Allen Buckley For United States Senate - What if Social Security Was Subject To ERISA?

Looking forward over the long term, Social Security is in trouble. How and why it got there is a lesson in fiscal irresponsibility.

Social Security is a “pay-go” system: Current taxes pay for current benefits. Technically, a trust fund exists for Social Security’s assets. However, substantively, there is no separate trust fund full of stocks, bonds or any other assets. Social Security has been running surpluses since 1983. Every year, those surpluses are loaned to the General Fund of the Federal Government. For the 2006 fiscal year, the surplus amount (that was loaned to the General Fund) was $185 Billion. Presently, the accumulated debt owed to Social Security by the General Fund equals approximately $2.1 Trillion. The surpluses are expected to continue to increase to $263 Billion in 2014, and then diminish thereafter until they expire in 2017.

There are two components of Social Security – the Old–Age and Survivors Insurance (OASI) component and the Disability Insurance (DI) component. The tax rates are, respectively, 5.3 and 0.9 percent. Thus, the combined rate is 6.2 percent. The tax applies to both the employer and the employee on wages up to the Social Security Wage Base - $97,500 for 2007. For self-employed persons (including most professionals), the rate is 12.4 percent, and it applies to net income up to the Social Security Wage Base.

Over the years, the Social Security Wage Base has increased for inflation. In 1968, the Social Security Wage Base was $7,800. The tax rate has also increased. In 1968, the rate was 3.8 percent.

The Congressional Budget Office’s chart of actual prior and projected revenues and expenses of Social Security is provided below:

Source: Congressional Budget Office.

The Heritage Foundation has produced the following chart on investment returns for Social Security participants, based on year of birth:

Let’s examine Social Security under federal law applicable to pension plans of private employers, to see how Social Security stacks up.

The Employee Retirement Income Security Act of 1974, or “ERISA,” is the federal law that governs retirement plans of private employers. How would Social Security perform if subjected to ERISA’s rules?

The “prohibited transaction” rules of ERISA section 406 prohibit a loan from a retirement plan’s trust account to the sponsoring employer. Assuming the Federal Government is the sponsor of the Social Security, a prohibited transaction would occur every year that the Social Security Trust Fund’s surplus assets are loaned to the General Fund of the Federal Government. As noted above, since 1983, exclusive of interest, the aggregate amount loaned equals approximately $2.1 Trillion. Note that there are no assets set aside to repay these loans. Rather, the General Fund must find a source of cash to repay these loans when they become due. The only realistic options are debt and taxes. Debts owed to the general public now equal approximately $5 Trillion. Many financial advisors advise against borrowing more than two-and-a-half (2.5) times one’s salary to finance a home purchase. The Federal Government now receives approximately $2.5 Trillion in tax revenues. So, if the federal government were an individual, it’s getting close to its limit.

For each prohibited transaction, there is an annual excise tax of 15 percent of the “amount involved.” For a loan, the amount involved is the interest amount. For the fiscal year of the Federal Government ended September 30, 2006, the amount involved (i.e. interest charged to the General Fund) was $98 Billion. Fifteen percent of this amount is $14.7 Billion. If the prohibited transaction is not corrected after notice from the IRS, the tax rate is increased to 100 percent. Thus, the tax for the 2006 fiscal year would be $98 Billion.

Under ERISA section 404, fiduciaries that oversee plan assets have a fiduciary duty to act prudently. They must ordinarily also diversify the assets of the trust. The only asset of the Social Security Trust Fund is the $2.1 Trillion loan to the General Fund. The debts and the present value of the unfunded liabilities of the Federal Government (including the dollars owed to the Social Security Trust Fund), excluding future outlays for defense, Medicaid and general government, now total approximately $50 Trillion. (The total net worth of all Americans was recently estimated at approximately $53 Trillion.) Surely, a prudent manager of assets would not loan all of its surplus assets to such a debtor. The penalty for breach of fiduciary liability is potential civil liability for the losses caused by the breach and a 20 percent penalty under ERISA section 502(l). (The 502(l) penalty is reduced by the prohibited transaction penalty.) Twenty percent of $2.1 Trillion is $400 Billion.

Under ERISA section 409, fiduciaries must exist who can be personally liable for a breach of fiduciary duty. These fiduciaries can be required to deposit their own money to make a plan “whole” for their breach of duty. In contrast, no such accountability exists for the Social Security trust fund. No congressman or presidential administration official stands to be personally liable for the irresponsible acts.

Social Security statements now carry warnings about the impending insolvency of Social Security.

The hypocrisy of the System is obvious. Private employers are required to set aside money in trust, properly invest that money and adjust annual contributions as necessary to ensure that all benefits will be paid. Absent bankruptcy of the employer, the employer is legally obligated to pay all benefits.

Consider the federal tax law enticements offered to individuals to save for retirement, including tax-deductible contributions to 401(k) plans and IRAs. The message sent by Congress: Be responsible and save for your retirement. Meanwhile, the Federal Government will recklessly spend beyond its means so as to hinder the future prosperity necessary for stocks to appreciate so as to provide the basis for a secure retirement.

Let’s step back and try to analyze this situation with a blank slate. Social Security participation is mandatory. Unlike a private employer plan, where the employee can decide whether or not to participate if his money is being invested, you must participate in Social Security. More specifically, if you have self-employment income and you don’t pay your Social Security tax, you could go to prison. Shouldn’t the members of Congress be held to fiduciary standards similar to or identical to those of ERISA?

What would have happened if the Social Security surpluses had been invested in stocks, bonds and other typical retirement plan assets from 1983 to the present date? Assuming an annual return of eight percent (8%), the surpluses would now total approximately $4 Trillion. And, instead of discussing how to solve Social Security’s impending insolvency, the discussion would be about how best to utilize Social Security’s surplus assets.