The Social Security Trust Fund Exposed

Have you read the news today?

Major news publications report that Social Security’s Trust fund for retirees will run out of reserves. FICA taxes, when collected, will be the only source of benefits. Estimates are that beneficiaries will receive an average of 75% of their promised retirement benefit starting in 2033. The mainstream news explains that the reason for such a large cut in retirement benefits is that the Trust fund reserves will run dry. But the media neglects to report that Congress is choosing not to fund Social Security. The program’s individual benefits for the average retiree from its beginnings have not been a genuine success. Congress chose not to fully fund Social Security to provide a minimum benefit that gives retirees who have no or only a small nest egg to provide fiscal security after retirement. The choice was based on false caution, and the current proposals do not fix it.

President Franklin D. Roosevelt’s first term began in 1933 with the Great Depression raging across the world. The group that suffered the most was lower-income retirees, especially those affected by industrialization. Roosevelt put together a plan to help ease the problem. It took him years of negotiation with the capitalist oligarchs to arrive at a bill Congress would pass in 1935. The oligarchs were wealthy individuals who advised politicians, including presidents. In the 1930s, they were colloquially called the “Captains of Industry.” Some ran for office themselves. Their power grew as American industry’s role in the economy grew after the Civil War. They asserted power by lobbying the three branches of the federal government. During Social Security’s design, their goal was to protect corporate and private wealth interests.

Capitalist oligarchs convinced politicians that the private sector held greater financial appeal than the government. They wanted to use tax money to fund private investment banks. Those banks would then distribute benefit checks to retirees. Their claim, then and now, is that their investments would grow the Trust fund and provide superior benefits. They claimed that a government-managed program only hinders private sector economic growth. In the end, Roosevelt, recalling the bank failures that had started the Great Depression, picked the least of two evils. He kept taxes to a minimum, reduced intended benefits, appeasing the capitalists, and made Social Security a government program. As we will soon see, Roosevelt should have rejected the capitalists’ assessments and sought the advice of Beardsley Ruml, Chair of the New York Federal Reserve, and funded Social Security retirement with no tax offsets.

It took until 1940 for Social Security to make monthly payments to people who retired after 1935, the year it became law. Recognizing that any new program requires a break-in period, I looked at figures from 1942. I also reviewed the same data from 1955, after the first increase in benefits in 1951. I did another collection of the same data in 1975, during a period of high inflation, followed by data in 1985, after an overhaul passed in 1983. Last, I collected data from both 1995 and 2023. The former since neoliberal austerity under Reagan and Clinton had completely revamped the economy, the latter because it gives us a glimpse of the present.

I accomplish consistency by expressing each data point as a national monthly average. The data points are apartment rents, Social Security benefits, and the median household salary. I generated an estimated cost of living from the average rent. From this rough estimate, I found that an average beneficiary’s monthly check did not even pay for an average rent from 1955 through 1995. Even more concerning, the average benefit for a two-person household never equaled the median salary or covered their monthly expenses in any of the years examined. Social Security has been successful for the middle class with a pension but has failed to provide fiscal security for those who did not have an employer-funded pension or even a savings plan.

In 1981, President Reagan was told that Social Security would run out of money to pay future beneficiaries. Reagan got together with Speaker Tip O’Neil, and in 1983 they introduced legislation to overhaul Social Security. Their goal was to create a surplus in the Trust fund, so that in later years what is happening today would not happen. Everyone, including Democrats, Republicans, and the media, cheered for the plan. Congress also showed strong bipartisan support with its votes.

The government raised the retirement age and increased FICA tax rates to save Social Security, and created a surplus in the Trust fund. The surplus would buy a special Treasury bond. These bonds earn interest, so the Fund would have an additional source of revenue. To address concerns of the poor and middle-class, it added a new feature to Social Security to ensure the wealthy benefits were reduced. Before we describe how this was done and its role in creating the approaching Trust fund shortfall, it is important to understand the Social Security Trust fund. First, we will provide a brief history of the fund. Then, we will examine how the fund is funded.

FDR created the trust fund for retirees to safeguard Social Security from the capitalist oligarchy who wanted then and still do today to redirect tax money to the private sector. They already made inroads in 1983 when President Reagan’s tax cuts passed in 1981. Companies could now establish IRAs or 401Ks for a business with a pension plan under a clause included in Reagan’s tax cuts. This accomplished the capitalists’ desire to redirect retirement savings to the financial sector. Before that, companies that had a pension plan could not offer employees an IRA or a 401K. Starting in 1981, businesses, one by one, ended their pension plans; others phased them out. Relaxed antitrust law enforcement, which resulted in hostile takeovers during and after Reagan’s administration, dissolved many pensions. Average workers received a lower retirement benefit package because of these changes. Reagan also weakened the labor movement, and union membership dropped significantly. Social Security changes in 1983 improved short-term benefits. Over time, the weakened unions and the risky investment retirement savings in IRAs and 401Ks resulted in lower benefits when adjusted for inflation, effectively lowering real benefits.

Think of the trust fund as a spreadsheet that records each person’s earnings and maintains a running total of FICA taxes for the retirement fund. The system subtracts the amount of each check from the “fund” when it distributes benefits to retired workers. In fact, all internal federal funds are stored on spreadsheet scorecards.

The US Treasury collects taxes and other revenue and records these numbers on multiple spreadsheets. But your tax dollars serve only a single purpose. That is to pay off your tax debt. When you pay anything towards your tax debt, that money has served its purpose and is removed from circulation. Left behind are worthless numbers on spreadsheet scorecards. Consider the worthless money on spreadsheet scorecards as “ghost money.” This money represents your tax payments or an allocation of the tax payment but no longer exists as money. In fact, the Federal government cannot redistribute money collected from taxes, as any tax collected satisfies the tax debt owed by the taxpayer. When Social Security sends out a check to a beneficiary. The ghost money informs the Treasury how much to spend, but the Treasury spends newly created money, and they delete the ghost money from the Trust fund spreadsheet to track the ghost money.

This leads us to the observation that the Federal Government does not use tax receipts to fund anything. The government has the power to create money through spending, so it does not use taxpayer dollars for spending. The illusion is that tax dollars exist forever. But money only exists while it lives in the private sector. Instead of money or gold in vaults, there is ghost money, and it takes up no space; they are numbers on scorecard spreadsheets. Money is not a problem for Congress, as it can create resources to pay for anything for a public purpose.

Social Security was changed in 1983 by President Reagan and Speaker O’Neill. They increased FICA taxes and implemented a two-year delay in full benefits, which was intended to make the changes more acceptable to lower and middle-income individuals. Included in the bill was an amendment that added a penalty tax of up to 50% of retirees’ Social Security benefits.

This first ever tax imposed on Social Security retirement income destroyed the myth created by FDR to protect the program. Roosevelt created a new tax so that it would appear there was a separate revenue stream funding the retiree trust fund. As noted earlier, FICA taxes went to the same place as all other taxes, then eliminated from existence, leaving only ghosts on spreadsheets.

This new tax created by Reagan was intended to limit the benefits collected by wealthier beneficiaries. But later the tax recovers that new money, and the Treasury uses that money to mark down the new tax obligation, decreasing the economic advantage of providing retirees having more money to spend. Then two other Social Security Trust Fund spreadsheet scorecards, the Social Security Disability fund and the Medicare funds, are marked up with the total value of the collected ghost money. In effect, by taking ghost money from retirees’ benefits, the Retirement Trust Fund has less ghost money, and future beneficiaries are at risk of receiving reduced benefits. The injustice is that congressional appropriations fund the other two funds in the federal budget. The only reason this tax was structured this way was to artificially keep deficits lower by taking benefits away from many deserving retirees.

Let us break this process down into a set of steps:

1. You work and get paid. You pay income taxes based on your salary plus FICA taxes, which are designated by law for Social Security. These taxes are paid from a portion of your salary.
2. The government uses the FICA taxes you pay to pay off your FICA tax liability and records the amount you paid on a spreadsheet to calculate your benefits. Since the tax liability has been paid, the scorecard is ghost money; it has no value.
3. You retire and, based on your lifetime earnings, your benefit is calculated. And each year, your benefit is recalculated based on inflation.
4. Every month, you are sent a check. The value of the check is deducted from the trust fund spreadsheet for the amount of your benefit. Once the check is deposited, new money is born.
5. The IRS will tax your promised Social Security benefit if your annual benefit plus other income exceeds $25,000 per year, and the government will add the ghost money from paying this tax to the Disability Trust Fund and the Medicare Trust Fund spreadsheet scorecards.
6. You do not receive the amount promised. The Trust is decreased by amounts that are not used for their intended purpose. Roosevelt devised a plan that protected retiree funds, and this plan is now compromised.

Operationally, only people with a large income in 1985 were affected. In fact, at first, only 10% of Social Security recipients in 1985 lost any of their benefits to the new taxes. In 1993, President Clinton extended the tax on Social Security benefits. Social Security describes the new tax rules:

“If you file a federal tax return as an ‘individual,’ and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income is more than $34,000, up to 85% of your Social Security benefits is subject to income tax.”

As described earlier, no federal spending comes from collected taxes. But when you get your annual Social Security benefit letter, there is no mention of the taxes you will pay out of your benefit. The government deducts not a penny unless you request withholding or quarterly estimated payments. But the biggest issue at hand is that the federal government promised future payments based on each person’s earnings plus inflation. In addition, the two tiers of taxation do not alter with inflation. Today’s minimum and maximum benefits exceed those from 1983. Eventually, anyone who collects Social Security will pay taxes. That scenario will occur when the minimum benefit reaches $2823 a month. The current lowest benefit is $1,033 a month. However, within three decades, even these individuals will face taxation on their benefits. Today, 40 years after the new tax was instituted, 56% are paying taxes on their benefits. The halfway point was achieved in 2015. This means that millions of dollars are taken every year from the Trust fund spreadsheet for retirees, and that amount grows every year. Those millions are not staying with the intended recipients. Instead, it is collected back to the Treasury, where it is removed from circulation just like every other tax dollar collected. (I could not find a summary of the numbers assigned to retirees that resulted in a smaller trust fund).

The strategies to save Social Security disproportionately target higher earners for tax increases. Social Security will become irrelevant and all retiree income will come from the private sector unless the regressive taxation of its benefits is discontinued; workers will take home less in their paychecks and get reduced benefits in the future.

Social Security requires a major overhaul. Every American should get Social Security retirement benefits from the government for at least a living wage, regardless of job or ability.

When Social Security started, it cheated the poor, and now it has encroached on cheating the middle-class too. Social Security will never cheat the wealthy; they always have more than they need. Limiting the wealthy’s Social Security earnings can be accomplished through a 90% tax on benefits for top-tier income taxpayers. The existing taxing of benefits process exists to inflate reported general revenues to “pay for” deficits. The decision not to include an inflation adjustment for a threshold minimum income and tax limits was a deliberate choice. It is the only Social Security program component not adjusted automatically.

It’s difficult to match tax receipts with federal expenses because taxes are consumed when they pay an individual’s tax obligation. As former Federal Reserve Chair, Alan Greenspan famously described to Rep. Paul Ryan at a hearing on March 2, 2005:

“I would not say that the pay-as-you-go benefits are insecure, in the sense that there is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”

Real assets just mean that there must be goods and services available to buy. An overhaul of the Social Security program could eliminate 100% of FICA taxes and fund all benefits and services to cover at least a living wage. If other earnings exceed the top tax tier, then your Social Security benefits are 90% taxed. Congress uses smoke and mirrors to make it look like there is an additional tax on the wealthy. The illusion is in place because of a Congressional fear of running a deficit, which is a fear with no basis in economic reality. Think about who gains from the illusion. It is certainly not a poor person.

Social Security was created over 88 years ago. There have been many changes, but all conform to the parameters and constraints of the original. Present economic constraints differ from the constraints that were extant during the Great Depression. We no longer depend on the quantity of gold in Fort Knox as a representation of wealth. The United States has a fiat currency that depends on the sum value of its real resources. Or, as Chairperson Greenspan called “the real assets (which are) created” will promote the general welfare.

Additional Information

Official History of Social Security

Beardsley Ruml’s Paper – Are Taxes For Revenue Obsolete