Social Security Trust Fund's Labor Day Bombshell

by: Bruce Krasting

I have written often on the status of SS. I also have some understanding of illegal aliens working in the US. I have sponsored four over the course of many years. I don’t hire them. But I pay many companies that do. The employers know they are illegal, but the workers have SS cards (fake) and so long as the PR taxes are collected no one seems to care.

These two interests of mine dovetail. SS has been collecting money from illegal aliens for years. They will keep the money they have collected and they will not pay out any benefits (except fraud) in the future. So this money is “free”. I have often wondered how big the numbers on this are. Now we know. The numbers are enormous. Without the Free Money coming in from illegal aliens SS would look much different than we "think" it does.

The WaPo had an article on this yesterday. They had hard numbers (sort of) in the article. I was absolutely stunned that the source of this information was Steve Goss, the chief actuary of the SSTF. Some thoughts/numbers:

  • Steve Goss does not reveal information of this significance unless he has a political agenda of his own, or he was told to. I am of the opinion that it was the latter and the WaPo/Goss story was a way for the Administration to get the illegal alien issue spun in a different light. Because of high unemployment the illegal story is getting traction and anger is boiling. What is happening in Arizona is the tip of an anti-immigration movement that is brewing in America. This is not healthy for society. Police profiling is not the American way. Except in 2010.
  • This information is an unmitigated disaster for SS. It comes a month after the release to Congress of their annual report that suggested that things had actually improved for SS over the past 12 months. The report did not highlight the fact that over $300b of assets held by the Fund were in fact contributions from illegal aliens. As much as 13% of the Funds holdings are tainted. Without this funny money the Fund would today be running substantial deficits. That red ink would force major changes in both payouts and taxes.
  • Goss provided a range of the cumulative impact to SS of $120-240b (as of 2007). He said that the overstatement was $12b in 2007. Those numbers do no not add up in my opinion. We know that the illegal population exploded from 2000 on. If the excess payroll income was only $12b in 2007, then it had to be a much smaller number ten-years earlier. There is no way it could add up to Goss’s minimum number of $120b. I think that when Goss was suggesting that the cumulative impact was 120-240b he was implying that the range of impact for 2007 would have been $12-24 billion.

Goss said that as many as 67% of all illegals are working with either a phony SS card or one that was no longer valid. Take this information together with a Pew report that put the number of illegal workers today at 11.1mm. This implies that there are 7,400,000 illegal workers contributing to SS. Most of this income is regular weekly pay. The average number for this in the US is $30K. About $100 per day. That comes to a total payroll of $225 billion! The SS tax on this is 12.4%, or $27b in just 2010. This analysis is how Goss got to the $240b 2007 topside estimate. Add three years to that at $25b a year plus interest on the whole nut and you get ~$350b.

I won’t (now) go into the longer-term impacts to SS of having overstated its surplus by $350b. That number is 13.5% of the assets of the Fund. I will say that this is a sea change event for how we look at SS. All prior analysis and all future expectations must now be revisited. I assure you that the results after excluding the illegal taxes will be will prove to be a major blow to the solvency of the Fund. It will change the debate on SS. It is that significant. Mr. Goss on this:

If for example we had not had other-than-legal immigrants in the country over the past, then these numbers suggest that we would have entered persistent shortfall of tax revenue to cover [payouts] starting [in] 2009, or six years earlier than estimated under the 2010 Trustees Report.

  • We know that the actuaries at the Fund have been aware of the magnitude of this issue for a very long time. The question I have is, “What did they do about it?” We need to understand what this means in terms of anticipated future benefit payments. There are two possibilities:

(1) The Fund knew the money was from illegal workers but chose to close their eyes. For the purposes of calculating future liabilities they assumed that everyone, including the illegal workers, would someday get benefits. But they won’t. This would imply that the future liabilities of the Fund are much smaller than has been projected. This “good” news would have to be offset with the reality that the “true” assets of the fund are significantly overstated.

(2) The Fund knew all along that the benefits that are associated with these illegal receipts are never going to be paid and therefore it has reduced the liabilities associated with this to some degree. This would essentially make a fraud of all of the SS accounting. I doubt (hope) that this is not the case. To restate both assets and liabilities would create a very big credibility gap for SS.

I have said repeatedly that nothing happens in D.C. by chance. That every nuance must be looked at closely. They all have meaning. In my opinion the WaPo article shines a very bright light on SS. They have been knowingly overstating assets and financial conditions for years. What possible motive could be behind this Labor Day weekend bombshell? My guess:

The Administration will use the Goss revelation to prove to the American people that illegal workers have made a major contribution to the US economy via the taxes they paid to SS. This will be done to blunt the growing tide of ire among those who actually live here. There could be another chapter to this story. It could be the ticket whereby some illegals get legal. The cost for a Green Card would be that the applicant would have to (among other things) agree to give up their rights to any future SS benefits based on prior contributions made to SS. They would be entitled to benefits based solely on what they were taxed in future years. Any previous contributions (both employer and worker) would be given up as a penalty. This thinking would set up the possibility for two extraordinary outcomes.

(NYSE:I) If SS eliminated the future liabilities associated with the estimated $320b of excess contributions and they were allowed to keep those tainted contributions SS would be transformed overnight to an over funded position of significant proportions. It would be so significant that the Fund could reduce the current 12.4% PR tax by 20-30% for the next three to four years. That would have a meaningful impact on the economy.

(II) America would get paid $350b (P+I) for allowing a significant number of workers to become legal. Many would still gripe. But the trade-off of a partial tax holiday for 150mm workers and their employers would shut down much of the opposition.

The Administration needs a win-win on the economy and immigration. Steve Goss at the Trust Fund may have given them the opportunity to do that. Stay tuned. It does not get much weirder than this.

Just a question. Has SS been aiding and abetting illegal workers? They have taken in over $300b. They understood what they were doing. Without the SS "wink and a nod" employers could not have hired them. Who’s abusing whom?