THE KANSAS CITY STAR

August 10, 2001, Friday METROPOLITAN EDITION

SECTION: BUSINESS; Pg. C1 ;JERRY HEASTER

Trust this: Trust fund is a sham

by JERRY HEASTER; The Kansas City Star

How much will it cost to redeem the debt piling up in the Social Security trust fund? The trust fund, as more Americans are beginning to discover, contains no real assets. Instead, it is a cache of Treasury IOUs. The surplus Social Security tax revenue represented by these special-issue, nonmarketable securities has been spent. The trust fund is a sham because spent money can't be saved.

The good news is that the payroll-tax revenue financing Social Security will be sufficient to pay benefits at current levels for 15 more years or so. When revenues begin to fall short of payments, though, Congress must cover the shortfall by finding the money to redeem the trust fund IOUs.

This can be done in several ways, including raising taxes, reducing benefits, restructuring and adding to the debt, or shifting funds from other budget areas - or some combination thereof.

Some readers have asked whether it would be possible to convert the nonmarketable securities to publicly held marketable Treasuries.

Possible, yes, but probably not feasible given the strains such a massive refinancing operation might put on the world financial system.

The current nonmarketable debt totals almost $2.9 trillion. The Wall Street Journal, using estimates from a report by the presidential commission charged with recommending fixes for Social Security, noted recently that $7 trillion in new bonds would have to be sold by 2040 to cover the shortfall. The total needed would rise to $14 trillion by 2050 and, according to the report, $47 trillion by 2075.

How about reducing budget allocations from other federal operations? Coming up with the cash to make the redemptions needed by 2020 would equal the budgets of the Environmental Protection Agency; the departments of Education, Interior and Commerce; plus a couple of key aid programs for children.

When it comes to raising Social Security's payroll taxes, covering the shortfall in 2020 would require an $860 annual tax increase for a two-earner couple with $50,000 in income. The same couple would face $2,100 more in annual taxes to finance the 2030 shortfall.

Or suppose, heaven forbid, Congress decides to cover the shortfall by reducing Social Security payouts? A medium-wage earner and spouse retiring at 65, the report estimates, would face an annual benefit reduction of $2,227 to cover 2020's projected shortfall. By 2030, that couple could face a benefit cut of $4,605.

When trust fund apologists are confronted with the reality of the scam, they respond that it's all moot because the U.S. government would never default on these debts. This is true, but honoring the trust fund's implied promises can't be done by waving a magic wand.

The simple truth is that somebody will pay, because the money isn't there. The only place Washington can get the money it needs is from the people in whose name it taxes and spends.

This is why reform is imperative, and reform must include some form of privately owned accounts for future beneficiaries funded by part of their current Social Security taxes. It's the only way to keep Congress from continuing to piddle away the surplus revenues most people think are being saved to finance their Social Security benefits.

- To reach Jerry Heaster, write the business desk at 1729 Grand Blvd., Kansas City, MO 64108, call (816) 234-4297 or send e-mail to jheaster@kcstar.com.