by Dale Coberly

and Uncle Sam

moving parts edition

Most of us have heard the “phony iou” claim about the Social Security Trust Fund, with its accompanying cartoon of a hapless Uncle Sam furiously borrowing from his left pocket to fill up his right pocket, and stuffing “worthless iou’s” into the left pocket to pay for what he borrowed.
And most of us know there is something wrong with this picture, but find it hard to say just what it is. And of course some of us know exactly what is wrong and say it clearly, only to be met by unbelieving looks from the folks who had nodded their heads wisely when the folly of Uncle Sam borrowing from himself was first “explained” to them.

I have tended to “explain” the fallacy of the Uncle Sam cartoon by reminding people that there is more than one person in the United States and that we borrow from each other all the time. The people who pay the income tax tend to be “the rich.” And the people who pay the payroll tax tend to be “the poor.” Moreover, the people who paid the “excess” payroll tax, the boomers, are NOT the people who will pay back the money. The money will be paid back by the boomers’ “children,” who will generally have more money than the boomers did, and who presumably get the advantage of living in a richer, stronger country paid for by the money that was borrowed. This explanation has met with no notable success.

I thought I’d take the “only one man in America and his name is Sam” hypothesis seriously for a moment and see if i could use it to explain what is wrong with some other aspects of the phony iou claim… including the one that “we pay for our Social Security twice… once when we paid the payroll tax and once again when we pay the income tax to repay the money the government borrowed from Social Security (or “from itself,” in some versions).”

Goes like this:

Forget the government, forget Social Security, forget the income tax. Just imagine that YOU have been saving… putting your money in a box… for something, call it A, that you will need in three months. You have a hundred dollars in the box… just what you will need for A when the time comes.

Suppose then that something comes along that you need to buy right now, like a nuclear submarine to save you from the Russians or something. Call that B. It will cost 100 dollars.

Suppose also that you have a steady job.

Now, you can’t afford to pay for B out of this week’s earnings. But you do have enough money in your box of savings for A. And you won’t be needing to pay for A right away.

So you take the money for A out of the box, leaving behind a note that reminds you that you have to pay it back.

You use the money to buy B “in cash.” Then you start replacing the money you borrowed from the box, at ten dollars per week out of your income. In ten weeks, just in time, you will have enough money in the box to pay for A.

So, have you paid for A twice?

I hope you didn’t answer yes. Because then who paid for B? You paid a hundred dollars for B, and you paid a hundred dollars for A. You did NOT pay two hundred dollars for A. The point here is that you CAN borrow from yourself, and when you pay back the money to yourself, you have not “paid twice” for what you were originally saving for. You paid once for that, and once for whatever you borrowed the money for.
[Truth in advertising: i tried this explanation on a kind friend of mine. He didn’t buy it.]

Be glad to hear your reasons why.