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The Trust Fund Raiders

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Dean Baker
Cleveland Plain-Dealer, July 19, 2001

Hollywood hopes that Tomb Raider will be its big summer blockbuster. While it may not have the same visual appeal, Trust Fund Raiders is far more scary and will have a much more enduring impact.

In case you have not heard, Trust Fund Raiders is the script being crafted in Washington by President Bush's Social Security Commission as it seeks to dismantle the nation's most important and popular social program. They gave away the plot line in a chilling preview presented last week by Former Senator Daniel Patrick Moynihan and Richard Parsons, the co-chairs of the Commission. In a column printed in the Wall Street Journal, the co-chairs told the nation that the Social Security Trust Fund "is a financial obligation, not a financial asset." While the meaning of this phrase  may not be apparent to everyone, it came through loud and clear to those of us who are Social Security movie buffs -- they intend to steal the Trust Fund.  

To avoid being confused by the Commission's special effects, just keep your eye on the money. Every year approximately 150 million workers and their employers pay the Social Security system approximately $500 billion in taxes on their wages. The vast majority of this money goes to pay current benefits for retirees, but at present the system is pulling in $170 billion a year more in revenue than it needs to pay benefits. 

This current surplus is not an accident. It was designed into the system by a Commission chaired by Alan Greenspan in 1983. (Senator Moynihan also sat on this Commission.) The point of the surplus was to build up a large reserve that would help pay for the retirement of the baby boom generation. What does the Social Security system do with this surplus? It buys government bonds which it holds in its Trust Fund, as it is required to do under the law. Currently, the Trust Fund holds nearly $1.2 trillion in government bonds, approximately $8,000 in bonds for every worker in the country.

But -- watch closely here -- President Bush's Commission tells us that these government bonds are not assets, they are "a financial obligation." Okay, the system holds government bonds as do millions of individuals, banks, and private corporations. People and corporations who hold bonds all think of them as financial assets -- why shouldn't the Trust Fund? 

Now the special effects -- the bonds are a financial obligation of the federal government -- exactly right, and completely irrelevant. All government bonds are a financial obligation of the federal government, that doesn't prevent them from being assets for the people that hold them. 

The Trust Fund Raiders now start waving their hands and yelling that we will have to use tax revenue to repay the bonds held by the Social Security trust fund. Yes, we will have to use tax revenue to repay any bond. The important point here is that the tax revenue will come from different people than the ones with claims on Social Security. Most of the money to repay the bonds will come from the income tax. The income tax is disproportionately paid by the wealthy, as President Bush reminded us repeatedly in arguing for his tax cut. On the other hand, most of the claims on Social Security are from low and middle income workers.     

Again, keep your eye on the money. Millions of Americans hold some amount of government bonds. While some of our own tax money may be used to pay off our own bond, no one in their right mind would just throw the bond away and say it is just my tax money anyway. That is what the Trust Fund Raiders are trying to get us to do with the Social Security Trust Fund. They want us to throw away more than $1 trillion in Social Security's assets, just because some fraction of it may come from our own tax dollar.  

So, as President Bush's Social Security Commission goes through its course, just repeat "it's only a movie." If 150 million workers insist on having the Trust Fund's bonds repaid, just like any other bonds, then no politician in the country will dare propose defaulting on the debt to Social Security. Social Security will only be in trouble if we start to take this movie seriously.  


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.