Democratic Underground

The Biggest Embezzlement of All Time
July 23, 2001
by Stanley C. Simon

The IRS collects income taxes, FICA, and other taxes. The income taxes go into the General Fund, where they are spent on various government expenses and paying government obligations held by the public. FICA taxes go into the Social Security Trust Fund, where they are spent to pay OASDI benefits. Any excess of the FICA taxes collected over the amount needed currently to pay OASDI benefits is used to buy government bonds. This transfers the money into the General Fund, where, again, it is spent on various government expenses and paying government obligations held by the public.

As a result of changing demographics, actuaries expect OASDI benefits paid to exceed FICA taxes collected starting about 2011. The government bonds owned by the Social Security Trust Fund should be sufficient to cover the shortfall for about 15 years. The money to pay these government bonds will come from the General Fund, ie., from income taxes. After about 2026, the Social Security Trust Fund will be bankrupt.

On June 24, 2001, President Bush's economic speech writer, David Frum, appeared on C-Span's Washington Journal, where he said, "There is nothing in the Social Security Trust Fund except accounting entries." Also on June 24, 2001, the Secretary of the Treasury, Paul O'Neill, appeared on ABC, where, of the Social Security Trust Fund, he told Sam Donaldson, "Private pension plans are required by law to be funded with real assets."

Private pension plans which own government bonds think they own real assets. Indeed, because the bonds are backed by the full faith and credit of the United States, the plans think they own the safest assets available. The Social Security Trust Fund is required by law to invest its surplus in government bonds because they are the safest assets available.

These remarks by Frum and O'Neill imply that the goverment bonds owned by the Social Security Trust Fund will not be paid when the money is needed to pay OASDI benefits. Perhaps they think the President will be unwilling to propose a budget that includes enough income taxes, or that Congress will be unwilling to impose enough income taxes, to pay these bonds. It is easier for the Bush Administration and the Republicans in Congress to justify the tax cut if they do not intend to pay these bonds.

The Social Security Trust Fund now owns over $3 trillion in goverment bonds. In 2011 it will own much more. If the General Fund defaults on these bonds, it will be the biggest embezzlement of all time.


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