Column #82 THE SUPPOSED "RAIDING" OF THE SOCIAL SECURITY TRUST FUND

(Week 15 - Monday, Nov. 17)

The virtually universal view of pensions or retirement accounts is that they are monies that are put away in dedicated funds that are held in trust until the day they can be drawn upon when the beneficiary reaches an eligible age. This is not, in my view, an accurate description of how these accounts are presently constituted within the current monetary system, and the widespread misunderstanding about that has led to expectations that cannot possibly be fulfilled. The result is that, while we as a society have enacted social contracts designed to insure the financial wellbeing of those who have attained an advanced age, they have been formulated in such a way that millions of people who are counting on the solvency of such arrangements are in the current financial crisis seeing their value decline precipitously, or are losing them altogether.

Retirement accounts can take on many forms. Let us look first at the one we citizens of the nation hold most in common, and perhaps take most for granted; i.e. the Social Security Trust Fund.

Let us imagine a situation in which money is deducted from the wages of a worker early in his productive years and "put away" in this fund. Now fast-forward to, say, three decades later when this person retires and draws his first Social Security check. Let us suppose that he spends the first of those dollars on eggs for his morning breakfast. I would ask the question, were those eggs really purchased with dollars that were earned thirty years before? If one answered "yes", one would also have to answer the question, "Where, then, have these dollars been held for all that time?"

For some strange reason we in this "financially sophisticated" society seem to think that when retirement money is deducted from a paycheck it must be put into some vault where it is kept for safekeeping until the day that we need it. I would point out that if that were indeed the case, then the money so sequestered would constitute a net withholding of money from circulation that would have to made up for by someone "borrowing" an equivalent amount into circulation from the private banking system. To "fully fund" the Social Security Trust Fund, therefore, the social order would be obliged to take on an immense amount of new "debt" on which compounding "interest" payments would need to be made. What is more, these idle funds held in trust would themselves represent a vast quantity of money that had been borrowed into circulation, and upon which "interest" payments would need to be paid in an ongoing manner. Essentially we the people would be paying double "interest" charges for the use of the sum of money held in the trust fund. Monetarily speaking, this is a prohibitively expensive arrangement.

Nonetheless, in our political dialogue we as a society seem to lack a basic understanding of this fact. If that were not so, why then in the political arena is there an almost universal chorus of protest raised about the supposed raiding of the Social Security Trust Fund to finance general expenses of the Federal government? Do we really expect that these hundreds of billions of dollars should be left to languish in a vault unused until the workers from whose checks they were deducted retire and start to draw them out? The "interest" payment on such a sum would of itself typically offset the whole value of the fund, or more.

This professed platform plank is so contrary to the realities they are obliged to deal with in their budget-making processes that it makes me wonder what they could be thinking of when they say such things. Assuming that they are for the most part sincere, then the passion and tenacity with which they cling to this dubious idea can only be a telling example of the great disconnect between their understanding of the monetary realities they are called upon to deal with, and the economic notions that they hold. Truth be told, I don't think that our leaders are alone in this confusion, as I almost never hear anyone challenge them on this view in the public domain. On the contrary, almost invariably there comes an echoing demand from the public to "get spending under control" and stop the supposed "raid on their money".

The economic activity required to produce the first eggs of post-workforce life occurred within a few short days prior to their being consumed, and the money that financed that activity had to have come from cash flow that was concomitant with the productive process that was responsible for the material manifestation of the product itself. In other words, material wealth that is coming into existence today is financed by dollars flowing today. Whatever dollars were deducted from a worker's paycheck years ago had to have long since flowed into other economic activities. The notion that this could be otherwise within the current "debt"-based monetary system is a bookkeeping fantasy. Our failure to understand the actualities of our financial lives and deal with them in a clear and positive way is at the core of why we have become so anxious about the certainly of these so-called dedicated funds being there when we reach retirement age.

In truth the Social Security "Trust Fund" is not a trust fund. It is not money that has been put away. It is, rather, a system for the tallying of credits that determine the eligibility of each citizen for access to the money that is flowing through its operating budget in any given month after one has reached the age of eligibility. The monies that are is paid out through Social Security do not come out of a pool of capital that has been put away for that use, but are taken out of revenues flowing through government coffers in present time.

The problem with thinking of it as a fund that is being raided is that it distracts our minds away from the true nature of the threat to the national economy which underwrites this social welfare program, which in turn is the source of the perception that it is being raided it in the first place; that is, the unrelenting demands placed upon the economy in general, and government budgets in particular, by the "interest" payments required to maintain the money supply. Such misunderstanding leads to the misguided proposal to insure the purported fund's solvency into the future by opening it up for "investment" in the financial markets. The ultimate irony is that if such a proposal is carried out, it truly will become a fund that has been raided. I will continue with this analysis in the next column.

Richard Kotlarz
richkotlarz@gmail.com

The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm