WASHINGTON, Jan. 26 (UPI) -- Screaming "Fire! Fire!..." when smoke is detected in a crowded room may be the prudent thing to do, but what about an author who stridently writes "Fraud! Fraud!" about the operation of the Social Security system, when, in fact, the U.S. government is spending the money according to rules enacted by Congress.
If fraud has occurred, then someone must be brought to justice, but if the claim is manufactured or embellished, then someone has been falsely accused.
Allen W. Smith does just that in "The Looting of Social Security" (Caroll and Graf Publishers, New York, 2004, $11.20 paperback, 256 pp). Smith unleashes his attack with the bold salvo that President George W. Bush is "participating in massive ... fraud against the American public. ..."
He goes so far as to suggest that Enron learned its game of deceit from the Social Security Administration. He attempts to establish his case through arguments that range from the mistakes that President Franklin Roosevelt made in following the theories of John Maynard Keynes in trying to spend the country out of recession, to the greedy desires of the Bush family.
The alleged looting, according to Smith, stems from mishandling of Social Security trust funds, which have risen steadily since changes to the system enacted by Congress in 1983. Those changes greatly increased the familiar OASDI (Old Age Survivor and Disability Insurance) taxes seen by most workers on their payroll stubs and W-2 forms. The increased taxes have been much greater than the benefits paid, leading to an accumulated surplus, accounted for as the Social Security Trust Fund. While Smith correctly observes that very few understand the true nature of this fund, he does not challenge its scrupulous accounting. Where then is the "looting?"
To understand his argument the reader is asked to grapple with a range of topics including the differences between on-budget versus off-budget accounting, the national debt, and the 1990 Budget Enforcement Act.
The mechanism that creates the Social Security Trust Fund is a simple one. Each day the Social Security Administration receives taxes (collected by the Treasury Department) and pays benefits. On a day when receipts exceed benefit payments, the SSA deposits the excess by purchasing a special Treasury note. Interest is added on these notes, just as with any other government note or bond. On a subsequent day when benefit payments exceed tax receipts, the SSA redeems just enough of the special notes to make up the difference.
This is the process that has been in place since the original enactment of Social Security in 1935. Over the last 20 years, since the 1983 congressional amendments to Social Security, there has been a lot more depositing than redeeming, resulting in a trust fund of approximately $1.3 trillion.
Is there any claim by Smith, or anyone else, that the accounting books have been altered, or that Enron-like companion organizations have been spawned for the purpose of creating impenetrable financial deals? No. So, where is the "looting?"
Smith claims that the theft is the result of combining the Social Security Trust Fund surplus with the deficits of all other federal programs. The U.S. government has reported the "off-budget" Social Security surplus and the trust fund separately from the "on-budget" deficits of other programs each and every year. In fact, Smith displays a table of this separate accounting for each year from 1976 through 2003. His source is the Economic Report of the President, 2003. Where, then, has this fraudulent, illegal combination occurred? Smith points to the public pronouncements of Presidents Bill Clinton and George W. Bush.
"Bill Clinton is the one who gave birth to the budget-surplus myth," claims Smith. He says, although does not quote, Bill Clinton "announced a $69.2 billion federal budget surplus in 1998" by adding together that year's $99.2 Social Security surplus to the $30.0 billion deficit from all other programs. The next year, 1999, there was a true non-Social Security surplus of $1.9 billion growing to the $86.6 billion surplus in the 2000 election year win of George W. Bush. Bush ran on a tax-reduction platform during that surplus year, yet Smith is convinced that Bush knew trouble lay ahead.
"I think there is little doubt that Bush knew he would be dipping into Social Security.".
Whether Smith is truly able to discern what was in the president's mind or not, he does not prove any dipping except through public statements that supposedly treat the Social Security Trust Fund as having been combined with other programs. Smith quotes a few Bush statements, but none that make this explicit.
Smith works to bolster his argument by claiming that the 1990 Budget Enforcement Act made it illegal for a president to speak of the Social Security surplus and the deficit from other programs in combined fashion.
In fact, that law requires that, once a budget is set, Congress must reduce spending to the same extent it increases spending when passing costly new legislation. In order to demonstrate that great harm has come to the American people, Smith appeals to the notion that any deficit and any debt for any person, organization, or nation is dangerous and deadly. The concept that debt is a fundamental financial instrument that, when managed properly relative to assets, allows many personal and business endeavors to move forward, seems to be lost on author Smith.
The rather thinly-veiled true purpose of this book is revealed in the author's language about the two presidents who allegedly committed this fraud. For Clinton, its progenitor, the failure is "sin," for Bush it is "massive illegal fraud against the American people." Sin is mentioned once. Fraud is screamed from cover to cover. Clearly Smith is no fan of Bush, his father, his family, or his friends, and he uses his poorly constructed looting indictment as the vehicle for his venting.
To be sure, there are problems with Social Security that lie ahead, but they are not primarily difficulties with the trust fund. The big, unavoidable problem is the uncontested projection that Social Security benefit payments to the Baby Boom generation will far outstrip the trust fund and all future payroll taxes. Smith notes this on page 25, saying, "the Social Security fund is not actuarially sound on a long term basis," but he does not return to the issue until page 179 where he characterizes it as a "long-term problem that must be addressed." In fact it is the main problem.
The existence of the Social Security Trust Fund and its effect on the economy and public policy is a matter of importance. But it is overwhelmed by the lack of actuarial soundness. This is likely to become the greatest non-defense debate in U.S. history. The discussion needs to begin now while there are still a few years before the firestorm hits. The author of "The Looting of Social Security" smells smoke, but his excited mix of arguments about the trust fund and its supposed looting, rather than the actuarial imbalance, amount to screaming the wrong words and pointing to the wrong exit.
Paul Robberson directs actuarial systems development at Watson Wyatt Worldwide. He is a fellow of both the Society of Actuaries and the Conference of Consulting Actuaries. He has advised public and private pension plan sponsors for 30 years.
