REALITY

Conservatives, unable to make the argument that their policies are better, like to pretend that they represent the real course of American history. Since Social Security is so darned popular, some Privateers are now trying to say that we have to phase it out because that was the intention in the first place. We saw this lie recently when FOX host Brit Hume doctored an FDR quote to make him say the opposite of what he actually said. Now Williams is fabricating history to make the claim that Social Security was designed with personal accounts from the get-go.

Of course that's baloney. Williams found this pamphlet online, and you can read it for yourself. It's a simple explanation of what Social Security numbers are for -- to keep track of your earnings and payroll taxes so that old-age benefits can be paid accordingly. Nowhere does it say that you will have a personal account with money in it. Indeed, the pamphlet discusses the "Old-age Reserve Account," a "trust fund" which draws interest and which is used to pay benefits. This is even more explicit in the text of the law itself, also available online. Mr. Williams must either be too blind with privatization fever to see the text, or too duplicitous to tell the truth.

MYTH: The market will provide

The return Social Security recipients receive from a life of paying into the government's social Security system is only about 1.4 percent of investment. That is a 1930s return on investment. At present estimates that return will in coming years become negative: that is, a Great Depression-era rate of return. Private investment accounts pay out more than 4 percent. The president's plan for reforming Social Security envisages that kind of a return. Moreover holders of what he calls Personal Retirement Accounts will be free to bequeath whatever remains in their accounts at the hour of their deaths. (R. Emmett Tyrrell, Jr., "Clinging to the past," Washington Times, 2/18/05)

AARP takes the easily demonstrable truth that "individuals will get higher returns with private accounts" and somehow redefines it as a myth without mentioning a single fact. Since 1900, the average return on stocks was 6.3 percent a year, according to the Bridgewater Group, but only 1.4 percent on U.S. bonds. (Alan Reynolds, "Myth illogical," Washington Times, 2/20/05)

REALITY

According to the Social Security Trustees' report, which supposedly "dooms" the system to a shortfall, the U.S. economy will only grow at 1.4%. If this is the case, then it is implausible that stocks will give the fantastic returns Privateers proclaim. If, on the other hand, economic growth is better (as it has been), then the current Social Security system will be completely solvent, with no changes.

One thing that Privateers don't tell you is that the market is guaranteed to fluctuate. If these boosters were giving investment advice, they would go to jail for not mentioning this. If you happen to retire during a low point in the business cycle, or a recession, you would have to cash in your meager nest egg anyway. There will always be losers in the stock market.

Let's be clear: we encourage individuals to invest money privately for their retirement. It's a good idea. But one thing it isn't is a guarantee. That's where Social Security comes in; while your investments may do well or may do poorly, Social Security will provide for basic needs, if not wants.

That's why the smart move is to shore up the current system, through minor adjustments today, and to take steps to encourage more savings.

Will Republicans wise up? We wouldn't bet on it, but then again, past performance is not necessarily indicative of future results.