From the beginning of this series debunking the Privateers' myths about Social Security, two claims have persisted the longest. The first is the claim that Social Security will be "bankrupt" on some specified date -- a claim which is by definition false, as SS is a pay-as-you-go system, and it will always have an income. The automatic benefit cuts in the case of a shortfall mean that, after 2041 at the worst, benefits would still exceed those paid today, and would certainly be more than if the Bush administration adopted some kind of price-indexing cut scheme, as they have quasi-proposed.

The second claim is weirder -- the idea that There Is No Trust Fund. Repeated like a mantra, it resembles a zen koan, but Privateers are not meditating. They are actively seeking to supplant reality with a device of their own making, a device more loyal to their ideological aesthetic. The persistence of this myth is inversely related to the persistence of our society's memory...

Mastering what he called "the usual paralyzing tricks of eye-fooling," Dali painted with what he called "the most imperialist fury of precision," but only, he said, "to systematize confusion and thus to help discredit completely the world of reality." (Museum of Modern Art, gloss on Salvador Dali's "The persistence of memory")

MYTH: There is no trust fund

A lot of people in America think there is a trust — that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you. But that’s not the way it works. There is no trust fund -- just IOUs that I saw firsthand. (President George W. Bush, speaking in Parkersburg, WV, 4/5/05)

We also know the so-called Social Security Trust Fund actually contains no money, because Congress has spent all the money (the surplus from the Social Security tax over actual outlays) on other things since the program's 1937 inception. (Richard W. Rahn, "What we don't know," Washington Times, 4/5/05)

But this ignores the reality that the trust fund exists only on paper. It has nothing but $1.7 trillion in IOUs. The surpluses have been used to fund other government spending. (Tom Bray, "Pandemic pension woes," Washington Times, 4/3/05)

REALITY

The idea that the President of the United States is traipsing around government buildings questioning the validity of bonds issued by the Treasury Department, even posing with the bond printout while grinning and saying it's no good -- is disgraceful. He, and all the hacks backing him up, want us all to forget why we have trillions of dollars invested in the Social Security trust fund.

Back in 1982-83, Reagan's Social Security commission, chaired by Alan Greenspan, concocted a plan to alleviate the strain on the system to be caused by the upcoming retirement of the Baby Boom generation. Normally Social Security is a pay-as-you-go system, where workers pay benefits for their elder retirees, and when these workers retire, their benefits are paid by younger workers. To cover the disproportionate population bulge of the Boomers, the Greenspan plan was simply to raise the Social Security payroll tax to partially prefund the Boomer retirement. This fund currently holds about $1.5 trillion, and even pessimistic projections forecast it to reach about $4 trillion (in today's dollars) when the Boomers start retiring.

As it has been for seventy years, this trust fund is held in Treasury bonds -- long considered the safest investment in the world. Why would Privateers -- including the president -- suggest that these bonds are no good? Their idiotic reasoning is that, because they are Treasury bonds, which are loans to the federal government, the government has "spent" the money.

But you know what? All that money we borrowed from China's and Japan's central banks? We spent that too. And they're just holding those dinky little bonds. If you go to the Bureau of Public Debt you'll see some very large numbers: our $7.78 trillion in public debt is divided into the categories of intragovernmental borrowings ($3.18 trillion) and debt held by the public ($4.6 trillion). But these categories both constitute the national or public debt:

Public debt. Federal government debt incurred by the Treasury or the Federal Financing Bank by the sale of securities to the public or borrowings from a federal fund or account. (Glossary of terms in the federal budget process, Rules Committee Majority Office, United States House of Representatives)

(Publicly-held debt, confusingly, is a subset of public debt -- bonds which the public at large, i.e. China, can buy.)

President Bush is no stranger to these terms -- public debt has risen over $660 billion just in the last year, and Bush's first-term budgets borrowed $639 billion from Social Security. And the thanks? "There is no trust fund."

We know that Bush is a big spender who's not very concerned about deficits, but there's something particularly offensive about his attacking the trust fund. The payroll tax hits mainly lower- and middle-class Americans, since it is capped (currently at $90,000). He seems to be suggesting a massive wealth transfer, in which 80% of Americans would lose an average of 20% of their annual income, and the richest 1% of households would gain an average of $730,000.

Aside from being completely unethical, defaulting on the Social Security trust fund would betray the very specific promise made to Americans in 1983 when the payroll tax was raised. And it would betray the financial credibility of the country. Even questioning the validity of public debt is a violation of the Constitution, which the president is sworn to uphold:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. (Fourteenth Amendment, Section 4 of the United States Constitution)

While Encyclopedia Brown is out mocking our major financial obligations for being kept in a locked filing cabinet (actually, like everything else, it's all on the computer -- those are just printouts), he seems to be missing the point of his grandstanding. The only thing threatening the trust fund is his own rhetoric.

MYTH: Private pension "woes" teach us to privatize Social Security

In the corporate world, mammoth pension liabilities, representing an excessive promises, already are hitting home. ... It's interesting to note that much of the private sector already has reformed its pension system along the lines of the Bush proposal, substituting defined contribution plans which workers control for defined benefit plans never adequately funded. (Tom Bray, "Pandemic pension woes," Washington Times, 4/3/05)

REALITY

There is indeed a lesson to be learned from imperiled private pensions, but it's not the answer Mr. Bray wants. As Prof. Michael Hudson writes in this month's Harper's, the trouble with private pensions is that their managers have been assuming absurdly high returns on the stock market, in order to underfund the pensions.

For quite a few years now, companies simply haven't been putting away enough money to pay retirees what they are owed.... The problem was created by fund managers and CFOs who believed—or at least pretended to believe—that pension reserves could grow at fantastic rates of return forever. Milliman USA, a benefits consulting firm, reports on the assumed rates of return on pension investments at the hundred largest firms in America. How high did these companies bet? In 2000 and 2001, the median projected rate of return was 9.5 percent. In 2002 it was 9.25 percent. And in 2003 it was 8.55 percent.

These are wildly optimistic projections...[T]he top hundred corporate pension funds earned an average annual investment return of just 1.3 percent between the end of 1999 and the end of 2003.

At the beginning of 2001, for instance, IBM proposed that it would earn $6.3 billion on pension-fund assets of $61 billion—about 10 percent. This was an astonishing demonstration of confidence given that IBM had earned only $1.2 billion on those assets the previous year. In the event, IBM actually went on to lose $4 billion in 2001. Barely daunted, the company's managers predicted a 9.5 percent return in 2002. They lost another $7 billion. In 2003 they predicted a return of $6 billion, and—as the market began to recover—they at last beat their prediction, by $4.4 billion. The result of this "recovery" is that, since George W. Bush took office, IBM's pension-fund assets have plummeted by more than $1 billion.

Does this faith-based investment sound familiar? It should -- even as they forecast a sluggish economy to back up their "bankruptcy" claims, Privateers are promising fantastic returns to citizens who give up their guaranteed benefits. Of course, there is no gain without risk, and private pensions clearly demonstrate that the magic of the market can turn around and bite you in the ass. Assuming future returns as present profit is the biggest lie of the Enron Age, and Privateers want to try that scheme on Social Security.

The second lesson is that, as more and more companies underfund their defined-benefit pensions, and more switch to defined-contribution schemes in which the worker has no clue what to expect when he or she retires, the bedrock guarantee of Social Security is more important than ever.

MYTH: Free lunch

[I]n the debate on Social Security reform, [Sen. Lindsey] Graham has suffered a sort of economic amnesia. He is proposing a large tax increase, in the form of raising the income level subject to payroll taxes, in order to finance the transition to personal retirement accounts. Such a tax increase is not only unnecessary, but it would be devastating to our economy.

The president's proposal to allow younger workers to divert a portion of their payroll taxes to personally owned investment accounts would, temporarily, increase the already impending gap between promised benefits and projected tax revenue. But over time, the power of compounded interest (the greatest power in the world, according to Einstein) will allow ever-greater portions of workers' retirement benefits to come from their accumulated savings. The government's obligation will diminish accordingly, the funding shortfall will shrink, and, unlike the current system, a reformed Social Security system would become permanently solvent. The temporary funding of $1 trillion-$3 trillion is a bargain because it wipes out the $11 trillion shortfall of the current system.

... This week, we began an advertising campaign in South Carolina to remind Mr. Graham of the principles of ownership and economic freedom he's fought for in the past. (Pat Toomey, "Economic amnesia," Washington Times, 4/1/05)

REALITY

As the president himself has admitted, private accounts do nothing to help the solvency of Social Security -- and in fact, the carving-out of funding for current benefits will hurt the system's finances.

As we have explained many times, Social Security is primarily a pay-as-you-go system, with current taxes paying for today's retirees. By diverting some of these taxes, privatization creates a funding gap -- estimated to be more than $5 trillion in the first 20 years of the Bush plan. The plan is designed to offset each individuals traditional benefits by the amount they took out of the system (although even this clawback has some problems, as we went into last week), creating what the administration calls a "net neutral effect." The projected shortfall -- under pessimistic assumptions, $4 trillion in the next 75 years, or $11 trillion through the implosion of the sun and the collapse of the universe -- would not be reduced without cutting benefits beyond the amount of the carve-out.

For the government, the "power of compounded interest" will show up in two places only: first, the Trust Fund will receive less interest as it accumulates less in coming years, causing worse solvency, and second, we will be paying interest on the $5 trillion in debt that the government will need to take on to pay for this transition.

The most that Toomey can say is that if the government cuts benefits, it will be obliged to pay less in benefits. Well, duh! Unfortunately, privatization requires us to pay for this expensive transition -- yes, we do have to pay someday for massive deficits! And a basic fact of life is that, if retirees are going to receive retirement income, somebody has to pay for it. Merely shifting the assumed risk of retirement security from society as a whole (social insurance managed by the government) to individuals does not magically produce money -- it just wishes away the risk.

Pat Toomey, currently president of Le Club de Growth, is most famous as the anti-government ideologue who ran against Republican Senator Arlen Specter in Pennsylvania from the far right. Lindsey Graham, a Gingrich Republican whose staunch conservativism is marked unusually by integrity, has been floating the idea to combine benefits cuts with raising the payroll tax cap to more historical proportions, in order to make up the revenue shortfall. The message is clear: it's alright if Republicans drive up massive debt, but even think of correcting revenue and the Toomeys of the world will try to take you down.