Federal finance consists of the federal government “lending” itself money and then paying itself interest on those “loans”. An example of this can be seen by the surpluses generated by the Social Security portion of the payroll tax that are then “lent’ to the general fund.
The interest rate paid by the federal government in 2013 on those loans was 1.875 percent, which according to the FDIC, is more than three times higher than even 5-year CDs are currently paying.
To those buying American debt, the feds pay horrible interest rates, comparatively, however, they pay themselves rates that are well above the market rate. The interest paid on the “special issue securities” held by the SSA also differs from regular interest in that it accumulates, rather than being paid out periodically.
That means the interest in the SSA’s “trust fund” has been accumulating since 1937. Many say that this means SS will be able to use that fund to pay benefits in full until 2033, but as comforting as that may be, SS has never really been solvent.
One of the big problems with SS is that it is classified as being off budget, meaning that there is no budgeting decision required of Congress, the process is all automatic.
Jon Hall, an economic analyst, has urged Congress to change Social Security to require the system to operate entirely out of revenue from its dedicated tax, the payroll tax, which would bring an end to the “autopilot” nature of the program. Hall states that this would force Congress to deal with their fiscal problem immediately, by requiring Congress to create a mechanism to save payroll tax surpluses so that it can’t be spent. The reason for this autopilot structure within SS came about because Democrats wanted to use income tax to fund social programs. According to Hall, this scheme allows the feds to not have to adjust the system and to continue paying benefits at the same level without having to raise the payroll tax.
Do you agree with Hall? Please share your answers with us in the comments below.
Kenneth G. Marks has been practicing personal injury law since he was admitted to the California Bar in 1981. www.KmarksLaw.com