Fact or Fiction: Congress Stole From Social Security?

Fact or Fiction: Congress Stole From Social Security?

Did lawmakers really begin comingling Social Security dollars with general government spending back in the late 1960s?

Sean Williams
(TMFUltraLong)
Feb 8, 2019 at 6:06AM


For nearly 80 years, Social Security has been a financial rock for our nation's elderly. Although it's not an entitlement, most Americans will earn themselves a retirement benefit through decades of hard work. And when they do hang up their work gloves for good, there's a good chance they'll be reliant in some form on what's received from Social Security. More than 3 out of 5 of today's retirees lean on the program for at least half of their income, with 84% of non-retirees expected to be reliant on Social Security income in some capacity to make ends meet, according to an October 2018 Gallup survey.

Yet, it's also a program that's facing hardships like never before.

https://g.foolcdn.com/image/?url=htt...=700&op=resizeIMAGE SOURCE: GETTY IMAGES.

This is Social Security's biggest challenge since its inception

According to the annually released Social Security Board of Trustees report from this past June, the program is on the verge of expending more than it collects in revenue each year. This inflection point is representative of a series of ongoing demographic changes, and the fact that the current payout schedule, inclusive of cost-of-living adjustments, simply isn't sustainable over the long term (which is defined as the next 75 years).

Though Social Security currently has just shy of $2.9 trillion in asset reserves, the program can't withstand net cash outflows caused by higher expenditures forever. By 2034, the Trustees portend that the program's $2.9 trillion in asset reserves will be completely gone, leaving no choice but to reduce benefits by up to 21%, assuming Congress has failed to raise additional revenue or make expenditure cuts.

How Social Security got into this bind is often a source of contentious debate. However, one avenue of blame almost always leads to the Lyndon B. Johnson administration.

https://g.foolcdn.com/image/?url=htt...=700&op=resizeIMAGE SOURCE: GETTY IMAGES.

Social Security's accounting procedures raise eyebrows

Back in 1968, President Johnson made a change to the presentation of the federal budget, choosing to include Social Security and its trust funds. This created what was known then as the "unified budget." Prior to this, from its creation in 1935 through fiscal year 1968, Social Security was presented as a separate budget entity.

Why include Social Security in the federal budget, you ask? The simple reason is that the President's Commission on Budget Concepts found the existing method of presenting budgets confusing.

Since this was before Congress had independent budgeting processes (which weren't introduced until 1974), there were three separate budgets floating around, all of which had different federal deficits. In order to simplify things, Johnson proposed implementing a unified budget, beginning with fiscal year 1969.

This was the first year that Social Security and its trust funds were presented "on-budget" with all federal spending.

In 1983, with the passage of the Amendments of 1983 under the Reagan administration, the process was set in motion to again take Social Security "off-budget." Said the National Commission on Social Security Reform at the time, "The National Commission believes that changes in the Social Security program should be made only for programmatic reasons, and not for purposes of balancing the budget. Those who support the removal of the operations of the trust funds from the budget believe that this policy of making changes only for programmatic reasons would be more likely to be carried out if the Social Security program were not in the unified budget."

This change was to be implemented over time, with the full off-budgeting of Social Security and its deficit accounting complete by 1990.

https://g.foolcdn.com/image/?url=htt...=700&op=resizeIMAGE SOURCE: GETTY IMAGES.


Here's why some Americans believe Congress raided Social Security (and why they're wrong)

The concern among quite a many Americans is that this on-budget approach allowed the federal government to comingle funds from Social Security's trusts and net cash surpluses with general government spending. In essence, there's the belief that Congress raided the Social Security trust funds to finance government activities, ranging from education and healthcare to the ongoing Vietnam War.

To be more specific about the net cash surpluses above, they're currently loaned out to the federal government, as required by law. The nearly $2.9 trillion Social Security has built up since its inception isn't sitting in a vault collecting dust. Rather, the federal government has borrowed this money by selling the Social Security Administration (SSA) special-issue bonds, and is using it to fund various line items in its general budget.

Some folks strongly believe that if the federal government paid back what it has borrowed, with interest, Social Security would be just fine and not facing any long-term problems.

It is, without question, a compelling theory. But as I've explained before, it's without merit.

To begin with, regardless of whether Social Security and its trusts were presented on-budget or off-budget, the way the program has been financed hasn't changed one bit. Social Security's payroll tax revenue has always been used to fund beneficiary payouts, SSA expenses, and Railroad Retirement exchange transfers -- nothing else. The funds in the trusts were never comingled with general federal spending, even if the unified budget presented things under one umbrella.

Additionally, every cent that's been borrowed by the federal government via its special-issue bonds is accounted for.

Not only that, but these bonds bore an average interest rate of 2.85% as of the end of 2018. This means Social Security is generating interest income from the federal government on what it borrows each year. In 2017, it led to $85.1 billion in interest income, and between 2018 and 2027 an estimated $804 billion, in total, will be collected. If this borrowed amount were paid back, the program would lose out on a lot of future income, putting it on even worse footing than it already is.

https://g.foolcdn.com/image/?url=htt...=700&op=resizeIMAGE SOURCE: GETTY IMAGES.

This is a much better reason to wag your finger at Congress

If you want to blame Congress for something, blame both parties for not finding a common-ground solution to the program's imminent $13.2 trillion cash shortfall. Each party brings a solution to the table that would work. Unfortunately, since Democrats and Republicans each have a workable fix, neither feels incentivized to work with their opposition to find a middle ground.

Ultimately, Congress hasn't stolen a red cent from Social Security -- but it is threatening to make life more expensive for workers, because the longer lawmakers wait to fix Social Security, the more expensive it'll be for working Americans.

https://www.fool.com/retirement/2019...l-securit.aspx