Let The Crusade Begin…

Good Morning,


I wrote an Op-Ed for the local paper (The Austin American Statesman).  It’s on page A8 of today’s paper.  I’ve printed it below (my unedited version with a slightly different title than they used).  You can also read it online at this link.


I also want to thank David Wenger, Director of Communications at McCombs. It was his idea to write this. He edited my draft and he was the one who got it published. Thanks David.


Please forward this email to others who may be interested.  If you want to sign up for the (free) email delivery of my blog, see the instructions at the bottom of this article.


The Lockbox Myth (or “Sorry PolitiFact…There Ain’t No Lockbox”)


This past month, PolitiFact Texas helped perpetuate the false belief that the Social Security program is funded and that we have a mystical “lockbox” at our disposal.  While arguing that Minnesota Congresswoman Michele Bachmann made false statements about Social Security, PolitiFact stated that “in assessing the financial health of Social Security, it’s important to realize … it’s also built up a big trust fund that it can tap when necessary.”


Too many Americans are horribly uneducated when it comes to our government’s finances and our eventual debt crisis (which will be caused by deficits, Medicare and Social Security).  Comments like those made by PolitiFact compound this problem.  While Social Security is just one piece of our eventual debt crisis, it’s an important piece.  We all need to understand how this works.  Only then will citizens know the questions that they should be asking our politicians and then maybe we can stop kicking the can down the road.


I would urge all citizens to start by understanding two things: the amount of underfunding that Social Security faces and the fact that the $2.4 trillion in “our big trust fund” has already been spent by our government.  In addition, it would really help if we all accepted the fact that this isn’t a Republican or Democrat issue and it’s not a liberal or conservative issue.  This is a problem that we face as a nation – we don’t have enough money to pay retirees what we have promised to pay.


Start by understanding the numbers.  The reality is that Social Security is grossly underfunded.  We have $2.4 trillion in our “big trust fund.”  People who are currently in the Social Security system (anyone who is working) will put in another $19.1 trillion (in “today’s dollars”).  Unfortunately, current workers and retirees will take out approximately $37.7 trillion (in today’s dollars).  So we have $2.4 trillion, we’ll take in $19.1 trillion (bringing us to $21.5 trillion), but we’ll pay out $37.7 trillion.  We are short by $16 trillion!  It would be one thing to be $16 trillion short on a $900 trillion liability, but it’s particularly outrageous to be $16 trillion short on a $37.7 trillion liability.


At this point, you should realize that Politifact’s assertion that there is a “big trust fund” is like a parent who has saved $20,000 to pay for college for his ten children.  When asked how he’s going to pay for all that tuition, he points to his trusty lockbox.  The reality is that he may pay for the first child, but the rules are going to change for the rest of the children.  In addition, if Mom and Dad want to pay tuition for more than the first child, they’re going to need to cut their spending on other things or they’re going to need to raise their income (or sell assets).


Second, understand what happens with our “big trust fund.” By law, the Social Security Administration can do only one thing with these funds (the $2.4 trillion that they are holding for us)…they can invest them in special Treasury bonds.  In other words, by law, the only thing that they can do is loan the money to our government.


Our government needs to borrow the money because we run a deficit most years.  (When you’re good at something, stick with it.)  This deficit has been financed by Social Security, China and others.  Unfortunately, Social Security is going to need to be paid back in the coming years (as baby boomers retire).   Hopefully other lenders will not need their money back.


As Social Security redeems their Treasury Securities (because they’ll need their $2.4 trillion back), our government will have to pay this back out of our General Fund.  It would be great if our government ran a surplus and could use the surplus to pay Social Security back.  But, since I recently broke it to my children that there is no tooth fairy, I’ll also break it to you that it’s very unlikely that the Surplus Fairy is going to appear any time soon.  This means, that we’re going to have to convince lenders to step in and replace Social Security.


You have to ask yourself how long lenders will trust a government that is approximately $50 trillion underfunded (when you consider Social Security and Medicare combined).  Remember that lenders (outside of Social Security and other parts of are government) have only loaned us $9 trillion (to date).  We’re counting on our ability to turn to them for much more.


The bottom line is that we’re in trouble.  Social Security is woefully underfunded and Medicare is an even larger problem.  This is going to increase the amount that we’re going to have to borrow from investors – and there’s no certainty that investors will always be willing to lend to us.  Most importantly, we’re never going to solve these problems until the electorate understands the issues and starts to pressure our elected officials into making the hard (but right) decisions.  We’re not doing anyone any favors by convincing them that we have “built up a big trust fund.”


Leeds is a senior lecturer in the Department of ?Finance, McCombs School of Business, at the?University of Texas. He blogs on finance and market issues at leedsonfinance.com/.

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