The Curse Of The Rock Report

ant The Curse Of The Rock Report. ©
Or, "GRASSHOPPERS PARADISE."

There is much talk in political circles about the future solvency of Social Security. There seems little argument that retirement benefits will not be available in thirty years for those people known as the "baby boom" generation. The reasons for this are not well known, although it is assumed that the primary cause is the ever increasing number of people who have retired and will retire in the next several decades. The following text will try to show that the above conclusion may not be completely accurate.

DISCLAIMER. My conclusions, that I offer here, may not be new, but I have not heard anyone else speak of them, perhaps you have.

DEFINITIONS. The term Social Security actually refers to a range of social services. That portion of Social Security that deals with our retirement benefits is called the "Old Age, Survivors, Disability Insurance", or OASDI.

PRELUDE. My own examination of the predicted problems with Social Security began several years ago when, while watching C-SPAN a politician stated that the Government was buying government bonds for the OASDI trust fund. Since then I have heard this claim repeated several times, but it is always stated in passing and never a dedicated topic of any debate or discussion. This seems odd to me, because the Government buying bonds from itself does not sound very equitable, or wise.
Then last year, I watched a valiant Senator stand alone on the Senate floor and argue that there was in reality no such thing as the Social Security (OASDI) trust fund because of the way it has been managed, particularly the tactic of using Federal bonds as a investment strategy, of course there were many other Senators arguing against any notion of impropriety in this. In trying to counter the accusation, the opposing side clearly stated that the fund did in fact contain various types of Federal bonds but maintained that this is a viable investment.

The actual makeup of the OASDI (Social Security) trust fund is defined in the data in appendix #3 of this document and that data was taken from a book published by the U.S. Government. It shows that the OASDI trust fund is clearly composed of Federal debt securities, i.e., government bonds. (I hope I am not the only one with a problem over this.)

I have pondered this situation, the fact of the trust fund being composed of bonds and the talk of Social Security going insolvent within thirty years. As an aid I started drawing simple diagrams (flow charts) of the OASDI investment scheme, and came up with some situations that were both surprising and disturbing, especially when I found I could perform algebraic-like consolidations on my charts. These consolidations (or simplifications) gave a more understandable view of the problem.

This report represents my conclusions. I utilized some very basic rules for my examination of Social Security. These rules are good for tracking what-ever the Government does:
1. Follow the money.
2. Follow the money again.
3. When in doubt, follow the money some more.
The only other tools used were the data from Appendix #3, and assumptions using my own common sense, the accuracy of which I offer up for your judgment

FLOW CHARTS.

If the reader is unfamiliar with the concept of flow charts, they are simple graphical diagrams that display the flow of a medium, from its origin

to its destination. In our case the flow medium will be money, (cash, green-backs, sawbucks, etc.), The flow origins and destinations will be represented as simple geometric shapes and the flow will be represented by a line with an arrow to denote direction. As far as flow charts go mine are simpler than most, so you should follow them without a problem.

In any examination of Social Security and its OASDI trust fund, the terms "investment" and "insurance" must play a dominant role, so let's start with these as examples of my flow charting.

INVESTMENT.

Figure #1 is my flow chart of what may be your investment in the stock market. The left side of this chart shows three flows, the first is labeled "investment" and represents, oh, lets say one thousand dollars just for this example. Because the investment is leaving your wallet we shall consider it a negative number (-$1,000). Second, the line labeled "return" represents the original investment price that is returned after a required amount of time. Because this flow line points into your wallet we shall consider it a positive number (+$1,000).

And the third flow line being the "dividend" or profit from the investment. In this example our investment yield will be (picking a number at random) ten percent, so the flow quantity of the "dividend" flow line would be one hundred dollars. Again because the flow is into your wallet, it will be a positive number. (+$100) In the real world, that which I call the Return and Dividend are associated together as one payment (or flow) when the investment is cashed in, but for the purpose of this text I need to show them as separate. Therefore two flow lines are shown. (I hope this is not too confusing because it is an important element for later charts.) The right side of the chart (or the other side of the equal symbol) reflects the algebraic-like simplification I spoke of earlier. The right side of Figure #1 is equal to the left side because the right side represents the "SUM" of the three flow lines from the left side, or the equation ((-$1,000) + (+$1,000) + (+$100)) = +$100. In other words the investment and return are equal but opposite and cancel each other out, leaving only the profit as the end result of the entire process. The profit going into your wallet is the reason you make the investment in the first place, so your hypothetical investment was successful.

INSURANCE.

Reference Figure #2:
Insurance companies use the many minor cash flows (premiums) from many people in order to make large investments of one type or another. The profit from those investments, in combination with the premiums, can then be used to pay the claims of the insured

(like you) and also make its payroll for its employees, and profit for the share holders of the company. Note that in Figure #2 the investment is shown as the final result just as in the right side of Figure #1 (just the investment profit or "dividend") and that the label of "stock market" is used as merely a generic source of investment and does not necessarily reflect what a insurance company might utilize as an investment. It is obvious I hope, that in the case of Figure #1 and Figure #2, it is most important that the investment be successful, that both the private investor and the insurance company invest wisely and earn a profit; if not, hard times follow.

A BASIC GOVERNMENT MONETARY SYSTEM.

So much for the private sector, and now, on to the Government.

As one last example of my flow charts, I offer Figure #3, a flow chart for my favorite social program "Welfare." The Welfare system operates on a basic Marxist axiom, "from each according to his ability, (taxpayer), to each according to his needs,(recipient). So depending on how much you earn, money flows from your wallet into the federal budget and from there into the wallet of the Welfare recipient, (based on how much he needs).

THE OLD AGE, SURVIVORS, DISABILITY INSURANCE.
DON'T GET MAD:

You will quickly notice that Figure #4 for the OASDI budget resembles that of the Welfare flow chart from Figure #3. Do not worry, it is not

my assertion that Social Security is just a Welfare program. As we follow the money through the system, the investment end of the insurance process will show true. In order to properly chart the flow of money through the system we need to assign some parameters for this example. Starting with Figure #4. For the OASDI tax revenue flow line we will pick an arbitrary quantity of two billion dollars. A mere pittance of its actual yearly value. After we show the complete investment cycle we will be able to determine the flow quantity available to the OASDI outlays based on our two billion dollar input.

Step 1, reference Figure #5.

In the real OASDI system, I am assuming that a certain percentage of OASDI revenues is used immediately for recipient benefits, while the remainder is used as the investment. For our scenario I will say that this split is fifty percent. So in Figure #5 the OASDI revenues are drawn as two lines. Flow line A-1 passing to A-2 is one billion going for benefits, and flow line B-1 is one billion to be used as the investment. In order to purchase the investment in government debt securities the OASDI budget transfers one billion dollars to the Treasury Department, (flow line B-2). With the purchase of the securities completed, the Treasury Department transfers one billion dollars in bonds into the OASDI trust fund shown as flow line "C."

Step 2, reference Figure #6.

When the bonds in the trust fund mature they can be redeemed. So flow line "D" shows the bonds being returned back to the Treasury Department . The Treasury is required to, one, return the original investment price shown as flow line E-1, and, two, pay the dividend for the investment, shown as flow line F-1. In our scenario we will say the dividend is one hundred percent of the original investment. Ergo flow line F-1 equals one billion dollars worth of dividend, or "profit" from the investment.

Figure #6 clearly shows how an investment retirement fund should work; either a private one or though the Government. With a one billion dollar investment, the available funds for OASDI benefits have been increased by fifty percent, (flow lines E-2 and F-2 combined with flow A-2). Looking at the system as shown in Figure #6 one wonders how something that could be so efficient, can be near insolvency. Of course we have not finished following the money yet.

Question: what does the Treasury Department do with the money from the sale of the bonds?

Step 3, reference Figure #7.

Looking back to Figure #5, when the bonds where purchased the Treasury Department would have transferred the one billion dollars from that sale into the Federal budget, (shown in Figure #7 as flow line B-3). That money is now available to be spent on whatever the congress dictates, Aircraft Carriers, Food Stamps, Highway Repair, Welfare, or whatever. Flow line B-4 represents this spending. I have added the normal income tax flow just as a reference, (Flow line G-1 passing into flow line G-2). All four segments of flow B (B-1 through B-4) demonstrate that our OASDI tax dollars are being used for government functions that should have been handled by the Federal income tax. This is where I start getting pissed off. The two programs should be completely isolated from each other. For a long time I have heard the claim that Congress has been borrowing from Social Security. Flow line B undoubtedly is the mechanism for such borrowing.

Question: where does the Treasury Department get the money to pay back the bond and its interest dividend?

Step 4, reference Figure #8.

When any bond is redeemed, the money has to come out of the Federal budget. This occurs under the general category of "payment of the national debt, or payment of the interest on the national debt." So when the OASDI trust fund bonds are cashed in, the original bond price (flow line E-3 passing to E-1) and the bond dividend (F-3 passing to F-1) comes out of the Federal budget and is transferred to the Treasury in order to honor the redemption of the bonds. Of course the origination point for this transfer is the U.S. Income Tax, i.e. Your wallet, (flow line E-4 and F-4)

This chart shows, I believe, the real reason that Social Security approaches insolvency because it demonstrates the following conditions:
1. That the only source of income for the OASDI is the wallets of the American taxpayer.
2. That the tactic of putting Federal debt securities into the OASDI trust fund has the affect of covertly transferring income tax revenues into the OASDI budget.
3. That this process cannot be considered an investment, therefore Social Security is not an insurance system.
4. That the money we pay into the OASDI tax is spent as soon as we give it to the Government.
5. That all Social Security benefits originate entirely and immediately from those tax payers working now, and not from a mythical investment paid by the recipients during their working life.
The problem with the system becomes more evident when we perform some consolidations of our flow lines and make the chart simpler.

Step 5, reference Figure #9.

Prior charts are drawn in a way to demonstrate the actions of the Treasury Department and OASDI trust fund. In order to begin the consolidation, on Figure #9 I have redrawn the treasury and trust fund in a different manner. However, you will notice that all flow lines are accounted for and the functions in the chart do not change. This drawing change demonstrates that the flows between the OASDI budget and the Federal budget, for all intents and purposes, pass through the Treasury without affect. In other words the Treasury is a bureaucratic conduit that, besides shuffling a lot of paper here and there, really has no purpose, ( not as far as this application goes). Figure #9 also shows that the flow line representing the transfer of the bonds, ( flow lines C and D ), passing back and forth between bureaucracies, first as a promissory note (flow line C), then as a demand for payment, (flow line D). Though associated with the flow of money, (C associated with B, and D associated with E, F), they in themselves are not monetary flows. In our simplification process we only want to show the flows of money that display the end result. So when Figure #10 is drawn I will delete the Treasury Department, without affecting any flows. I will also delete the flow line C and D without affecting the end result. I would like to delete the OASDI trust fund as another useless bureaucracy, but it does in fact have a very important function that I will discuss later.

Step 6, reference Figure #10.

As another step in the simplification process I have merged multiple redundant lines back into one line, this occurs in four separate places on the chart. It is required that the quantity of each combined flow line equal the sum of the individual lines, so;
Line AB(1) equals lines A-1 plus B-1, or two billion dollars.
Line AEF(2) equals lines A-2 plus E-2 plus F-2, or three billion dollars.
Line B(4)G(2) equals lines B-4 plus G-2, or Federal spending including the one billion borrowed from the OASDI budget.
Line E(4)G(1) equals lines E-4 plus G-1, or Federal income taxation including the one billion necessary to repay the money borrowed from the OASDI budget.

Step 7, reference Figure #11.

There is one more set of equal and opposite lines we can eliminate. The negative flow of one billion out of the OASDI budget into the Federal budget, flow line B-2, B-3 when added to the positive flow of E-1, E-3, (also equal to one billion) will cancel out, i.e. equal zero. In order to show that deleting these two lines, does not affect the final outcome, look at it from the OASDI budgets point of view; In line B one billion goes out, and in line E one billion comes in. The budget has neither gained nor lost, just as if these two flows had never happened, so we can delete them from our chart. And this does not affect the final result.

Step 8, reference fig #12.

Halting the consolidation process for a moment, figure #12 shows more clearly the covert transfer of income tax revenue as flow line F. This is the flow of just the interest dividend from the bonds purchased by the OASDI budget. This chart shows a deplorable situation. First we as taxpayers pay through our OASDI tax to make the investment, figure12 whats wrong here?

then we as tax payers pay through our income tax in order to pay the yield of interest on that exact same investment. Politicians call this an investment, Congress calls it legislation, I call it "GROUP SEX," (if you know what I mean).

Still not convinced?
In 1985 as part of the great bipartisan fix of Social Security, 13 billion dollars (real dollars) worth of these Federal debt securities were transferred from the Hospital Insurance Trust Fund, and the Disability Trust Fund into the OASDI trust fund. Tell me please, how does increasing the debt in the OASDI trust make it stronger? There is only one way I can see, it adds to the flow of the interest yield as shown by flow line F in Figure #12. Actually it does more than that. Step back to Figure #11, as far as these 13 billion in bonds go, the OASDI trust did not make the original purchase, so there will not be a flow line B for these bonds. However because the OASDI trust will redeem them, there will be a flow line E at the time the bonds are redeemed. So this means that pertaining only to these transferred bonds, without flow line B, we cannot cancel out flow E. With flow E intact this represents a direct transfer of the original investment price of 13 billion dollars from income tax into the OASDI budget, in addition to whatever the actual interest yield turns out to be from flow line F. ( Please Reference appendix #4. )
What all this boils down to is this, we do not have to wait thirty years for Social Security to go insolvent. It is insolvent now, and has been for many decades. If not then why the need to supplement the OASDI budget with money from the income tax revenues?

Step 9 Figure #13.

There is one more consolidation to make. The flow of the interest dividend as flow line F originates from your wallet. The destination for flow line F is the OASDI budget then out as benefits to the recipients. As it turns out, that flow pattern also describes the flow line labeled as AB(1), the original payment as OASDI tax. And that makes these two flow lines redundant and therefore they can be combined as we did before with other flows. So Figure #13 is drawn showing all the possible simplifications. The sum of the two redundant lines is now labeled as "AB(1)F(4)," and that flow equaling both flows added together, or three billion dollars.

Gee!, Figure #13 sure does look A lot like Figure #3, the chart for Welfare. I guess I might have been wrong when I said Social Security is not just another Welfare program. It turns out it really is just another Welfare program. Boy, is my face red, or what?!
Please do not shoot the messenger, but I did say that when we followed the money through the system that the investment end of the insurance process will show true. The truth being, there is no investment, no insurance. Preferring accuracy over political correctness I recommend that Congress change the OASDI name to, "The Old Age, Survivors, Disability Welfare System."

CLOSURE. Is Figure #13 a valid representation of the full flow diagram in Figure #8?
In each chart the total flow out of your wallet is three billion.
In each chart the total flow available to the OASDI recipients is three billion.
All flows that affect the outcome are accounted for, and they retain their points of origin and destination.
So I say, yes, the two charts display the same total flow pattern, only Figure #13 has done away with the bells and whistles that help keep the covert transfer of income tax funds from the public eye.

Are my assumptions that created Figure #8 valid?
I think so, but the question is for your opinion and judgment to decide.
As the last point in defense of my assumption, I offer this.
As another attempt for passage of the balanced budget amendment to the Constitution looms in the Congress, liberal politicians again are holding back claiming they want an exemption for the Social Security trust fund. Why is that, if Social Security is a totally separate Government entity funded by its own tax structure, (the OASDI tax), as I had always assumed it to be? Then how does fiscal responsibility for the Federal budget threaten it? It does not threaten Social Security but it does threaten the covert transfer from the income tax budget, in that, if the Government cannot borrow from the OASDI trust fund, the flow of the interest dividends will dry up as the bonds are redeemed and the trust fund emptied of its debt, and that means no more covert flow of income tax funds to hide the failure of the Social Security system, and thus expose Social Security as just another Welfare program. This is what liberal politicians fear, and they are willing to keep this country in debt in order to keep this exposure from happening.

Fear not the balanced budget, it only means the end of debt in the Federal budget and the end of deceit in the OASDI budget.
Fear instead the liberal politicians.

The Last Word. (If there is such a thing.)

If you agree with my conclusions, it does not take much thought to realize that all trust funds listed in Appendix #3 have their own covert flows just as social security does. This allows politicians to say "such an such a program only costs the tax payers "x" amount", when it actually costs us "x+y amount, "y" equaling the covert flow from the trust fund for that program. When you are a politician trying to defend a socialist program, it's best to quote the imaginary lower cost than the actual greater cost. If you find my common sense faulty, then I hope you have alternate answers to the questions I have tried to answer here:

1.What happens to the money when the bonds for the OASDI trust are purchased?
2.Where does the money come from when those bonds are redeemed?
3.How does increasing the debt in the trust fund, "improve it"?
4.How does a balanced budget threaten the OASDI trust fund?

Respectfully submitted for your consideration.
Eric (The Rock) Andersen.

Oh!, by the way, the purpose of the OASDI trust fund that prevented it being deleted as a useless bureaucracy is thus.
Its purpose in our society is to maintain the illusion (" the illusion" ) of an investment/insurance system. This is what socialist legislation has done for us, (to us).
And they didn't even have to get us drunk first.
Am I the only one who feels like having a cigarette?