Social Security built on "funny money"

Yesterday, the chief actuary of Medicare explained why the entitlement program has no future.  Today, Fortune senior editor Allen Sloan explains why the Social Security trust fund has no present.  It doesn’t exist, Sloan explains, thanks to a generation of both Republicans and Democrats raiding it:

Today, let’s talk about one of the world’s biggest piles of funny money — the $2.54 trillion Social Security trust fund. It matters now because Social Security revealed plans last week to tap the fund for $41 billion this year and will begin tapping it on a regular basis in less than five years.

This year’s cash deficit, the first since the early 1980s and the biggest ever, means the government will have to borrow money to redeem some of the Treasury securities in the trust fund. Even at a time when Uncle Sam is borrowing $1.5 trillion a year to keep his checks from bouncing, $41 billion is real money.

Here’s why the trust fund is funny money. Let’s say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenue is below its expenses, Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow money to pay me, regardless of how big the trust fund is.

In other words, Social Security only holds bonds on more debt.  We don’t have money in the Treasury, a rather obvious point since we run budget deficits every year.  We have over $13.3 trillion in debt, which the Treasury keeps expanding thanks to Congress’ spending.

And the reason we don’t have a trust fund — the “lockbox,” as Al Gore put it — is because Congress under control of both parties and with the cooperation of Presidents of both parties have used Social Security surpluses to cover up the real annual deficits each year, replacing the excess cash with the worthless IOUs that Sloan identifies.

That’s why the SSA Trustees Report in 2009 made this declaration:

Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

In other words, we’re at the last stages of a Ponzi scheme, one that has been created for the political protection of the party in power, both Republicans and Democrats.  They skimmed Social Security off the top for decades, and the “lockbox” has been an illusion the entire time.  There is no “trust fund” in any definition of reality.

In order to fix the problem, Congress has to first stop raiding Social Security.  It’s impossible to overemphasize this point.  Even if the heavens parted and a miracle occured where we could get real, effective reform of Social Security that would leave it financially solvent from now until forever, it’s meaningless if Congress continues skimming off the top to hide deficits.  All that reform would do would be to provide Congress with more fig leaves for its fiscal irresponsibility.

The solution has to include an end to deficit spending entirely, as well as a financial model that doesn’t resemble a Ponzi scheme.  Until we stop adding to our debt and start paying it down, Social Security will literally not exist except as floating debt with an illusion of substance.