Poor Lyndon Johnson. When it comes to Social Security, he gets blamed for something he never did. Our 36th president is often accused of being the first chief executive to tamper with Social Security financing. Well, he did tamper with it. But not in the way conventional wisdom would have you believe.
And I was reminded of this in the reactions I got to my last two columns in which I cleared up myths about Social Security financing and presented a number of proposals for reforming the program. Dozens of you wrote and told me some version of this sentiment that came from a reader in California: “Social Security wouldn’t need any changes if Congress would just pay back the money that President Johnson stole from the Social Security system back in the ’60s.” And here is another version of the story as relayed by a Texas reader: “We all know that LBJ cooked the books when it came to the Social Security trust funds. Get that money back and Social Security will be flush with cash!”
For decades now, misinformed critics have charged that Johnson moved Social Security money from its own separate ledgers to the government’s general funds in order to spend it. That’s not quite right. Here is what really happened.
We all know that the Vietnam War, which LBJ inherited from his predecessor, John F. Kennedy, was rapidly turning into a huge albatross around Johnson’s neck. And it wasn’t just the loss of thousands of young men’s lives that was bothering him. It was also the staggering costs of paying for the increasingly unpopular war in Southeast Asia. He was looking for a way to hide some of those costs, not just from Congress but from the American people. The government’s general coffers were essentially empty. But he noticed that there was an entirely separate government fund that was flush with cash — the Social Security trust fund.
What most people mistakenly think LBJ did was simply tap into those funds and “steal” Social Security money to help pay for the Vietnam War. But that is NOT what he did.
What he did do was simply change an internal government bookkeeping practice. Up until that period of time, Social Security’s income and expenditures had always been kept on a completely separate set of government books. Johnson merely added Social Security’s accounts to the general government budget. But this is the important (and almost always overlooked) point: He did not change in any way the method used to invest and spend Social Security money.
In other words, Social Security funds were not touched. By pulling off this bookkeeping maneuver, by adding the Social Security funds to the government’s overall ledgers, LBJ was able to disguise the growing deficit caused primarily by all the spending for the Vietnam War.
Maybe this analogy will help you understand what happened. Fred and Ethel are married. They both work. And they keep separate bank accounts to manage their finances. Fred spends money like there is no tomorrow. His bank balance is always near zero. Ethel saves a lot of her income, so she has a substantial account balance. Fred talks Ethel into combining their assets. Neither person changes their habits. Fred keeps spending just his money and Ethel saves most of hers. But suddenly Fred looks like he has more money than he really does because, on paper at least, his bankrupt account has been combined with Ethel’s flush ledgers.
Fred is like Johnson and the overall government budget. Ethel is Social Security. Fred really hasn’t done anything wrong. He hasn’t taken any of Ethel’s money. He’s simply using her money to make his bottom line look better.
Like Fred, Johnson moved the balance sheets for Social Security money into the overall government budget for one sneaky reason: to mask his (and Congress’) risky spending habits. All that Social Security income made the actual government deficit appear smaller.
This accounting procedure, adding Social Security trust fund accounts into the overall federal bookkeeping ledgers, is known as the “unified budget.” And despite its shifty intentions, you could make the argument that the procedure is entirely justified. After all, Social Security money is government money and it makes sense to add it in with all other government funds.
Still, after the American people figured out what was going on, these bookkeeping shenanigans left a bad taste, not only in their mouths, but in those of Congress as well.
That’s why back in the 1990s, Congress changed the law to remove Social Security funds from the overall federal budget. So Social Security went back to its original “off budget” status.
Of course, by doing that, the government deficit, at least on paper, suddenly seemed much worse that it previously did. So almost ever since then, Congress has essentially kept two sets of books.
One is the official budget with Social Security funds not included. But a second is the unified budget with Social Security funds still added in.
Which budget picture Congress presents to their constituents depends on the message they are trying to convey. If they want to scare you and tell you how bad the economy is and why you need to re-elect them to help reduce the deficit, they will show you the official budget books (with Social Security not included).
If they want to impress you and tell you how they have been working diligently to control government spending and reduce the deficit, and why you need to re-elect them to continue to do so, they will show you the unified budget (with Social Security surpluses included).
Having said all that, I cannot stress enough that all of this game-playing with the government books has absolutely nothing to do with how Social Security tax money is spent on Social Security benefits and invested in government bonds. So Johnson, and no president since, and, for that matter, no member of Congress, has ever stolen a nickel of Social Security money. But they sure have played around with it!
