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Too many people don't understand how Social Security is funded and don't bother to try to figure it out. Others understand, and then prey upon those who don't in order to fearmonger. Still others try to get it right, but get confused with all the info and then proceed to misinform others!

I don't know what Factcheck.org's excuse is, but they posted a piece today that's extremely, undeniably false and misleading with respect to Social Security. They apparently failed to know or learn that there are 3 milestones with respect to the funding of Social Security, First, benefit payments outstrip revenue from FICA and employers, but the Social Security Trust Fund continues to grow due to huge interest payments from the special issue US Treasury securities. The second milestone is when revenue and interest from the Social Security Trust Fund is outstripped by benefit claims - that happens 5 to 10 years from now. And then the third milestone, which almost certainly won't happen - when the combination of Trust Fund is fully spent and the current revenues from current workers won't be sufficient to cover the benefit claims of retirees, survivors and disabled workers.

The issue here is the vast financial distance between the revenue from taxes and the outgo in expenses we currently have. Deficit spending and the exploding National Debt that deficit spending has been creating is a crisis, but, except for the deficit spending that was pushed this December to fund the payroll tax reduction, Social Security doesn't add a penny to the deficit. Factcheck is wrong, and most Democrats are right!

Here's a link to the Factcheck.org article entitled

Democrats Deny Social Security’s Red Ink

I'd encourage you to visit the link and read all of what they say and how wrong they are. They act as though Democrats are wrong, but they aren't.

See, Democrats should be correcting the misperceptions about how Social Security, in general, contributes to the National Debt! They should be denying that which doesn't exist!

They said

Some senior Democrats are claiming that Social Security does not contribute "one penny" to the federal deficit. That’s not true. The fact is, the federal government had to borrow $37 billion last year to finance Social Security, and will need to borrow more this year. The red ink is projected to total well over half a trillion dollars in the coming decade.

But that's not true. The US Treasury didn't have to borrow that amount of money to finance Social Security. They confused the fact that there wasn't an annual surplus last year with the overall surplus. It's easily done - I had to educate one of the regulars here last week about that issue. At least he understood that there's an annual surplus and a "surplus" - he had simply misinterpreted what some other authors had written, and assumed that they were talking about the "surplus" when those authors were really talking about an "annual surplus". In 2009, the Social Security Trust Fund (SSTF) increased by 134 billion dollars!

The Federal Government had to borrow from Peter to pay Paul - they didn't have to "borrow" $37 billion. That doesn't increase the overall indebtedness! It simply shifts it from one credit card to another! When an American decides to get a loan to pay off all of their credit cards, they might borrow $10,000 to pay off two cards that are $2500 apiece and one that's $5000. They owed $10,000 yesterday, and they owe $10,000 today. They didn't borrow $10,000 to fund new debt! And neither will the Federal Government be funding new debt when, in about 5-10 years, the revenue from workers and employers combined with interest income is exceeded by the benefits paid out to retirees, survivors and disabled workers.

Here are a couple of links with relevant info.

CBO's explanation about surpluses with and without interest income from the Trust Fund.

FAQ's from the SSA about the SS Trust Fund.

Here's the most recent SSA summary.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy.

So, here's the letter I am sending to Factcheck. It doesn't cover all the bases, but it hits the high points and refutes their nonsense pretty effectively. Free free to liberally steal from it, or create your own email to let them know how badly they mucked this up!

To: Editor@Factcheck.org
Subject: Wrong, wrong, wrong on Social Security and the deficit

1. Except for the newly-implemented Payroll Tax (FICA) cut, Social Security does not contribute to the debt in ANY WAY!

2. Your assertion that USA Today's editorial writers were correct when they said that Social Security went "into the red last year" is WRONG! It didn't. Revenue from SS payroll taxes was less than benefits that were paid out, but the interest from the SSTF exceeded that shortfall, and so the overall "income" to the Trust Fund exceeded the payouts! There wasn't an "annual surplus", but there's still a surplus! It's not "in the red"! Not in any way. There's not a "negative cash flow", since income plus interest is greater than benefits! That doesn't happen for several more years, until 2016 or so (with a caveat for the unique FICA cut this year). The surplus in 2009 was 134 billion. The income in 2010 was expected to be 82 billion. For 2011, it's 72 billion, but then in 2012 it's expected to be 87 billion, and it reaches 94 billion in 2016. It's not "in the red".

3. The reason that Social Security "contributes to our fiscal woes" is because the Social Security Trust Fund (SSTF) has been loaning money to the General Fund, instead of the government having to borrow from US citizens or foreign countries. Once the amount of money in the SSTF stops growing, then the Trust Fund will have to start cashing in the special issue securities from the US Treasury to fund the benefits that retirees, disabled workers and survivors collect. The General Fund will NOT be paying those benefits. The General Fund will have to supplement the money that they have to pay out, but it's not taxpayers that will be funding those benefits.

Let me give you an analogy.

Over 15 years, I put $100,000 into a savings account to help pay for my child's education. None of that money is sitting in the bank's vault, of course. Most of it is loaned out to other people. That's how it earns interest for me and profits for the bank, by being loaned out and then paid back, right? And some of it is given to other depositors who are withdrawing some of their funds. As my child goes to college, each year I draw out $25,000. The BANK doesn't pay that money! They simply pay me out of other people's deposits - other money that's been put into the bank by other people, other money that's there to be loaned out or used to pay off people withdrawing money. It doesn't cost the bank anything!

In a similar way, the SSTF has a huge surplus that was begun in the mid 1980's. That money doesn't just sit there. A good portion of the funds being giving to the Social Security Administation via FICA taxes and employer contributions came in one month and then went right back out again to pay benefits. All the excess revenue to the SSTF, either from payroll contributions or from interest income from existing US Treasury securities, gets plowed back into more securities so that it will continue to earn interest. When there's a need for the SSTF to withdraw funds to pay beneficiaries, it'll be just like the bank which holds my savings account giving me money when I ask for it - the General Fund isn't going to pay it using deficit spending! The General Fund will have to borrow from another source to pay that money to the SSTF, just like the bank has to use other money from other depositors to pay me off!

Your assertion that, in general, Social Security contributes to deficit spending is totally without foundation! Totally! It does not contribute to our fiscal woes because it adds to deficit spending (except for the unique payroll tax holiday).

4. About that payroll tax holiday - that's not "Social Security". The "costs" of Social Security retirement, survivors and disability insurance benefits don't affect the General Fund, nor do they cause deficit spending. It's the unique way that the payroll tax holiday is being funded that will cause deficit spending. Declaring that it's "Social Security" that's causing that increase in our national debt, without about 4 different qualifiers and explanation, is disingenuous at best. What's happening is that Obama wanted to give targeted tax cuts to all income under $106,000. The easiest way to do that was to temporarily lower the payroll taxes (FICA) levied on that income, but it's not "Social Security" that is causing the deficit spending - it's a tax cut. In general, Social Security doesn't add a PENNY to the deficit, and only this temporary tax cut will cause a temporary change to that status.

5, The Federal Government DID NOT have to borrow $37 billion to finance Social Security last year. First off, the interest income exceeded the gap between income from FICA and outgo for benefits. Secondly, there are 3 tipping points, and we've only passed one of them. Incredibly, you did a whole story about Social Security apparently without knowing this! The first tipping point was when tax revenues were exceeded by the cost of benefits. The second is when the growth of the SSTF stops and reverses course, as a result of smaller interest payments, smaller revenue, and larger benefit expenditures. That's still several years down the road. The third is when revenue from FICA and employer contributions, combined with money from reserves in the SSTF no longer are enough to pay 100% of currently expected benefits. That happens in 25-30 years (if ever - if we have a relatively reasonable growth rate between now and then, we won't actually have any shortfall - but we should still proceed as if we will face that shortfall, and therefore we should do something to eliminate it, and we should do it sooner rather than later.).

You wrote "The combined effect is to add $130 billion to the deficit in the current fiscal year." But that's not true. Borrowing from Peter to pay Paul doesn't add anything to the deficit! It simply changes who we've borrowed money from!

But all we've hit so far is that first milestone/tipping point. As I said, it confounds me that you don't seem to understand this!

But, on the broader point, you're also WRONG as WRONG can be! When I withdraw money from my savings account, it's not "costing" the bank anything. They are simply tranferring money deposited by another person to my account for my immediate usage. When the SSTF needs to "make a withdrawal", and cash in the special issue securities from the US Treasury, the US Treasury will simply have to borrow from someplace else! If someone has to pay off one credit card, they might borrow from another source. Their indebtedness remains EXACTLY the same - they simply owe Peter instead of Paul! The Federal Government isn't borrowing an additional $37 billion dollars to finance Social Security - they're simply going to have to borrow from China to pay the SSTF! Social Security is not a "growing drain on the government's finances." Owing one group $37 billion or owing another group $37 billion doesn't add one penny to the 'drain' on government finances!

Again, I am baffled as to how some intelligent group of people with all kinds of access to all sorts of resources on this topic could get such simple things so massively wrong!

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