The Enronizing of America
Content
The Social Security Trust Fund Debacle: How an Accounting Error in 1967 has Created a $5 Trillion Hidden Debt for the American Taxpaying Public. By W. Spencer Thompson & Laird B. Thompson, PhD In June of 2002, Dr. John Shoven, Director of the Stanford Institute for Economic Policy Research (SIEPR) wrote a policy brief in which he stated: “The Federal Government should learn some lessons from its investigation and prosecution of Arthur Anderson and Enron for creative and false accounting, particularly regarding the handling of “special purpose entities or subsidiaries”. Part of Enron’s problem is that apparently its balance sheet and income statements were misleading due to the existence of these “off balance sheet” operations. Ironically, our government engages in some of the same accounting chicanery. The unified budget surplus and deficit measures that are widely reported can be quite misleading. Most of us can remember the “good old days” of 1998, 1999 and 2000. The federal government reported that it ran surpluses in those years of $69 billion, $126 billion and $237 billion respectively. Common sense says that surpluses correspond to a reduction in debt outstanding, whereas deficits mean that the total debt is increasing. But the total debt of the United States went up by approximately $260 billion between the beginning of 1998 and the end of 2000. Just to summarize, in three years we ran a cumulative surplus of about $430 billion at the same time our national debt increased by $260 billion. The discrepancy is a whopping $690 billion.” How can this be described for the non-economist to understand? If Social Security takes in $100 billion dollars in a year through taxes from payrolls and business, then these are the receipts. If Social Security then pays out $80 billion in benefits to retirees, these are the outlays. Now there is a $20 billion surplus at the end of the year. What do they do with the money? Put it in a bank and save it for a time when the outlays exceed the receipts as the baby-boomers retire? No, what the government does is to take the $20 billion, put an IOU in the bank in the form of issuing “special issue Treasury Bonds” and spends the $20 billion on annual projects. At the end of the year, Social Security shows a $20 billion surplus because the IOUs are done in a way that is “off balance sheet” as Dr. Shoven says above and never shows up on the federal budget. As a result, the budget shows either a surplus or a deficit but it never shows that (a) there was an extra $20 billion that came into the US Government or (b) that it was spent – none of this shows up on the budget at all. And, in actuality there is a debt of $20 billion that is owed to Social Security by the US Government to repay the bonds – and this debt never shows up in a way that the American taxpayers can see and understand. The result of the Federal government using this “Enron Accounting” system is that there is almost $5 trillion dollars in debt that has never been in the annual budget accounting of the OMB. Unless the government chooses to use an honest, or “sustainable” accounting system, this problem will continue to grow trillions of dollars of debt for our children and grand-children. And what politician will step forward to stop this? It will take one of exceptional courage and vision, because under the present accounting system the politicians get “free money” – because the funds never show up on the Federal budget as an expense item, then the congress and president don’t have to raise taxes to pay for government programs – they just spend the money that Americans put into their Social Security Trust Fund! To put it another way, the federal accounting system takes our hard-earned cash that we are putting into the Retirement Trust Funds (social security, military retirement and civil service retirement accounts among others), trades it out for an IOU promise, and spends it for on-going projects. The American taxpayer cannot afford to allow the Federal government to continue this accounting scheme, for it threatens to bankrupt the entire country.
In order to understand how this happened, one needs to go back to somewhere in the 1920s and discover who created the practice of issuing “special interest Treasury Bonds”. These bonds are only issued between entities within the American government and are not available to the public. The bonds are guaranteed by the US Government, and for several decades were only used in relatively small amounts from year to year as part of an increasingly complex federal budget system. By 1937, special issue Treasury Bonds were commonly used for the Highway Trust Fund, who may be collecting taxes for a few years to pay for a project that was multiple years in duration and not distort the annual budget. To put it another way, this was a very short term interim solution to the difference between an annual cash budget (showing tax income each year) vs a longer term accrual budget that showed the budget over the lifetime of an extended project. In 1937, with the Social Security Act passing, the Treasury Department began using the special issue Treasury Bonds to hold the excess cash they got in one year to pay out in the next (in much the same way they did with the Highway Department). As an example, let’s say that the government got $100 billion on tax day for Social Security but had to pay $10 billion a month in outlays. They would come up a bit short at the end of the year before they collected the next years’ taxes, so they would issue the Treasury bonds to tide them over for a few months. The special issue bonds were almost exclusively short term – five years or less. They were simply setting the cash aside from one year to the next as a way to take care of the “float” without distorting the accuracy of the annual surplus or deficit. The “float” is the excess cash that wasn’t spent, but would be spent in the short term future. In this way, the use of special issue Treasury Bonds was for short term, very specific projects and not intended for larger long term funding of the Social Security Trust Fund. It turns out that these special issue bonds have been used as the primary “investment” of the Social Security Trust Fund since 1937, but for many years, these were all short term special interest bonds that matured within a year or two. This process continued through 1959 when the administrative policy was changed to spread the maturity dates of the Trust Fund's portfolio of par-value specials as evenly as possible over the next one to fifteen years. In 1994 the congress passed the Social Security Independence and Program Improvements Act (PL 103296) and created a very complicated system of issuing the Special Issue Treasury Bonds that is still followed today. In principle, these bonds have specific value, have set interest rates and are issued as either short term or long term bonds within a budget system that shows them as capital expense items within the context of an annual budget. Unfortunately, this is not the case with these bonds. The reason for this appears to be the way in which the “unified budget” first created in 1969 has been implemented. By 1967, all federal expenditures were about 10% of the total economy, so it was the single largest entity in the US economy. The budget format had not changed since about 1918, a time when specialized agencies were not a significant part of the government. It was not until the New Deal in the 1930s that these independent agencies became a significant part of the government budget. By the 1950s, the Highway Trust Fund, the Airport & Airway Trust Fund, social security and other specialized agencies all had their own budgets and their own sources of revenue (for example, the social security tax could only be used for that purpose). These had a significant impact on the national economy without being represented in the federal budget.
They were about 40% of the total budget and these specialized agencies were not under the review and control of congress. As a result, President Johnson created the Presidential Commission on Budget Concepts in 1967. The commission produced a rather small report – only about 100 pages in small-format pamphlet form. They strongly recommended creating a single, unified budget for the US Government, and laid out the structure they felt was appropriate for such a budget. They were quite apparently aware of the accounting problem inherent in special issue Treasury Bonds, for one of their strongest findings was finding #13. On page 9 of the report, it says “The commission strongly recommends against a “capital budget” which would provide separate financing of capital or investment expenditures on the one hand and current or operating expenditures on the other. Such a budget would seriously distort the budget as a decision-making tool.” This warning, however, was completely ignored as the unified budget was put into effect. Instead, the Unified Budget that was implemented under Johnson in 1969 used the concept that most receipts and outlays were shown as “on budget” items, however there were also “off budget” items as noted by Dr. Shoven above. To put this another way, the effect of it was to create a Unified Budget that formally established the “Enron accounting” system that plagues us today. The most important off budget item was the inter-agency special issue Treasury Bond. Because these transactions were never shown on the budget, they were never captured as expense items. The result was that the government was spending money on the one hand and not showing mounting debt on the other hand – they never showed the creation of the special interest Treasury Bonds as a cost that should be shown along with on-budget outlays. The result was that the annual budget surplus or deficit did not correspond with the annual decrease or increase in the national debt – the deficit did not equal the debt. This disparity is shown below on Figure 1.
Figure 1. A plot of the national debt (the blue line) vs the annual budget surplus or deficit (the red line) from 1980 to 2011. Note that in the Clinton years, the annual budget showed a surplus (in the negative debt range) but the national debt increased. See Shoven comments above.
The Social Security system has been a “pay as you go” plan and was not funded prior to the 1980s. By that time, even many state pension systems were funded, but not Social Security. This problem of creating “off budget” debt got significantly worse in 1983 when President Reagan assembled a National Commission on Social Security Reform headed by Alan Greenspan. The charge for the commission was to create an economic “vehicle” to reduce the coming impact of retiring baby-boomers that would put the Social Security system into a negative cash-flow situation. This was a laudable goal – to take a 30-year economic crunch and extend it out to 60 or 70 years to defray the economic stress on the system. The way this was accomplished was by a significant increase in the Social Security contributions, which increased annual receipts for the Trust Fund. Unfortunately, the commission issued in #19 in their “findings and recommendations” section that “The National Commission recommends that the investment procedures of the OASI, DI, HI, and SMI Trust Funds be revised so that… only special issues would be purchased by the trust funds in the future.” In other words, the Greenspan commission further exacerbated the “off budget” problem of the Unified Budget by mandating that ALL Social Security Trust Fund assets be held as special issue Treasury Bonds. Once again, “Enron accounting” was formalized for the Federal budget system. In addition to creating further “hidden debt” with the special interest Treasury Bonds, the Reagan administration created a significant change in the rate of creation of this hidden debt. Figure 2 shows that the Social Security Trust Fund Assets went from about $50 billion in 1986 to well over $200 billion by 1990. This upward trend has continued ever since, and in fact was further exacerbated during the Clinton administration.
Figure 2. Social Security Trust Fund Assets. Note changes in slope on the line of “hidden debt” creation. See text for details. During the second Clinton term, the administration – under the direction of Secretary of the Treasury Larry Summers – made extensive headlines claiming to have created a surplus in the national budget. In fact, as shown by Figure 3, this was false. During the time of the highly touted surplus, the debt actually increased as noted by Dr. Shoven earlier in this article.
Figure 3. The national debt increase (blue line) vs the annual budget deficit and surplus (red line – negative values indicate a surplus). During the budget “surplus”, the deficit increased although more slowly than at other times. In addition, as can be seen on Figure 4, the Treasury Department tripled the annual amount of special interest Treasury Bonds that were created between the years 1997 and 2001 – from about $50 billion a year to about $150 billion annually – and this higher production rate has been maintained up until the recent economic down-turn. This seems to raise the question of why? Why, when the administration was bragging about running a surplus did they create such a huge run-up in the hidden debt? Is it the case that Larry Summers saw the “value” of “Enron accounting” in creating “free money” for politicians to use and helped them get even more efficient at running a bogus accounting system?
Figure 4. The annual creation of long term special interest Treasury Bonds. The result has been that as long as there is a net surplus in Social Security – that receipts exceed outlays – then all of the surplus has been used to purchase special issue Treasury
Bonds. Then, the moneys that are traded for these bonds are simply spent by the government on a series of “special projects” on an annual basis. It is plausible to argue that the Social Security Trust Fund surpluses have been used to finance wars and broad tax cuts over the past decade or more. The result is that no money has ever been saved for Social Security in the future – it has all simply been spent as “off budget” money. The net result of this aggressive hidden spending spree is that the Social Security Trust Fund now owns about $2.5 trillion dollars in special interest Treasury Bonds that have no dollar value in them – all those dollars have long since been spent. In the late 1980s and through the 1990s, the Gramm-Rudman-Hollings Act and its’ successors that claimed to address a “balanced budget” in fact did nothing of the kind. By formalizing the way in which “balanced budgets” were defined, they only considered the on-budget items in their discussions, never the off-budget items. Thus they guaranteed that the hidden debt would be free from public scrutiny by the way they wrote their laws. Once again, “Enron accounting” gained formal Federal endorsement. So now we have a $2.5 trillion dollar hidden debt in the Social Security Trust Fund, and this is terrible. However, it is actually significantly worse than this. As noted in Figure 5 below, the makeup of the Federal Trust Funds changed from 1980 to 2000. In fact, virtually all the funds held by all these agencies are in special issue Treasury Bonds – thus, if one tracks the “assets” held by social security (Figure 2) this only shows a portion of the problem. As noted below, in 2000, that hidden debt was only about 40% of the total hidden debt held by the trust funds. In 2011, that total was $4.7 trillion as shown by the Treasury Department (Figure 6). For another author who recognized and noted this problem, see Smithers, MS thesis, Naval Post Graduate School, 1993.
Figure 5. Federal trust fund accounts, from Nov. 2000 Treasury Responsibilities in Investment Fund Administration.
Figure 6. Assets held by trust funds in 2011, see Treasury Department listings on line. Thus, at this time, the Social Security Trust Fund holds only about 50% of the hidden debt of the country. If one plots these trust fund assets against the total trust fund assets since 1980 the graph is much more striking – see Figure 7 – more on the order of 1/3 of the entire federal debt.
Figure 7. The Social Security Trust Fund assets vs total Federal Trust Fund assets.
We are now in 2012 and the Social Security system has arrived at the “cross-over” point – this year outlays exceed receipts. As a result, no new special issue Treasury Bonds are being created, right? Not true – the interest on the debt of the $5 trillion dollars in assets held by the Social Security Trust Fund and the other Trust Funds is also being paid by the issuance of new special issue Treasury Bonds. That interest is now over $100 billion annually and is increasing every year – so the federal government continues to create “off budget” debt simply by paying the interest on the Trust Fund hidden debt with more of the special issue Treasury Bonds.
Figure 8. Summary of Americas debt problem. The American taxpayer should be outraged that this debt has been created by Greenspan, Summers and others – it has been an Enron-game played on a scale that the billionaires at Enron could only dream of. As seen on Figure 8, this hidden debt hit $1 trillion dollars back in the early 1990s, has risen to about $5 trillion dollars now, and is growing at a rate of about $500 billion a year. And why is there no hue and cry about this? Why has no one in Washington stood up and revealed this to the American public and demanded that the unified budget be changed to do away with this Enron-esque approach to accounting? Well, in about 1990, Daniel Patrick Moynihan did stand up to President George H. W. Bush and demand that the 1983 Greenspan commission implementations be repealed (or at least fixed). He was unsuccessful in the political community – the huge free “slush fund” of off-budget money was
too much for Washington to let go of. In 1983, Dr. Sylvester Scheiber, in testimony before congress concerning the Military Retirement Fund, called this process “smoke and mirrors”. Since that time he has published a number of articles and books on the subject, including one earlier in 2012 that shows over the next 100 years this is a $22 trillion dollar problem. And, in 2002, Dr Shoven gave it his best shot with clear words of warning noted above. This too has been ignored or buried by Washington and the abuse goes on today. How do we fix this problem? What is needed is that this history be explained to the American public in a way that they can understand; that politicians need to admit that this Enron-esque book-keeping is wrong, is deleterious to the American economy and that the Unified Budget needs to be emended to correct the system. To accomplish a proper reform, taxes need to be raised and spending cut to try and begin to reverse this $5 trillion dollar budget hole that Greenspan, Summers and others have created as their legacy for the American economy. References: Annual Reports for the Social Security Trust Fund: ssa.gov/history/reports/trust/trust reports Budgeting and Investing in the Military Retirement Fund, Samuel. J. Smithers, MS Thesis, Naval Post Graduate School, 1993. OMB Budget of the US Government, Historical Tables: whitehouse.gov/omb/budget/Historicals Report of the National Commission on Social Security Reform, Jan. 1983, Alan Greenspan et al. Report of the President’s Commission on Budget Concepts, Oct. 1967. Schieber, Sylvester, 2012, The Predictable Surprise; The Unraveling of the US Retirement System. Shoven, John B., 2002, The Enron-Like Accounts of the U.S. Government, SIEPR Policy Brief. Treasury Report: Treasury Responsibilities in Investment Fund Administration, Nov. 2000. Authors’ CVs W. Spencer Thompson is a graduate of the Stanford University Department of Economics in 1935 and received the Littauer Fellowship for Graduate Studies in Public Administartion from Harvard, 1937 - 1939. He served as Deputry Director of the Bureau of Public Debt in 1942 – 1943. While a top manager for Atlas Chemicals, he invented the 401k in about 1963. He established the investment procedures for the state employee pension funds for the state of Delaware and also served on the pension fund advisory board for the state of Arizona. He is currently 99 years old and carries a century of economics theory and application experience with him. Laird B. Thompson is a PhD geologist who has had a 40 year career in oil and gas. He is recognized as an expert in microseismology and in fractured reservoir characterization, including expertise in shale gas reservoirs and hydraulic frac’ing. He is a new-comer to economic theory and practice, but has had an excellent teacher in helping him to understand the labyrinth of American public economics.
In order to understand how this happened, one needs to go back to somewhere in the 1920s and discover who created the practice of issuing “special interest Treasury Bonds”. These bonds are only issued between entities within the American government and are not available to the public. The bonds are guaranteed by the US Government, and for several decades were only used in relatively small amounts from year to year as part of an increasingly complex federal budget system. By 1937, special issue Treasury Bonds were commonly used for the Highway Trust Fund, who may be collecting taxes for a few years to pay for a project that was multiple years in duration and not distort the annual budget. To put it another way, this was a very short term interim solution to the difference between an annual cash budget (showing tax income each year) vs a longer term accrual budget that showed the budget over the lifetime of an extended project. In 1937, with the Social Security Act passing, the Treasury Department began using the special issue Treasury Bonds to hold the excess cash they got in one year to pay out in the next (in much the same way they did with the Highway Department). As an example, let’s say that the government got $100 billion on tax day for Social Security but had to pay $10 billion a month in outlays. They would come up a bit short at the end of the year before they collected the next years’ taxes, so they would issue the Treasury bonds to tide them over for a few months. The special issue bonds were almost exclusively short term – five years or less. They were simply setting the cash aside from one year to the next as a way to take care of the “float” without distorting the accuracy of the annual surplus or deficit. The “float” is the excess cash that wasn’t spent, but would be spent in the short term future. In this way, the use of special issue Treasury Bonds was for short term, very specific projects and not intended for larger long term funding of the Social Security Trust Fund. It turns out that these special issue bonds have been used as the primary “investment” of the Social Security Trust Fund since 1937, but for many years, these were all short term special interest bonds that matured within a year or two. This process continued through 1959 when the administrative policy was changed to spread the maturity dates of the Trust Fund's portfolio of par-value specials as evenly as possible over the next one to fifteen years. In 1994 the congress passed the Social Security Independence and Program Improvements Act (PL 103296) and created a very complicated system of issuing the Special Issue Treasury Bonds that is still followed today. In principle, these bonds have specific value, have set interest rates and are issued as either short term or long term bonds within a budget system that shows them as capital expense items within the context of an annual budget. Unfortunately, this is not the case with these bonds. The reason for this appears to be the way in which the “unified budget” first created in 1969 has been implemented. By 1967, all federal expenditures were about 10% of the total economy, so it was the single largest entity in the US economy. The budget format had not changed since about 1918, a time when specialized agencies were not a significant part of the government. It was not until the New Deal in the 1930s that these independent agencies became a significant part of the government budget. By the 1950s, the Highway Trust Fund, the Airport & Airway Trust Fund, social security and other specialized agencies all had their own budgets and their own sources of revenue (for example, the social security tax could only be used for that purpose). These had a significant impact on the national economy without being represented in the federal budget.
They were about 40% of the total budget and these specialized agencies were not under the review and control of congress. As a result, President Johnson created the Presidential Commission on Budget Concepts in 1967. The commission produced a rather small report – only about 100 pages in small-format pamphlet form. They strongly recommended creating a single, unified budget for the US Government, and laid out the structure they felt was appropriate for such a budget. They were quite apparently aware of the accounting problem inherent in special issue Treasury Bonds, for one of their strongest findings was finding #13. On page 9 of the report, it says “The commission strongly recommends against a “capital budget” which would provide separate financing of capital or investment expenditures on the one hand and current or operating expenditures on the other. Such a budget would seriously distort the budget as a decision-making tool.” This warning, however, was completely ignored as the unified budget was put into effect. Instead, the Unified Budget that was implemented under Johnson in 1969 used the concept that most receipts and outlays were shown as “on budget” items, however there were also “off budget” items as noted by Dr. Shoven above. To put this another way, the effect of it was to create a Unified Budget that formally established the “Enron accounting” system that plagues us today. The most important off budget item was the inter-agency special issue Treasury Bond. Because these transactions were never shown on the budget, they were never captured as expense items. The result was that the government was spending money on the one hand and not showing mounting debt on the other hand – they never showed the creation of the special interest Treasury Bonds as a cost that should be shown along with on-budget outlays. The result was that the annual budget surplus or deficit did not correspond with the annual decrease or increase in the national debt – the deficit did not equal the debt. This disparity is shown below on Figure 1.
Figure 1. A plot of the national debt (the blue line) vs the annual budget surplus or deficit (the red line) from 1980 to 2011. Note that in the Clinton years, the annual budget showed a surplus (in the negative debt range) but the national debt increased. See Shoven comments above.
The Social Security system has been a “pay as you go” plan and was not funded prior to the 1980s. By that time, even many state pension systems were funded, but not Social Security. This problem of creating “off budget” debt got significantly worse in 1983 when President Reagan assembled a National Commission on Social Security Reform headed by Alan Greenspan. The charge for the commission was to create an economic “vehicle” to reduce the coming impact of retiring baby-boomers that would put the Social Security system into a negative cash-flow situation. This was a laudable goal – to take a 30-year economic crunch and extend it out to 60 or 70 years to defray the economic stress on the system. The way this was accomplished was by a significant increase in the Social Security contributions, which increased annual receipts for the Trust Fund. Unfortunately, the commission issued in #19 in their “findings and recommendations” section that “The National Commission recommends that the investment procedures of the OASI, DI, HI, and SMI Trust Funds be revised so that… only special issues would be purchased by the trust funds in the future.” In other words, the Greenspan commission further exacerbated the “off budget” problem of the Unified Budget by mandating that ALL Social Security Trust Fund assets be held as special issue Treasury Bonds. Once again, “Enron accounting” was formalized for the Federal budget system. In addition to creating further “hidden debt” with the special interest Treasury Bonds, the Reagan administration created a significant change in the rate of creation of this hidden debt. Figure 2 shows that the Social Security Trust Fund Assets went from about $50 billion in 1986 to well over $200 billion by 1990. This upward trend has continued ever since, and in fact was further exacerbated during the Clinton administration.
Figure 2. Social Security Trust Fund Assets. Note changes in slope on the line of “hidden debt” creation. See text for details. During the second Clinton term, the administration – under the direction of Secretary of the Treasury Larry Summers – made extensive headlines claiming to have created a surplus in the national budget. In fact, as shown by Figure 3, this was false. During the time of the highly touted surplus, the debt actually increased as noted by Dr. Shoven earlier in this article.
Figure 3. The national debt increase (blue line) vs the annual budget deficit and surplus (red line – negative values indicate a surplus). During the budget “surplus”, the deficit increased although more slowly than at other times. In addition, as can be seen on Figure 4, the Treasury Department tripled the annual amount of special interest Treasury Bonds that were created between the years 1997 and 2001 – from about $50 billion a year to about $150 billion annually – and this higher production rate has been maintained up until the recent economic down-turn. This seems to raise the question of why? Why, when the administration was bragging about running a surplus did they create such a huge run-up in the hidden debt? Is it the case that Larry Summers saw the “value” of “Enron accounting” in creating “free money” for politicians to use and helped them get even more efficient at running a bogus accounting system?
Figure 4. The annual creation of long term special interest Treasury Bonds. The result has been that as long as there is a net surplus in Social Security – that receipts exceed outlays – then all of the surplus has been used to purchase special issue Treasury
Bonds. Then, the moneys that are traded for these bonds are simply spent by the government on a series of “special projects” on an annual basis. It is plausible to argue that the Social Security Trust Fund surpluses have been used to finance wars and broad tax cuts over the past decade or more. The result is that no money has ever been saved for Social Security in the future – it has all simply been spent as “off budget” money. The net result of this aggressive hidden spending spree is that the Social Security Trust Fund now owns about $2.5 trillion dollars in special interest Treasury Bonds that have no dollar value in them – all those dollars have long since been spent. In the late 1980s and through the 1990s, the Gramm-Rudman-Hollings Act and its’ successors that claimed to address a “balanced budget” in fact did nothing of the kind. By formalizing the way in which “balanced budgets” were defined, they only considered the on-budget items in their discussions, never the off-budget items. Thus they guaranteed that the hidden debt would be free from public scrutiny by the way they wrote their laws. Once again, “Enron accounting” gained formal Federal endorsement. So now we have a $2.5 trillion dollar hidden debt in the Social Security Trust Fund, and this is terrible. However, it is actually significantly worse than this. As noted in Figure 5 below, the makeup of the Federal Trust Funds changed from 1980 to 2000. In fact, virtually all the funds held by all these agencies are in special issue Treasury Bonds – thus, if one tracks the “assets” held by social security (Figure 2) this only shows a portion of the problem. As noted below, in 2000, that hidden debt was only about 40% of the total hidden debt held by the trust funds. In 2011, that total was $4.7 trillion as shown by the Treasury Department (Figure 6). For another author who recognized and noted this problem, see Smithers, MS thesis, Naval Post Graduate School, 1993.
Figure 5. Federal trust fund accounts, from Nov. 2000 Treasury Responsibilities in Investment Fund Administration.
Figure 6. Assets held by trust funds in 2011, see Treasury Department listings on line. Thus, at this time, the Social Security Trust Fund holds only about 50% of the hidden debt of the country. If one plots these trust fund assets against the total trust fund assets since 1980 the graph is much more striking – see Figure 7 – more on the order of 1/3 of the entire federal debt.
Figure 7. The Social Security Trust Fund assets vs total Federal Trust Fund assets.
We are now in 2012 and the Social Security system has arrived at the “cross-over” point – this year outlays exceed receipts. As a result, no new special issue Treasury Bonds are being created, right? Not true – the interest on the debt of the $5 trillion dollars in assets held by the Social Security Trust Fund and the other Trust Funds is also being paid by the issuance of new special issue Treasury Bonds. That interest is now over $100 billion annually and is increasing every year – so the federal government continues to create “off budget” debt simply by paying the interest on the Trust Fund hidden debt with more of the special issue Treasury Bonds.
Figure 8. Summary of Americas debt problem. The American taxpayer should be outraged that this debt has been created by Greenspan, Summers and others – it has been an Enron-game played on a scale that the billionaires at Enron could only dream of. As seen on Figure 8, this hidden debt hit $1 trillion dollars back in the early 1990s, has risen to about $5 trillion dollars now, and is growing at a rate of about $500 billion a year. And why is there no hue and cry about this? Why has no one in Washington stood up and revealed this to the American public and demanded that the unified budget be changed to do away with this Enron-esque approach to accounting? Well, in about 1990, Daniel Patrick Moynihan did stand up to President George H. W. Bush and demand that the 1983 Greenspan commission implementations be repealed (or at least fixed). He was unsuccessful in the political community – the huge free “slush fund” of off-budget money was
too much for Washington to let go of. In 1983, Dr. Sylvester Scheiber, in testimony before congress concerning the Military Retirement Fund, called this process “smoke and mirrors”. Since that time he has published a number of articles and books on the subject, including one earlier in 2012 that shows over the next 100 years this is a $22 trillion dollar problem. And, in 2002, Dr Shoven gave it his best shot with clear words of warning noted above. This too has been ignored or buried by Washington and the abuse goes on today. How do we fix this problem? What is needed is that this history be explained to the American public in a way that they can understand; that politicians need to admit that this Enron-esque book-keeping is wrong, is deleterious to the American economy and that the Unified Budget needs to be emended to correct the system. To accomplish a proper reform, taxes need to be raised and spending cut to try and begin to reverse this $5 trillion dollar budget hole that Greenspan, Summers and others have created as their legacy for the American economy. References: Annual Reports for the Social Security Trust Fund: ssa.gov/history/reports/trust/trust reports Budgeting and Investing in the Military Retirement Fund, Samuel. J. Smithers, MS Thesis, Naval Post Graduate School, 1993. OMB Budget of the US Government, Historical Tables: whitehouse.gov/omb/budget/Historicals Report of the National Commission on Social Security Reform, Jan. 1983, Alan Greenspan et al. Report of the President’s Commission on Budget Concepts, Oct. 1967. Schieber, Sylvester, 2012, The Predictable Surprise; The Unraveling of the US Retirement System. Shoven, John B., 2002, The Enron-Like Accounts of the U.S. Government, SIEPR Policy Brief. Treasury Report: Treasury Responsibilities in Investment Fund Administration, Nov. 2000. Authors’ CVs W. Spencer Thompson is a graduate of the Stanford University Department of Economics in 1935 and received the Littauer Fellowship for Graduate Studies in Public Administartion from Harvard, 1937 - 1939. He served as Deputry Director of the Bureau of Public Debt in 1942 – 1943. While a top manager for Atlas Chemicals, he invented the 401k in about 1963. He established the investment procedures for the state employee pension funds for the state of Delaware and also served on the pension fund advisory board for the state of Arizona. He is currently 99 years old and carries a century of economics theory and application experience with him. Laird B. Thompson is a PhD geologist who has had a 40 year career in oil and gas. He is recognized as an expert in microseismology and in fractured reservoir characterization, including expertise in shale gas reservoirs and hydraulic frac’ing. He is a new-comer to economic theory and practice, but has had an excellent teacher in helping him to understand the labyrinth of American public economics.
