Basic Reforms without Starving Seniors

Conrad LeBeau

Social Security income for retired senior citizens became a reality when President Franklin D Roosevelt signed the Social Security Act on August 14, 1935. Social Security taxes were first collected in January 1937 and the first payments were made later that month. Medicare to help retirees with medical expenses first became law in July of 1965.

For the past 72 years, Social Security has been a great success, providing benefits to retired citizens, their spouses and dependents and those who are disabled. For 61 of the past 72 years, it has run a surplus. The assets of the surplus with interest stood at slightly over 2 trillion dollars at the end of 2006. In spite of the surplus, the income from social security taxes and the benefits paid out are expected to break even around the year 2016. By 2016, the surplus with interest in expected to reach around 4 trillion dollars.

The Social Security Surplus

This surplus and assets have been created over the past several decades when Congress authorized the US Treasury to sign bonds and notes of obligation with interest payable to the Social Security Adm OASI and DI trust funds. In turn, Congress used the surplus funds collected from social security payroll taxes to fund general expenditures of the federal government. The obligations owed to the social security trust funds are a significant part of the national debt.

In 1975, cost of living increases (COLAS) were added to the benefit structure of social security. In the past several years, cost of living increases added to social security benefits paid out have been less than the total actual cost of living expenses and did not include cost of living increases for food and energy. This decrease in benefits paid out has the effect of gradually reducing the purchasing power of retirees. This is stealing from our senior citizens and is inexcusable when we had an 80 billion $ surplus last year in available social security funds.

If the Social Security system will have assets of 4 trillion in 2016, why the concern about reforming social security

The concern comes mainly from Wall St and the financial centers of the privately owned banking system. Some members of Congress also wonder how constituents will react if payroll taxes are raised or benefits are cut. Today, younger workers wonder if money will be available when it is their turn to retire.

When the Social Security Adm starts selling its bonds back to the federal government, it would fund the system sometime past the year 2043. Some Congressmen are concerned that the debt owed to the financial markets will then increase by 4 trillion over time as the government borrows from Peter to pay Paul. Fortunately, there are other and better options.

There are other options besides increasing the retirement age, increasing payroll taxes or increasing the interest bearing national debt.

There are two main solutions to the projected future deficit.

1. Eliminate income cap not subject to FICA taxes. First is to eliminate any ceiling on wages that is taxable under FICA. Today the ceiling on wages that are subject to social Security taxes is around $90,000 annual income. If this cap were eliminated, then persons making $90,000 to one million a year of more would pay social security taxes on all this income. This would substantially increase revenues to the Social Security Adm.

2. Federal Reserve bailout: Congress can order the Social Security Adm to sell the interest bearing bonds it holds to the 12 Federal Reserve Banks requiring each bank to purchase 6 billion dollars worth of these bonds each year. While Congress presently requires that the Federal Reserve Banks to turn over their profits to the US Treasury at the end of each year, Congress can also order the Federal Reserve banks to turn over to the US Treasury both the principle and interest on all bonds purchased from the Social Security Adm as each bond is paid in full during the fiscal year.

An Act of Congress could convert the 4 trillion dollar liability it will owe to Social Security fund in 2016 into an asset and use this asset to reduce the national debt

The conversion of a debt into an asset can only occur by an Act of Congress. To some extent this has already occurred on a limited scale. The 12 Federal Reserve Banks have purchased and today own several billion of dollars in US Government bonds. However, by law, the profits made by each Federal Reserve Bank are returned to the US treasury at the end of each year. Because the interest paid to the Federal Reserve banks is returned to the US Treasury each year, the US bonds held by the Federal Reserve Banks are really the eqivalent of zero percent interest bearing notes.

The amount of money the Federal Reserve returns to the US Treasury could be increased by enacting a law that prohibits the Federal Reserve Banks from destroying the principle that is paid on Social Security bonds by the US Government and requiring each Reserve bank to turn over to the US Treasury both the principle and interest that it has received as payment. In this process, the money moves from the US government (the debtor) to the lender (the Federal Reserve) and then the money is recycled back to the US Gov't as an asset instead of a loan.

A debt can become a future asset when the person or entity (bank) receiving payment for it gives it back to the person or entity from whom it was received. This can occur because Federal Reserve Banks do not owe this money to a third party (depositor). Federal Reserve Banks are authorized by Congress to create money by expanding credit. The Federal Reserve is the nation's wholesaler of money. When the Federal Reserve writes a check it is creating new money. This is because the check is not drawn against another bank. It is simply added to the deposit ledgers of any bank as a book entry deposit. When Federal Reserve banks lend "credit" as "money," it is also called "checkbook money". "Credit" can be defined as "a promise to pay money that circulates as money".

About 95% of the nation's money supply is credit and it is stored in the hard drives of the banks computers as a bookkeeping entry. Thus, most of the nation's money supply is stored as numbers called "dollars" in the hard drives of the bank's computers. Cash, which comprises coins and currency, is about 5% of the nation's money supply and is stored in vaults.

Checks, bank drafts or electronic funds as credit instruments are redeemable for cash according to public demand. Cash is not needed to redeem all credit instruments, as the public prefers to use credit (cards or debit cards, checks) for making purchases instead of using cash. Thus, in fractional reserve banking, about 100 dollars in credit or loans can be made available for each 5 dollars in available cash.

Federal Reserve banks can redeem the checks they write as they are authorized to purchase currency from the Bureau of Engraving for the cost of printing and there are no limits on how much currency they can purchase.

How long would it take for the Federal Reserve Banks to buy 4 trillion dollars worth of Social Security bonds?

If all twelve Federal Reserve Banks each purchased 6 billion dollars worth of bonds from the Social Security Adm beginning in 2016, it would take over 55 years to complete all the purchases of these notes and this would help provide funds to keep social security solvent until the year 2070 or longer.

In addition to the solvency plan presented here, Congress needs to restore the full cost of living benefits to social security recipients including food and energy costs and the floor on minimum payments needs to be increased as follows:

For persons retiring at
62 years of age - $700 a month minimum
63 years of age -$800 a month minimum
64 years of age -$900 a month minimum

In addition, when anyone reaches the age of 65 years, they should receive $1000 a month minimum even if they retired in an earlier year.

In addition, all persons receiving disability or who are on Part D Medicare should be allowed to spend up to $400 a month in dietary supplements and dental care and have it paid by Medicare as long as it is prescribed by a health care professional. This should include also drugs that are used for off-label (non-FDA approved) purposes and any other low cost therapy that is deemed to be safe and effective by the prescribing physician for the prevention or treatment of human disease.

To all concerned citizens: if you agree with these proposals, send a copy of this article to all the Presidential candidates and to your US Senator and US Representative and ask them to introduce legislation to implement this plan.

Return to Home Page