Following President Bush's State of the Union address, FOX News Washington managing editor Brit Hume and National Review contributing editor and former Bush speechwriter David Frum both claimed that the Social Security trust fund is a fantasy and that the program will face a crisis after 2018, the year that the program will begin to draw on trust fund assets -- in addition to new payroll tax revenues -- in order to pay promised benefits, according to projections by the Social Security trustees. In fact, the assets in the Social Security trust fund -- billions of dollars' worth of U.S. Treasury notes -- are every bit as real as the assets held by millions of investors worldwide, including large banks, insurance companies, and individual investors saving for retirement.
Hume's and Frum's comments were intended to support Bush's claim in his speech that after 2018, "every year ... will bring a new shortfall" in Social Security and that "in the year 2027, the government will somehow have to come up with an extra $200 billion to keep the system afloat." While Bush implied that the program will be penniless after 2018, the truth is that 2018 is simply the year when Social Security is projected to begin drawing on trust fund assets to pay promised benefits, rather than relying solely on new payroll taxes.
On FOX News' February 2 post-speech coverage, Hume echoed the fallacy that the trust fund isn't real as he purported to explain why Democrats jeered at Bush when the president argued that Social Security faced an imminent threat:
HUME: It is known that a number of Democrats disagree vigorously with the president about the urgency of the problem. And some have said that the system is, actually, basically solvent until well into the 2050s. That probably depends on what you mean by "solvent."
On paper, there's quite a lot of money that is in -- that is in the Social Security trust fund -- that is credited to the Social Security system on the government's books. ... And while the money has been put into government notes, and that is to say, has been borrowed by the government and spent on various things, and therefore does not exactly physically exist in the government's treasury anywhere. ... And that is the money that allows people to say that the system remains solvent for quite a long period of time.
However, that money would have to be -- would have to come from somewhere to be paid into the Social Security system when the moment comes. And that is what allowed the president to say it would require a very large tax increases [sic] or spending cuts or benefit cuts or whatever to solve that particular shortfall. So, that's what that disagreement appears to be about. And there's a case -- obviously to be made on both sides of that.
But if only money that "physically exists" somewhere is real, then the entire world financial system is based on a fantasy. After all, the money in the typical American's checking or savings account doesn't "physically exist" either; it's simply an entry in a bank ledger.
On MSNBC's post-speech coverage, Frum lauded Bush's speech for presenting the "reality" that "the Social Security trust fund ... is a myth":
FRUM: I think it was a magnificent speech. I thought it was incredibly powerful. ... And it derived all of its power from the firmness of its message, backed up by realities like the Iraqi vote, backed up by realities like the truth that he hit home about the Social Security trust fund that the Democrats invoke to explain why they can ignore the Social Security problem for half a century is a myth, that the Social Security trust fund isn't there, and the problem begins in 2018, not so very far away.
Later on MSNBC, when political analyst Ron Reagan began to explain that "in 2018, we start to go into the trust fund," MSNBC analyst and former Republican presidential candidate Pat Buchanan exclaimed, "There is no trust fund!"
While it's true that after 2018, "tax increases or spending cuts" may be necessary for the General Fund (i.e., the part of the federal budget used to pay for almost everything besides Social Security and Medicare) to repay its debts to the Social Security trust fund, as Hume suggested, the same measures will also be required to honor all outstanding public debt, currently estimated at $7.6 trillion. The U.S. Treasury notes held by the Social Security trust fund are no less binding on the government than the trillions of dollars of similar Treasury securities held (Microsoft Word document) by investment banks, insurance companies, foreign central banks, and others.
In a discussion of Social Security with FOX News chief Washington correspondent Jim Angle on the February 3 edition of Special Report with Brit Hume, Hume conceded that "the Social Security system is not bankrupt" in 2018, but quickly added that "the government at that point is obligated to come up with billions of dollars growing into the hundreds of billions, to make good its obligation to Social Security." But as Angle noted seconds earlier, if the General Fund hadn't been borrowing money from the Social Security trust fund, "it would borrow the money anyway, but it would borrow it somewhere else." Still, Angle and Hume continued to treat the General Fund's debt to Social Security as a problem with Social Security, rather than a problem with the amount of overall debt incurred by the General Fund. Angle warned that after 2018, "you talk about $200 billion that you have to come up with, create out of nowhere." But the debt that the General Fund will owe to the Social Security trust fund in these years is no different or more onerous than the trillions in debt owed to the private sector. Indeed, the majority of America's public debt is owed to the private sector, not to other public accounts.
From the February 3 edition of Special Report:
HUME: So what is the consequence of the fact that the Treasury owes this money to Social Security, and Social Security will need it starting in 2018 to pay benefits?
ANGLE: We're going to have to raise taxes or borrow more money.
HUME: Or cut benefits.
ANGLE: Or cut benefits. You are talking about years in which you talk about $200 billion that you have to come up with, create out of nowhere, either from taxes or borrowing.
HUME: So, the Social Security system is not at that point bankrupt. It is not insolvent in any legal terms.
ANGLE: No. No.
HUME: But the government at that point is obligated to come up with billions of dollars growing into the hundreds of billions, to make good its obligation to Social Security.
A January 10 New York Times editorial explained:
In suggesting that 2018 is doomsyear, the president is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.'s -- as detractors of Social Security so often claim. The facts are different: since 1983, payroll taxes have exceeded benefits, with the excess tax revenue invested in interest-bearing Treasury securities. (An alternative would be to, say, put the money in a mattress.) That accumulating interest and the securities themselves make up the Social Security trust fund. If the trust fund's Treasury securities are worthless, someone better tell investors throughout the world, who currently hold $4.3 trillion in Treasury debt that carries the exact same government obligation to pay as the trust fund securities. The president is irresponsible to even imply that the United States might not honor its debt obligations.
Similarly, Princeton economist and New York Times columnist Paul Krugman explained on December 7, 2004, that claiming that the General Fund does not truly owe its apparent debt to the Social Security trust fund amounts to arguing for a large income transfer from working-class Americans to the wealthy:
Right now the revenues from the payroll tax exceed the amount paid out in benefits. This is deliberate, the result of a payroll tax increase -- recommended by none other than [Federal Reserve chairman] Alan Greenspan -- two decades ago. His justification at the time for raising a tax that falls mainly on lower- and middle-income families, even though Ronald Reagan had just cut the taxes that fall mainly on the very well-off, was that the extra revenue was needed to build up a trust fund. This could be drawn on to pay benefits once the baby boomers began to retire.
If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice.