Wednesday, May 11, 2011

What Social Security System??

I was going back to some of the information that I was saving to use in a blog
on the Social Security System. What got my interest was the third paragraph. 
Think about it!

Recent attention to the Social Security Trust Fund

On February 2, 2005, President George W. Bush made Social Security a 
prominent theme of his State of the Union Address. One consequence was 
increased public attention to the nature of the Social Security Trust Fund. 
Unlike a typical private pension plan, the Social Security Trust Fund does 
not hold any marketable assets to secure workers' paid-in contributions. 
Instead, it holds non-negotiable United States Treasury bonds and U.S. 
securities backed "by the full faith and credit of the government". The 
Office of Management and Budget has described the distinction as follows:

These [Trust Fund] balances are available to finance future benefit payments 
and other Trust Fund expenditures – but only in a bookkeeping sense.... 
They do not consist of real economic assets that can be drawn down in the 
future to fund benefits. Instead, they are claims on the Treasury that, when 
redeemed, will have to be financed by raising taxes, borrowing from the 
public, or reducing benefits or other expenditures. The existence of large 
Trust Fund balances, therefore, does not, by itself, have any impact on 
the Government’s ability to pay benefits. (from FY 2000 Budget, 
Analytical Perspectives, p. 337)

Other public officials have argued that the trust funds do have financial 
and/or moral value. "If one believes that the trust fund assets are 
worthless," argued former Representative Bill Archer, then similar 
reasoning implies that “Americans who have bought EE savings bonds 
should go home and burn them because they’re worthless because the 
money has already been spent.”[10] At a Senate hearing in July 2001, 
Federal Reserve Chairman Alan Greenspan was asked whether
 the trust fund investments are “real” or merely an accounting device.
 He responded, “The crucial question: Are they ultimate claims on real 
resources? And the answer is yes.”[11]

From the point of view of the Social Security trust funds, the holdings of 
"special" government bonds are an investment that returned 5.5% to the 
trust funds in 2005.[12] The trust funds cannot resell these "special" 
government bonds on the secondary bond market, although the interest 
rate is determined based on market interest rates. Instead, the "specials" 
can be sold back to the government at face value, which is an advantage 
when interest rates are rising.

To escape paying either principal or interest on the "special" bonds held 
by the trust funds, the government would have to default on these 
obligations. This cannot be done by executive order. The Congress would
 have to pass legislation to repudiate these particular government bonds. 
This action by Congress could involve some political risk and, because it 
involves the financial security of older Americans, seems unlikely.[citation 

An alternative to repudiating these bonds would be for Congress to simply 
cap Social Security spending at a level below that which would require 
the bonds to be redeemed. Again, this wouldbe politically risky, but would 
not require a "default" on the bonds.

The week after his State of the Union speech, Bush downplayed the
 importance of the Trust Fund:

Some in our country think that Social Security is a trust fund -- in other 
words, there's a pile of money being accumulated. That's just simply not 
true. The money -- payroll taxes going into the Social Security are spent. 
They're spent on benefits and they're spent on governmentprograms. 
There is no trust.[13]

These comments were criticized as "lay[ing] the groundwork for defaulting 
on almost two trillion dollars worth of US Treasury bonds".[14]

However, even right-leaning politicians have been inconsistent with the 
language they use when referencing Social Security. For example, Bush 
has referred to the system going "broke" in 2042. That date arises from 
the anticipated depletion of the Trust Fund, so Bush's language "seem[s] 
to suggest that there's something there that goes away in 2042."[15]
Specifically, in 2042 and for many decades thereafter, the Social Security 
system can continue to pay benefits, but benefit payments will be 
constrained by the revenue base from the 12.4% FICA (Social Security 
payroll) tax on wages. According to the Social Security trustees, continuing 
payroll tax revenues at the rate of 12.4% will enable Social Security to pay 
about 74% ofpromised benefits during the 2040s, with this ratio falling to 
about 70% by the end of theforecast period in 2080.[16]

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