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Turning the Trust Fund Into a ‘Piggy Bank’

What Will Washington Do about Social Security?

Our political leaders are once again looking at the Social Security Trust Fund as a source of money to tap when they desire to spend more than they can through other various tax and borrowing schemes.

For clarity, when referring to the "Payroll Tax Cut" they are talking about cutting the revenue source for the main part of the Social Security program which is sometimes abbreviated RSDI for Retirement, Survivors, and Disability Insurance. One of the proposals now circulating in Washington D.C. to cut in the SS revenue paid by working individuals and corporations will result in a reduction of some $240 billion in real dollars flowing into the trust fund each year until it expires or is repealed.

Washington proposes to cover this revenue gap by putting general fund paper IOUs in the trust fund. (There are other proposals including a new federal real estate transactions tax but the IOU proposal is the most prominent). This is an extension and magnification of the continuing raids on the Social Security Trust Fund.

This Trust Fund is managed by an authority set up to manage this national social insurance program. It simply is not another government program and if one tampers with the trust fund itself by mixing it with general fund dollars, one automatically changes it from a trust fund managed by a legally established board to a congressional "piggy bank." For decades administrations and Congress, both parties, have resented the fact that this large trust fund could not be dipped into more frequently for the more favored federal spending of the day.

Two Texans found it most convenient to do this. President Lyndon B. Johnson (LBJ) did it to mask the expenses of fighting the Vietnam War. He spent SS and Transportation Trust Fund money to fight the war, and left IOUs in the trusts. Remember the saying "Both guns and butter"? George W. Bush also did this to cover the cost of the huge 2001 tax cut and wars in the Middle East. He promised in one televised debate in 2000 that he would honor the trust fund, but he went back on his word.

Based on recent calculations the SS Trust Fund is solvent into the 2030s, and with some minor tinkering it can be made solvent through 2075. But if Congress cuts the SS insurance payment each of the insured (and their employers) must pay, then financial prospects for the SS Trust Fund will drop dramatically and the required fixes will become dramatically different and more difficult.

What we are seeing now is a process, sanctioned by many in both parties, which will change Social Security from an insurance paid for by beneficiaries to just another federal program that directly competes for increasingly scarce federal general revenues.

Some Republicans, especially lobbyists including the most powerful Republicans in Washington, see this as a way to eliminate the payroll (SS) tax on businesses and to eventually do away with this social insurance program altogether. They would like to change it to a voluntary program with funds being managed by Wall Street. Bush proposed this idea in 2005 but gave up quickly.

Democrats seem to like the concept of mixing SS funds with other federal programs in order to provide more flexibility in expanding and administering social programs.

At the beginning of the current recession, in 2007, Congress passed a bill and the IRS sent every taxpayer a check for $300 to $1,200-the Economic Stimulus Tax Rebate Check-to "stimulate the economy." Of course, the Treasury had to borrow the money to do this. Under the concept of a "payroll tax" or a "SS Holiday", they do not have to borrow the money from other countries such as China or Saudi Arabia; they can just put in a paper IOU promising to pay the money back when needed. And, the unspoken truth is if the US is able to pay it back.

If the so called "pay roll tax cut" plan currently in Congress that is supported by many in both parties is approved, the SS Trust Fund will lose $240 billion the first year. Then if not reversed it could lose $2.4 trillion in ten years or less completely bankrupting Social Security Insurance Trust Fund. It is very doubtful that it will last only one year because if the economy is not booming this time next year, no one will want to raise taxes by $240 billion a year especially on average tax payers. Repeatedly Washington has continued the Bush tax cuts for millionaires (and others) when the expiration date arrived on two occasions. The rational given each time is "do not raise taxes in a slow economy." Thus, it is not likely that the economy will be booming or that federal spending will drop dramatically any time soon and that will cause strong opposition to re-raising the social security tax.

Thus, the "Old Age, Survivors, and Disability Insurance Trust Fund" is in danger of being destroyed in the name of stimulating the economy but the real forces are much more sinister. Americans need to understand that cutting something called the "payroll Tax" could very well end up destroying Social Security as we know it. Americans need to wake up before it is too late!

Wade Gilley of Reston, Virginia is a retired university president and former Secretary of Education for Virginia.