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Remember the Lockbox? Too Bad We Didn’t Get It.
Some time long ago in a strange land that used to be called the United States of America - sometime before Bush 43, Cheney and Rove decided it didn’t matter if we were united or not as long as their team had the power - back in that hard-to-remember time before this Crewe came along - we had a “balanced budget” and were “generating surpluses” in the Federal budget.
Al Gore thought we could do even better - he understood that the budget was not really balanced or generating a surplus - even though the printed material said it was. He knew (as, really, everyone in Congress and the executive branch knows) that it was only the surplus from Social Security taxes compared with Social Security benefits currently being paid that was making the Federal budget look like it was in balance. In truth, absent Social Security the budget was still in deficit even during the later Clinton years.
Bush 43 knew that truth too, even as he was screaming “It’s your money!!”. He knew there was no money, yet he promised to raise even less money. It was the old right wing concept that if you starve the Federal treasury the Congress would have no option but to cut “spending” - which in their minds meant reducing spending on the social safety net - Social Security, Medicare and Medicaid.
What happened is they got their tax cuts for the rich and the Federal budget turned into a yawning chasm of deficits just as they intended that it would (aided by Bush’s Iraq war that he didn’t even consider asking us to pay for) - but they forgot the second part. They either didn’t or couldn’t cut spending - we’ll never know how their late night truth telling to each other determined that outcome, whether it was lack of interest in spending cuts or whether they just thought the political costs would be excessive.
In the virtual world of a Gore presidency things might have been different. Gore would have tried to reverse the “unified budget” initiated by Nixon that combines the real “operating” budget of the country with the Social Security program that has been generating more cash than it spends for all these years, thus covering up the true size of the operating deficits. Gore would have tried to give us a budget we could possibly understand and in so understanding the problem, deal with it. But of course the Supremes had other ideas. So, instead, we got the various fantasies of the past nearly 8 years.
What we are going to get next, given that the Social Security “cash profit” is about to turn into a “cash loss” in 2015, is I believe part of what the falling stock market is trying to tell us. Things ain’t going to be looking so good. In fact, if it turns out, as I expect, that the world will start to be unable to produce enough oil to meet its on-going energy requirements in 2010 or so - and will produce less and less every year thereafter - then this fiscal mess caused in no small part because we failed to segregate Social Security from the real Federal budget will be exacerbated severely by ever-rising oil prices and stagflation.
To a great extent, the above is what the Peterson film that I recently reviewed is about. A reader, “francis swift” (who knows who anyone really is on the internet?) apparently of similar mind to mine, sent me an analysis of the “Social Security Accounting Fraud” that better explains all this in more detail (absent the oil part - that’s just my own view). It was written by a college professor (of accounting), so it must be true. I am re-posting it below:
Puts & Calls: J. Edward Ketz / The biggest accounting fraud? Social Security
Sunday, January 23, 2005If President Bush and members of Congress and those responsible for the management of the federal government were chief executive officers, chief financial officers and directors of business enterprises, they might be in prison today. I wince when I hear them discuss budget deficits and budget surpluses and the future of Social Security.
Stacy Innerst, Post-Gazette
Click illustration for larger image.Maybe they don’t know what they are talking about, which is bad enough given their enormous responsibilities. But then again, maybe they do understand, in which case they are as guilty of accounting fraud as Enron’s Jeff Skilling and Kenneth Lay.The president has started a campaign to allow the partial privatization of Social Security. Republicans view this as a way to save Social Security and to allow average persons to earn more than the pathetic return on their Social Security investments.Democrats lately have countered that there is no crisis, citing the Congressional Budget Office’s claim that funds will exist until 2052. As is typical, whenever the two parties debate an issue, they are both wrong.The key to comprehending the subject is to conceptualize Social Security as one of the government’s special purpose entities — or SPE.Ever since the passage of the unified budget act in the Nixon administration, the government has had the privilege of looting Social Security funds by transferring the money into the general fund, from which Congress’ members can spend on whatever pork projects they wish. This ingenious way of raising taxes without explicit legislation has allowed the president and Congress the use of an extra $2 trillion over the years.Unfortunately, the funds are as depleted as one of Adelphia Communication’s SPEs. Adelphia’s founding and now convicted patriarch, John Rigas, might even have learned his scheme from Washington!Recall one of the tricks employed in the Adelphia scandal. Rigas set up an SPE that borrowed money from outside investors. In turn, the SPE lent money to Adelphia and held receivables from Adelphia.Of course, the corporation did not consolidate the SPE with its operations, so outsiders did not appreciate the existence of the SPE’s liabilities. On the other hand, Adelphia did not bother to recognize its debts to the SPE, arguing that they were off-balance sheet items. The scheme came tumbling down when the investors discovered that the SPE was sitting on a lot of worthless receivables.Under unified budgeting, Social Security works the same way, with American laborers serving as the investors. The workers transfer some funds in the form of Social Security taxes to the Social Security fund. The Social Security fund takes this cash and gives it to Congress to disburse as it chooses. And Congress refuses to combine these activities with the general fund, treating it as an off-balance sheet liability. Some day this scheme will come crashing down.The Congressional Budget Office and Democrats make the mistake of believing that Social Security has $2 trillion of assets without examining and realizing that these assets predominantly consist of receivables from the general fund. These receivables aren’t collectible unless additional taxes are imposed on the populace. (As an aside, what type of return would an investor enjoy if he or she had to ante up the cost of the investment not once but twice?)Republicans led by Bush make the mistake that privatization solves the problem. Emphatically, it does not. It will still require about $2 trillion to clean up this accounting scandal whether or not privatization occurs. This amount will continue to climb until Congress repeals the unified budget act. (What is attractive about privatization is that it will force Congress’ hand since the cash from Social Security is no longer available for its members to loot. Also a plus is that it will start the evolution from an unsound defined benefit plan to a sound defined contribution plan.)In short, Congress must repeal the unified budget act to prevent further looting of Social Security and to report budget deficits correctly.The second step is to find a way of fairly generating $2 trillion over the next few years to pay back the American workers.I suggest removing the cap on Social Security taxes so that those earning over $87,500 can chip in and help. I would also define stock options as compensation to make sure those who receive corporate stock options do their share to save Social Security.First published on January 23, 2005 at 12:00 amJ. Edward Ketz is an accounting professor at Penn State’s Smeal College of Business.
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11 responses so far ↓
1 isaac // Aug 25, 2008 at 1:35 pm
Suprising to me that the professor suggests lifting the income cap on SS, rather than cutting the benefits- (means testing and raising the retirement age, for example). If that what the ‘experts’ are coming up with, we’re screwed.
This issue (budget mess/demographic trends)also supports one of my previously mentioned fears- that we will not have enough money, as a nation, to implement domestic/clean energy source technologies at anywhere close to the pace we will need. Therefore, I expect much higher liquid, solid, and electric energy prices, once global growth attempts to resume.
2 paultaut // Aug 25, 2008 at 2:07 pm
I don’t remember the figures so they should be considered with a grain of salt.
The pillaging of the Soc. Sec. system did begin in the 70’s and has continued as a “piggy bank” by every administration since.
Yes, we are screwed if we allow it to continue in its present form. BUT, what if we let the process continue. Instead of Pork, use it to fund the Renewal of the USA. Build manufacturing plants here, roads to get to those plants simultaneously. Vastly expand the usage of alternative energy sources of all types.
ReIndustrialize the USA and with it, Jobs would be created which would replenish the Soc. Sec. system. The System should be revamped anyway, the retirement age was never intended to deal with the medically enhanced average age of our current population. Many retirees would return to the workforce if they could.
If retirees could continue to receive medi care/aid while being re-employed, companies would snarf them up. Meanwhile, the taxes received from their wages would replenish…what the heck, better this way than just wasting a labor force or training a new one. There is nothing to lose this way and a lot to gain.
3 fran // Aug 26, 2008 at 7:59 am
isaac, paultaut–
isaac, i suspect the selection of salary cap has to do with “where the real money is to be made”. i do agree tat in the end all options will be needed. try the numbers; i think you’ll see. if not try the professor at his web site[search his name].
paultaut–the problem with other uses for ssa surpluss is cash flow. the kitty is almost nil, soon to be negative. i don’t believe there are sufficient numbers willing/able to return to workplace to make a big difference[again cash flow]. the next few years cola will create more problem with outflows[inflation running higher than recent past few years].
the program’s in a box.more revenue[taxes], more borrowing[deficits], reduction of benefits[politically intollerable].
positive cash flow needed; firing pres/congress won’t cover required expense.
4 paultaut // Aug 26, 2008 at 11:38 am
Fran, when has positive cash flow made a dif. to Congress? Outside of all the rhetoric, I mean.
The CBO stats only come out when either one side or the other wants to “push” an agenda of some sort. It then becomes a case of “figures don’t lie, but”.
Take the Franie bailout, the Fed is ready to purchase “whatever it takes” of Preferred Shares and treat them as “income” for the future thereby increasing the rate of return for America.
5 paultaut // Aug 26, 2008 at 11:42 am
It is a “bailout”, but not of individual investors per se. There are hundreds of banks holding these securities who assumed they were “safe” because of Gov. backing for these GSEs.
6 Robert Essian // Aug 26, 2008 at 3:05 pm
In the not to distant future I expect to retire, work 10-12 hours a week in my business helping my son out and to keep myself in chump change and girlfriend (wife) money. I expect Social Security to be there (early draw) to pay utilities and such. Our retirement plans can take care of the other things. House will be long paid off. My investments can sit and do what they do and hopefully go to my son’s.
I do not want the Government to use our Social Security for anything else, I want them to leave it alone and shore up its balance sheet and pay us our cost of living using food and gas in their inflationary figures. But please do not let them use it to fund yet another project…Please! Put the money in a lock box and throw away the key.
To conclude I want to exit this rat race
You will not catch me greeting people with a warm smile at my nearby Walmarts.
7 fran // Aug 26, 2008 at 8:33 pm
robert essian and all others–
your ssa annual contributions will be spent by congress each year to fund the annual gov’t expense until such time as the law[unified budget act ala nixon in 1970s is changed. there is nothing in the ssa trust fund but ious[worthless paper without either increased taxation or increased deficit borrowing. please read the essay by the the professor, understand it, and demand from your congressperson and federal senators their action. if you fail to act, you’ll be financially exposed in your retirement. understand this. noone in gov’t really wants to explain how they solve this dilemma, because in our current financial mess, there is NOT AN EASY ANSWER.
RE’RE TALKING TRILLIONS $$ RECOVERY. WE HAVE DEFITS MOST YEARS. MANY YEARS OF SURPLUSSES ARE REQUIRED.
8 paultaut // Aug 27, 2008 at 12:26 am
you are absolutely right fran. Demand away, many public interest groups have tried to no avail. The situation is so dire(nice word), horrific, frightening that Retired seniors should be encouraged back into the workforce to remove some of the strain.
There was a short film on Fox(I believe) on Sunday Morn which showed a flow of illegals scampering back to Mexico because of the lack of jobs. This is not a good sign.
9 Thomas Stone // Aug 28, 2008 at 10:51 am
For years I have prayed that the US Government would start using GAAP instead of cash based accounting. Then it wouldn’t matter whether Social Security was segregated from the rest of the budget.
In fact, my 2 step plan for fixing the government is simple.
1. Convert to GAAP
2. Pay congressmen the median income of a family of four plus let them split 5% of the GAAP budget surplus.
10 fran // Aug 28, 2008 at 5:24 pm
thomas stone–
gaap or non gaap, good for business purpose. business with adequate cash can survive.
the gov’t has been running negative cash flow for years. what are fiscal deficits?
the gov’t measured on business standards is bankrupt.
why do you think we have off budget accounts in the USA fiscal statement?
please read jim k’s article again with emphasis on parts about ENRON, ADELPHIA, AND THE INFAMOUS PHONE COMPANY.
Lord of accountants help us. please.
11 Tim // Aug 30, 2008 at 3:43 pm
Fran, your comment about there not being sufficent numbers willing or able to return to work….I am assuming you meant to reply to Paultaut’s comment on encouraging retirees to return to the workforce, and that your comment was derogatory towards that group of workers. Well, your comment was not welcomed here as one who was forced to retire early at 55 due to a disabiling back injury but could easily return to a normal desk job along with thousands of other “early retirees” who are just as upset with the way our Social Security system has been run as the rest of you. I and those tens of thousands would gladly get up tomorrow morning and go to work in an expanded US economy to keep those payroll taxes here at home where they belong.
Fran, you “kicked me when I was down” and I’m not going to take it! Put us to work!
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