Dipping into Millennials’ Social Security Cookie Jar


1965 was a momentous year for the US. LBJ, the newly elected President, was in a bind. He had objectives that required spending, which would generate a fiscal deficit —and, in turn, more government debt. But coming out of WWII, fiscal deficits were considered to be taboo by both political parties because they would further add to wartime debt accumulation.

The game plan, which should again be considered today, was: Don’t add more debt. Instead, grow the economy without additional government fiscal deficits. The plan implied having a balanced federal budget, while still growing income to service the debt load. (No doubt, the subject of a future blog.)

So the challenge for LBJ was to escalate the Vietnam War effort and make good on expensive campaign promises (called the “The Great Society”) all while running a balanced fiscal budget.

The Great Society was multi-dimensional but, most important, involved entitlements on a grand scale that included the expansion of Social Security and the introduction of Disability and Medicare.

So what came of it was perhaps the beginning of the government ethic to vote for whatever America wanted and to find a way, however devious, to finance it.

A way was found, and it’s still used today. The Federal Government would raid any pot of taxpayer money set aside for another purpose and spend it — and then cover it up.

How it is done is most easily understood with an analogy: A family is attempting to provide a college fund for its children. The children work while in high school and contribute to the college fund cookie jar each week. So do mom and dad. Except dad, exercising his sovereign oblige, dips into the cookie jar regularly to pay for whatever seems more pressing at the time. In return, he leaves a note — an IOU — to be due when funds are needed for their stated purpose.

Dad’s IOU does not appear on his balance sheet, but when college expenses need to be covered, he goes to his friendly bank for a loan to make good on the funds he raided. The loan from the bank provides the funds to retire his IOU but the bank loan goes on dad’s balance sheet. It’s a market transaction and adversely affects dad’s credit rating and the cost of borrowed funds from outside the family.

This is the general mechanics of what has occurred on a grand scale with the social insurance trust funds. The particular pot of money most tempting for the government to raid for other use was the Social Security “trust” fund. That’s because it was large and growing, at the time, as the Baby Boomers were just entering the labor force hence contributing to the Social Security trust funds via the payroll tax.

What made Social Security funds even more a target was that the great majority of the beneficiaries wouldn’t be scheduled to receive promised benefits for decades. That is, the missing funds not be missed for some time.

In order to raid the trust funds and cover it up gracefully, the government used an accounting sleight of hand. The Federal budget (in deficit) was consolidated with the Social Security budget (in surplus). This gained access to the unspent social security trust inflows to be spent on non-Social Security items. Furthermore with deficits and surpluses offsetting, the consolidated budget was near balanced affording the politicians the ability to claim fiscal responsibility to boot.

Hence with the surging Baby Boomer contributions of young workers exceeding the payouts to those retiring, the good ol’ government would spend the bonanza on the pressing wishes of the day. As the Treasury confesses (page 6):

“When revenues in the trust exceed benefit payments, the unspent monies must remain in the trust fund for future use. However, this excess cash is transferred to the Treasury’s General Fund and is used to finance other activities which fall outside the specific purpose of the trust fund.”

To give you an idea of the intent to cover-up the transaction, when Social Security cash was used by the Treasury for general purposes, the IOU placed in the fund was a new category of government debt created for the purpose of the cover-up. It is called “special debt,” not to be confused with “market debt,” a distinction the Treasury maintains.

The reason is special debt isn’t reported on the federal balance sheet and, in today’s financial nomenclature, is referred to as “off-balance sheet” debt. In other words, hidden debt.

The special debt is basically an IOU just like dad’s which is not sold on the market. Nor is it accounted for on the government balance sheet. This means the special debt issuance does not affect the market pricing of debt, nor the tally of debt on the government’s books and it is effectively below the radar when it comes to the market appraisal of the riskiness of the government debt load.

The raiding of social security trust funds and its cover up has worked smoothly behind the political and accounting scenes for a half century. But alas, with the arrival of the Baby Boomers at the trust fund window to claim benefits, at least one category of trust funds, the Disability Insurance fund is now running negative cash flow.

Like dad, the government needs to make good on the cash-call to pay the benefits and has begun to borrow the funds with on-balance sheet US Treasury debt. At this point in time, the chickens have finally come home to roost.

These days, the annual increase in government market debt now covers not just current fiscal deficits of the government but also covers the cash call for the special debt. For example, in the most recent fiscal year, the government fiscal deficit was $575 billion, but US Treasury debt sales were $1.3 trillion (which is not a trifling matter.)

Hence, we have entered the era when government debt accumulation is greater than the already-large ongoing federal deficit. Ultimately, it will adversely affect the market’s perception of the riskiness of US government debt as it piles up.

All this might seem like a fairytale gone badly but unfortunately it’s not a fairytale. But realize, it could have been avoided and can still be avoided for the millennial generation. It’s not too late for them to actually have a funded pot, with money that could grow for decades while invested in the private sector, when it’s their time to claim Social Security.

Such is the state of Social Security in countries that actually invested the funds in the private economy. Chile was the pioneer and was more or less followed in Latin America. It’s called “privatization” of Social Security. The trust funds have basically been invested in private sector funds that included private sector debt, a stock market index fund, and a foreign stock index fund, in addition to a government bond fund.

These funds, decades later, are paying out two to three times more than the payouts originally scheduled through investing in government bonds. If the private funds do not outperform the scheduled Social Security payout, the government would make up the difference — but that has never been necessary.

If funds contributed in, say, in 1970 had been invested in an S&P index fund, they would be redeemed today at about an 8 to 1 ratio as compared to the contribution at that time.

Providing for Social Security in this manner has other important benefits as well. Social Security contributions would be financing business sector expansion as opposed to government spending.

Moreover, workers would have a stake in the growth of corporate stock valuations and this would serve to reduce the contentious economic and political divide that exists in the US.

As it stands, the millennials&; social insurance contributions will fund the retirement of their parents’ generation and when their funding is insufficient they will have to support via higher taxes, a higher government debt load over their lifetime.

You millennials, it’s time to make your voices heard. Pass it on.


The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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