Republican presidential candidates Sen. Marco Rubio of Florida and Gov. Chris Christie of New Jersey have stated that Social Security is going broke and that the U.S. Treasury bonds that constitute the Social Security Trust Fund are worthless IOUs. With characteristic enthusiasm and confidence, Christie goes further to shout that anyone who tells you differently is a "liar."
To believe this description of the condition of Social Security, you would have to believe that when Ronald Reagan restructured the finances of the Social Security Administration he pulled off the greatest swindle in history, far larger than those of Bernie Madoff or Charles Ponzi and his scheme.
Social Security was originally designed to pay for retiree benefits with revenue coming solely from a tax on the payrolls of employed workers. This pay-as-you-go funding mechanism was to be self-sufficient, requiring that the payroll tax rate be sufficiently high to cover benefits being paid out to retirees.
Reagan recognized that to pay the benefits of the baby boom generation — which is much larger than the generation that followed it — would require a very hefty increase in future payroll tax rates when the boomers retired. To lessen that burden, Reagan raised the payroll tax rate in 1985 when the boomers still had decades left to work, forcing them to pay more for their own retirement.
That increase in payroll tax rates raised billions of dollars in payroll tax revenue for the SSA in excess of what was needed to pay current scheduled retirement benefits. An ingenious bond mechanism was used to invest these billions. The SSA used its excess cash to buy special-issue bonds from Treasury.
Decades later, as the boomers retired, these bonds would be sold back to Treasury for the cash needed to make up the difference between scheduled benefits and payroll taxes paid by future workers. This mechanism essentially uses the boomers' own cash, plus interest, to reduce the amount that would otherwise be paid by future workers.
During the many years between the purchase of the bonds by SSA and their eventual resale, the Treasury could use the cash. Reagan's intent was that this money be used to promote economic growth through investment in long-lived productive public assets like bridges and roads, or by reducing the national debt, or by cutting taxes to stimulate the private sector to invest and grow faster. As boomers retired, the Treasury would tax and borrow from the public to raise cash to buy the bonds back from SSA.
Reagan's original projection, based on reasonably assumed economic growth rates, was that all the bonds would be sold back to Treasury by 2060, by which time all but the most persistent boomers would be dead. All the while, the economy would be more productive due to the enhanced investment.
Of course, Reagan could not have predicted the growth-deadening impact of the terrorist attacks of Sept. 11, 2001, the 2008 financial meltdown, nor the increasing unwillingness of Congress to invest in growth-enhancing productive public assets. Due to the slower than projected economic growth rate, the SSA had smaller than projected surpluses and therefore purchased fewer than the projected amount of bonds.
Consequently, rather than running out of bonds around 2060, the latest estimate is that the scheduled rate of benefit payments will exhaust the bond fund around 2033, when tens of millions of boomers will still be alive and collecting retirement benefits.
It is this exhaustion of the bond fund that alarms those who claim that SSA is "broke" and who then proceed to predict that either retirement benefits must drop or payroll taxes must dramatically increase. Not so. Remarkably, because the Treasury's taxing and borrowing authority is independent of the special bonding mechanism it shares with SSA, Treasury will be able to continue to supplement the scheduled payroll taxes without increasing any of the taxes levied from the public.
If self-sufficiency of the system, a key goal of President Franklin D. Roosevelt, is to be preserved despite the insufficiency of the bond fund, then some combination of the many proposed small adjustments such as increasing the age of eligibility and/or the cap on taxable earnings will be necessary. There is no need to trash the memory of President Reagan or for politicians to call people liars or to misinform the electorate by declaring that SSA is broke.
William L. Holahan, left, is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.