There is no trust fund,
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The Social Security Act of 1935 created an “Old-Aged Reserve Account” in the Treasury and required that every year an amount determined sufficient to pay that year’s benefits was to be appropriated to it. Any of this money not needed for benefits was to be invested in federal debt (including unmarketable debt issued for this purpose) earning 3 percent interest, or other government-guaranteed debt.4
Presently, criticism arose. Winthrop Aldrich of Chase National Bank argued that the reserve would be fictitious; the government would just be issuing promissory notes to itself. As for interest on the bonds, which would supposedly help pay future benefits, the government would get the interest money from “the only source it could obtain it—the general taxpayer. The whole elaborate reserve set-up would not relieve him of any burden whatever.” Finally, the tax revenue the Treasury got in exchange for the bonds would be a standing temptation to extravagant spending.5 In his Milwaukee speech on Social Security during the 1936 presidential campaign, Republican candidate Alfred “Alf” Landon said much the same thing. It was as if, he charged, a father took deductions from his children’s wages to invest for their old age, “invested” them in “his own IOU,” and spent the money, leaving his kids nothing but those IOUs. Hence Social Security’s forced savings were “a cruel hoax.”6 President Franklin Roosevelt retorted that Social Security tax dollars “are held in a Government trust fund solely for the social security of the workers.”7
Yet attacks kept coming. Critics such as General Hugh S. Johnson, former head of the National Recovery Administration, and journalist John T. Flynn pointed out that unlike insurance companies, which invest their premiums to build a reserve to pay on their policies, the government was only issuing claims on itself. Hence the Social Security reserve was merely worthless IOUs. To pay future benefits, Americans would have to be taxed all over again.8
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Embezzled Funds?
When in 1939 the Roosevelt administration proposed various amendments to Social Security, congressional hearings and debate on the proposals saw extensive airing of the reserve fund controversy. Critics accused the administration of “embezzlement” and repeated the charges that the reserve was merely IOUs, and that Americans would be taxed twice. No embezzlement was occurring, defenders retorted; there wouldn’t be any double taxation, and the much-maligned IOUs were the safest investment around—U.S. government bonds. They raised a valid point: holding the surplus as cash was silly, and buying private securities was not allowed. So where else could the Reserve Fund money go but into Treasuries?10 By now three years old, the reserve-fund controversy had become a serious blow to Social Security’s prestige.
On the recommendation of Treasury Secretary Henry Morgenthau, the Social Security Amendments of 1939 created an Old Age and Survivors’ Insurance Trust Fund at the Treasury. This was done for the express purpose of ending the controversy. Testifying before the Senate Finance Committee during the hearings on the amendments, Social Security Board Chairman Arthur Altmeyer stated that the purpose of the trust fund was “to allay the unwarranted fears of some people who thought Uncle Sam was embezzling the money.”11
Creation of Social Security’s trust fund, then, was a public-relations ploy.
What happened exactly? Section 201 of the Social Security Act, “Old-Age Reserve Account,” was replaced by a new Section 201, “Federal Old-Age and Survivors Insurance Trust Fund.” The only substantial change was elimination of the transfer of revenues from the Treasury’s general fund via specific annual appropriation to the Reserve Account. Instead, a sum equivalent to the Social Security taxes received and put into the Treasury “is hereby appropriated” to the Trust Fund for the fiscal year ending June 30, 1941, “and for each fiscal year thereafter”—that is, automatically. The only other new features were a Board of Trustees (the secretaries of the treasury and labor and the chairman of the Social Security Board) to manage the fund, replacement of the 3 percent interest rate with the average rate on interest-bearing federal debt, and a provision for paying money from the fund into the Treasury to defray Social Security’s administrative expenses.
Otherwise, the Trust Fund operated just like the old Reserve Account. Indeed, it was the Reserve Account; its assets as of January 1, 1940, were transferred to the Trust Fund. Since the Reserve Account was, according to the Act, “an account in the Treasury” and the Trust Fund was “on the books of the Treasury,” the transfer was a formality. It was as if a shoebox full of bonds labeled “Reserve Account” was relabeled “Trust Fund.” Moreover, the key paragraphs of the new Section 201, for example, regarding the duties of the Trust Fund’s “Managing Trustee” (the treasury secretary) to invest the fund’s surplus in only certain types of U.S. government debt, correspond almost verbatim to paragraphs in the old one.
Social Security’s Trust Fund, then, is really a Treasury account, nothing more.
What’s a Trust Fund?
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Though Congress legislated the Trust Fund, it is not the settlor, because a settlor puts his own property into a trust, which Congress did not do.13 As for the Board of Trustees, who in a true trust would hold the legal title to its property, Section 201 of the 1939 Amendments did not even mention its having title to anything.
Nor do the purported trust “beneficiaries” have property in the fund to which they have an enforceable property right, as beneficiaries of a true trust do. Under questioning by Representative John McCormack of Massachusetts during the 1939 hearings, Board Chairman Altmeyer revealed that Social Security maintains no accounts containing funds earmarked for individuals, and never had.14 Its accounts, then, are just record-keeping entities: file folders, not piggy banks. No individual funds necessarily means no individual property in the Trust Fund.
Section 201 said nothing about property rights—for good reason. In arguing Helvering v. Davis (1937), the Supreme Court decision that upheld Social Security’s constitutionality, Assistant Attorney General Robert Jackson stated that under Social Security, “There is no contract created by which any person becomes entitled as a matter of right to sue the United States or to maintain a claim for any particular sum of money. Not only is there no contract implied but it is expressly negatived, because it is provided in the act, section 1104, that it may be repealed, altered, or amended in any of its provisions at any time.”15
And the government’s brief for the Supreme Court case Flemming v. Nestor (1960) argued that a current or prospective Social Security beneficiary does not acquire an interest in the Trust Fund—that is, a property right to its assets—and that the belief that Social Security benefits are “fully accrued property rights” is “wholly erroneous.”16 The Court concurred.17
All this confirms the observations by Suffolk University Law School Professor Charles Rounds, a fellow of the American College of Trust and Estate Counsel:
Despite the term “trust,” the Social Security system contains nothing that remotely resembles the common law trust. There is no segregation of assets, no equitable property rights, no private right of enforcement (all characteristics of the common law trust). It is merely a system of taxation and appropriation sprinkled with trust terms to hide its true nature.18
Moreover, Social Security’s Trust Fund does not operate as a trust fund does. Social Security revenues go into the Treasury’s general fund and are automatically credited to the Trust Fund in the form of Treasury bonds. The Treasury pays Social Security benefits and administrative outlays out of general revenue and debits the Trust Fund an equivalent value of bonds. Any leftover Social Security revenue finances general government operations, with an equivalent value of bonds remaining in the Trust Fund as Social Security’s “surplus;” to cover any revenue shortfalls.19 This is how a Treasury account, not a trust fund, works. And calling a Treasury account a “trust fund” to influence public opinion does not make it one.
In all respects, then, Social Security’s Trust Fund is bogus.
The adoption of the label “trust fund” for what was in fact a Treasury account was intended to cash in on the public’s understanding of this term—that assets are absolutely safe, invested on one’s behalf, and held for one’s future use—and to reassure the public that Social Security was sound and trustworthy. It worked. The reserve controversy disappeared. Over the following decades, Social Security continued to make public-relations capital out of the term by repeatedly telling the public that benefits are paid out of a trust fund built up from their tax payments.20
https://fee.org/articles/the-myth-of-th ... rust-fund/
; Julia Child
