Some Congressmen and private economists are fretting that the economy might need a second stimulus package, while others are concerned about the impact such a package would have on the country's already enormous budget deficit.
But there is a source of additional stimulus that wouldn't cost the government or taxpayers anything, and would put money back into the productive economy, that is, the private sector.
Social Security is often referred to as a pay-as-you-go system, meaning the money paid in every year is paid out in benefits. But it actually is a pay-in-way-more-than-is-needed system, which receives every year more in contributions than it pays out in benefits, building up a so-called reserve. The excess, the result of a 1983 reform to generate a surplus, is “invested” in special non-tradable Treasury securities, and ultimately used to fund government spending.
In the latest annual Social Security report, for the year ended Dec. 31, receipts totaled $805.5 billion, including $674.5 billion in payroll taxes and $116 billion in interest from investments in non-tradable special Treasury securities. At the same time, disbursements totaled $625.1 billion, including $615 billion in monthly benefits and lump-sum payments. As a result, the system generated $180 billion in excess assets that went to its reserve fund, raising the reserve total to $2.4 trillion.
That $180 billion should be returned to those Social Security participants and employers who paid it. And in future years, the payroll tax should be cut so that receipts and disbursements are equal, and then adjusted annually to meet disbursements. Employees and employers would get a tax cut from current levels until rising disbursements lifted the Social Security contribution back to current levels.
Social Security should be put on a non-reserve basis because the financing for the interest on the reserves, and the return of the principal, comes from the same source, the Treasury, and the major source of funding for the Treasury is the income tax, which distorts economic activity far less than a payroll tax such as the Social Security tax.
Actuarial professionals have been making the case against a reserve at least since 1893 in discussing existing or proposed British, German and U.S. state-sponsored old-age benefit systems.
As Reinhard A. Hohaus, an actuary in the social security bureau of Metropolitan Life Insurance Co., wrote in a still-relevant 1936 article in the Transactions of the Actuarial Society of America journal, “a full reserve basis is unnecessary for a national compulsory contributory ... plan of the scope contemplated by the Social Security Act.” Nor is “such a basis even desirable.”
When whatever reserves necessary for payments are depleted and contribution rates reach the point they can't politically be raised further, funds for benefit outlays “will be provided by the government from other sources — sources which may well be the same as would provide the funds necessary to meet the interest credited to the old-age benefit account under a reserve system.”
Mr. Hohaus agrees with Miles M. Dawson, an actuary who wrote that society's problem of old age dependency “will ultimately be solved along a non-reserve basis, leaving the wealth and capital of the world to be accumulated in other ways and to be used in very much more fruitful ways ... than enormous accumulations of (a government old-age pension reserve fund) are likely to be employed.”
In fact, most of the Social Security $2.4 trillion reserve fund should be returned to Social Security participants and employers, leaving only a cushion of, say, one to three years to provide for contingencies to finance Social Security payments. This could be done by granting employers and employees a Social Security tax holiday until the reserve is exhausted. Imagine what stimulus that would provide!
Building up the trust fund is a mistake. It takes away purchasing power of the contributors — employees and participating employers — diminishing economic activity and the national gross domestic product, and enhances the spending power of Congress.
Most employees do not realize their Social Security contributions are financing government spending; they believe they are “invested” in the trust fund.
The reserve, furthermore, provides no real enhancement to secure the payment of Social Security benefits.
What about the Social Security contributions Congress would no longer have to finance federal spending? Well, it is better for public policy that Congress should have to go to the voters by proposing and justifying tax increases to meet its spending desires.
The public would be more fully informed of congressional funding and appropriations, enabling it to make better political and fiscal decisions.
The big reserve approach should be ended. Reducing future contributions would put the system on a truer pay-as-you-go approach with a little extra contribution rate to provide a small cushion for fluctuations in projected benefit payments, and it would strengthen the underlying economy.