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Social Security Privatization is a Trojan Horse 
by Allen W. Smith, Ph.D.
December 11, 2004

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The Bush administration is gearing up to pull off one of the greatest frauds ever perpetrated against the American people. Under the guise of a plan to save Social Security, Karl Rove and company are pushing a scam to destroy Social Security, as we now know it.  Although there are multiple motives behind the attack on Social Security, the prime motive appears to be an effort to cover up the theft of $1.5 trillion of Social Security money by the federal government over the past two decades, more than one-third of which has occurred under George W. Bush.

Most Americans are unaware of the fact that the Social Security trust fund is empty.  Every cent of the $1.5 trillion Social Security surplus generated by the 1983 payroll tax increase-earmarked specifically for funding the retirement of the baby boomers-has been spent by the government, in violation of federal law, as if it were general-fund revenue.  The money has been replaced with non-marketable special-issue government IOUs that, unlike regular marketable Treasury Bonds, have no real value and are thus not real assets.  These IOUs are nothing more than accounting entries that tell us how much Social Security money has been taken by the government.  They are essentially worthless until and unless the government, at some future time, chooses to enact huge tax increases, or borrow massive additional amounts of money from the public, to repay its debt to Social Security.  When Al Gore proposed terminating this practice by putting the Social Security money in a "lockbox", George W. Bush promised to do likewise.  Bush further cemented his promise to keep his hands out of the Social Security cookie jar in his first State of the Union address on February 27, 2001.  In no uncertain terms, Bush said, "To make sure the retirement savings of America's seniors are not diverted in any other program, my budget protects all $2.6 trillion of the Social Security surplus for Social Security, and for Social Security alone."

During Bush's first term, $509 billion of Social Security surplus was generated by the payroll tax, and every dollar of it was spent for non-Social Security purposes.  Most of it was used to fund Bush's unaffordable income tax cuts.  As a result of the spending of the Social Security surplus by George W. Bush and his predecessors, Social Security faces a crisis that has nothing to do with the retirement of the baby boomers.  The 1983 payroll tax increase forced the baby boomers to prepay the cost of their retirement, in addition to paying for the benefits of people already retired.  Contrary to what we so often read and hear, Social Security has not operated on a pay-as-you go principle since 1983.  If it had not been for the government theft of Social Security surplus money, the trust fund would have sufficient assets to assure the payment of full benefits until at least 2042.  At that point, the youngest of the baby boomers will be 78 years old, and the bubble will have passed through the system.  The actuarial problem that would result in having insufficient payroll tax revenue to pay full benefits after 2042, if no changes are made, is a minor problem that can be resolved with minor reforms and modifications to the existing system.  Privatization does nothing to resolve this problem.

In 2018, the Social Security program will begin to run annual deficits after 34 years of consecutive surpluses.  But that would not be a problem, except for the government theft of Social Security money.  The government would just dip into the huge reserve in the trust fund, as provided for by the 1983 legislation, to supplement the inadequate payroll taxes, and there would be enough in the reserve to last until 2042.  Now, Alan Greenspan, who helped design the legislation that would require baby boomers to prepay the cost of their benefits, is proposing substantial cuts that would cheat the baby boomer out of part of the benefits that they have already paid for.  Most Americans do not yet know about the theft of the Social Security money, and Greenspan and Bush would like to keep it this way.  By focusing the nation's attention on a proposed privatization plan, they draw attention away from the unlawful theft of Social Security money.  Social Security is not broken and doesn't need to be fixed in the short term.  The problem is that the government has removed all the money from the vault and needs to replace it.  The privatization proposal is the Trojan horse with which they hope to destroy the current Social Security program before the people wake up to the fact that without the theft, there would be no Social Security problem for another 38 years.  Will America become a modern-day Troy?

Allen W. Smith is Professor of Economics Emeritus, Eastern Illinois University, and author of The Looting of Social Security (Carroll and Graf, 2004). Visit his website: Copyright 2004 Allen W. Smith.