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Sunday July 1 , 2001 Featured Views
Published on Friday, June 29, 2001 Pocketing the Trust Fund
by Dean Baker

Last week Treasury Secretary Paul OíNeill made the news by publicly announcing that the Social Security trust fund did not have any assets. This statement was newsworthy because the Social Security trustees report shows that the fund will have close to $1.2 trillion in government bonds at the end of the year. $1.2 trillion of government bonds would qualify as assets in most peopleís books. Mr. OíNeillís statement was especially strange since, as Treasury Secretary, he was one of the trustees who signed this yearís report showing the $1.2 trillion in bonds as assets.

Mr. OíNeill is claiming that the bonds held by the trust fund are not real, and therefore donít need to be paid off like other bonds. Itís clear who would lose in this story Ė the 150 million workers who pay Social Security taxes every year. The trust fund has accumulated its bonds from the Social Security taxes paid by these workers. When the fund collected more taxes than it needed to pay benefits, it bought government bonds.

Now OíNeill is telling us that those bonds are fake, effectively taking $8,000 from every worker contributing to Social Security. If OíNeill has his way, the money that we paid into Social Security to support our retirement will never be paid back by the government.

If the losers from Mr. OíNeillís plan are obvious, who are the winners? Fortunately, we donít have to look far. It turns out that the winners are the exact same people who got the most money out of the Presidentís tax cuts Ė including people like Mr. OíNeill. Defaulting on the trust fundís bonds will place hundreds of billions of dollars into these folksí pockets.

The way it works is fairly simple. While Social Security and Medicare are financed by designated taxes that come out of workersí paychecks, the rest of the government is financed primarily by the corporate and personal income taxes. As President Bush repeatedly told us, when he wanted to explain why the rich got most of his tax cut Ė rich people pay most of these taxes.

This means that if we donít make the government pay off the bonds held by Social Security, we are effectively giving another tax break to these same rich people. We can even get a rough idea of how much of a break weíre giving them. The $1.2 trillion held by the trust fund is approximately equal to how much the government is currently collecting each year in non Social Security and Medicare taxes. While the bonds would, in principle, be paid off over several decades, if the government just defaults on them, it is effectively giving people a tax break equal to their current income tax bill.

Last year Mr. OíNeill had an income of over $50 million. If he were to continue to do so well in subsequent years, his share of the windfall could easily exceed $10 million. Some other Bush Administration officials would also come out quite well from a default on the trust fund. For example, based on his 2000 returns, Vice-President Cheney would get back another $14,300,000 in taxes.

Some of the members of the Presidentís Social Security Commission, which apparently also advocates default on the governmentís debt to Social Security, might also be able put a few dollars in their pocket if they have their way. Richard Parsons, the Commissionís co-chair and a top executive at AOL Time-Warner, would surely be able to add a few hundred thousand dollars to his bank account if the government defaulted on its debt to Social Security. Even former Senator Daniel Patrick Moynihan, the other co-chair, would be able to pocket a lot more than the average Social Security check if the government defaulted on the trust fund.

In short, most of the people who advocate defaulting on the Social Security trust fund stand to get a substantial tax break if the government actually defaults on these bonds. Certainly they have other motivations, but it's comforting to know that someone would benefit from defaulting on the government's obligation to 150 million workers.

Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, DC. His email address is

-- Cherri (, July 02, 2001

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