One of Social Security's greatest myths is that benefits are paid from a trust fund accumulated from taxes held in trust. True, there exist an "Old-Age and Survivors Insurance Trust Fund" and a "Disability Insurance Trust Fund," usually referred to together as "the Social Security Trust Fund." Sure it's a trust fund. Why, it says so right here on the label!
Or is it?
The original Social Security Act created an "Old-Age Reserve Account" in the Treasury. Each year, an amount deemed sufficient to pay that year's benefits would be appropriated to the Account. Appropriations unneeded for benefits would be invested in federal debt, including unmarketable debt issued for this purpose, earning 3 percent. Social Security's tax rate was to rise gradually, to create a reserve big enough so its interest would help defray future costs. Tax collections would begin in 1937; benefit payouts, in 1942; thus the fund would start accumulating.
Criticism arose. Winthrop Aldrich of Chase National Bank argued that the reserve would be a fiction; the government would just be issuing itself promissory notes. In his famous Milwaukee speech on Social Security during the 1936 presidential campaign, "Alf" Landon likened the reserve to a father taking deductions from his kids' wages to invest for their old age, "investing" them in "his own IOU," and spending the money, leaving his kids nothing but IOUs, making Social Security's forced savings "a cruel hoax." Social Security tax dollars, President Franklin Roosevelt retorted, "are held in a Government trust fund solely for the social security of the workers."
After the election, the attacks kept coming. General Hugh Johnson, former head of the National Recovery Administration, and journalist John T. Flynn, pointed out that unlike insurance companies, which invest their premiums to build a reserve to pay claims by their insured, the government was only issuing itself IOUs. So the reserve was worthless. To pay future benefits, Americans would have to be taxed again. Defenders responded that the IOU talk was misleading; aren't all private instruments, such as stocks and bonds, really IOUs, their value depending on the resources and ethics of the issuing firms?
In 1939 FDR proposed amending Social Security. In the ensuing congressional hearings and debates, the reserve controversy exploded. Critics accused the Administration of "embezzlement" and reiterated that the reserve was just IOUs, so Americans would be taxed twice. No, no, no, defenders shot back; no embezzlement was happening, there wouldn't be any double taxation, and the IOUs were the safest investment there was – government bonds. By now three years old, the acrimonious controversy was hurting Social Security's prestige.
The 1939 Amendments created an "Old-Age and Survivors Insurance Trust Fund" at the Treasury. The record is clear that this was done to end the reserve fund wrangle. Testifying before the Senate Finance Committee on the Amendments, Social Security Board chairman Arthur Altmeyer, when asked what the purpose of the trust fund was, stated, "to allay the unwarranted fears of some people who thought that Uncle Sam was embezzling the money."
Moreover, the texts of the original Social Security Act regarding the Reserve Account and of the 1939 Amendments regarding the Trust Fund are virtually identical. Section 201 of the original Act, "Old-Age Reserve Account," was replaced by a new Section 201, "Federal Old-Age and Survivors Insurance Trust Fund." The only real change was the elimination of the specific annual appropriation transferring revenues to the Reserve Fund. Instead, a sum equivalent to Social security tax receipts "is hereby appropriated" to the Trust Fund for the fiscal year ending June 30, 1941, "and for each fiscal year thereafter." In other words, the money now goes into the Fund automatically. The only other new features were a Board of Trustees (Secretary of the Treasury, Secretary of Labor, and Chairman of the Social Security Board) to manage the Fund; replacement of 3 percent interest with the average rate on interest-bearing federal debt; and paying money from the Fund to the Treasury to defray Social Security administrative expenses.
Otherwise, the Trust Fund operated just like the Reserve Account. In fact it was the Reserve Account; the latter's assets as of January 1, 1940 were transferred to the Trust Fund. The Account was, according to the Act, "an account in the Treasury," and the Trust Fund, per the Amendments, was "on the books of the Treasury," making the transfer a formality. Essentially, a shoebox full of bonds just got relabeled.
The evidence is clear: Social Security's Trust Fund is a Treasury account, nothing more. The "trust fund" label was a public relations ploy to reassure the public that Social Security was trustworthy. It worked. The reserve controversy faded away.
Is the Trust Fund the real McCoy? Let's see. A trust fund is money or other property held in a trust, a trust being "A fiduciary relationship with respect to property, subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." A trust must have a "settlor," who creates the trust and puts property into it; a "trustee" who manages it and holds legal title to the property; a "beneficiary," who has equitable title to the property, and for whom the trustee manages it; "terms of trust," spelling out the trust's purpose, the duties and powers of the trustee(s); and, of course, property. (Charles E. Rounds, Jr. and Eric Hayes, Loring: A Trustee's Handbook,) 8th ed., pp. 1–2, 5, 79; Gilbert Thomas Stephenson, Estates and Trusts, 4th ed., pp. 63–66).
Social Security's trust fund does not have these defining features.
Congress is not the settlor. A settlor puts his own property into the trust, which Congress did not do. And Section 201 of the Amendments did not even mention the Board of Trustees having legal title to any property. Down go two characteristics of a trust.
Also, Section 201 said nothing about property – because there isn't any. In Flemming v. Nestor, the Supreme Court ruled that there are no accrued property rights to benefits. If you have no property right to benefits, how can you have property in the trust fund which supposedly pays them? Property in the trust fund implies a property right to benefits, and vice versa. A trust manages property on someone's behalf. No property, no trust.
Suffolk University law professor and trust expert Charles Rounds aptly summed up: "Despite the term u2018trust,' the Social Security system contains nothing that remotely resembles the common law trust. There is no segregation of assets, no equitable property rights, no private right of enforcement (all characteristics of the common law trust). It is merely a system of taxation and appropriation sprinkled with trust terms to hide its true nature."
Finally, consider how the Trust Fund operates. Social Security revenues go into Treasury general revenue and are credited to the Fund as unmarketable Treasury bonds. The Treasury pays benefits with general revenue, debiting the Trust Fund an equivalent value of bonds. Any remaining revenue finances general government, with an equivalent value of bonds in the Trust Fund as Social Security's "surplus." (House Ways and Means Committee, 1998 Green Book, pp. 73, 75, 77). That's a Treasury account in action, not a trust fund.
Social Security's Trust Fund is bogus. Meaning the "robbing the trust fund" issue is phony, too. Yet seniors buy it. Last night one of my friends told me he'd tried to straighten out his 77-year-old uncle, but the old boy just wouldn't believe him. Even my Mom fell for that "robbing the trust fund" baloney. Social Security's propagandists have programmed many Americans, especially seniors, like Moonies. Deprogramming is imperative.
John Attarian (send him mail) is a writer in Ann Arbor, Michigan, with a Ph.D. in economics. His book Social Security: False Consciousness and Crisis, which treats the myths and realities of Social Security in detail, has just been published by Transaction Publishers.
