THE SECRET IS OUT. President Bush audits the Social Security Trust Fund.

President Bush traveled there Tuesday to visit the trust fund. Americans could be forgiven for thinking that he toured giant vaults brimming with gold bars, diamonds, real-estate deeds, precious antiques, and paintings by Rembrandt and Frans Hals. No such luck.

"A lot of people in America think there's a trust," Bush said, "that we take your money through payroll taxes, and then we hold it for you, and then when you retire, we give it back to you. But that's not the way it works...There is no 'trust fund,' just IOUs, that I saw firsthand."

(Via Betsy's Page.)

"Imagine — the retirement security for future generations is sitting in a filing cabinet," Bush said in astonishment.

That drawer, inside an office of the U.S. Bureau of Public Debt, contains $1.76 trillion worth of special-issue U.S. Treasury bonds. Each of these, 225 pieces of paper in all, is contained in one of two white, loose-leaf notebooks that hold plastic page covers. Despite the protective plastic, these certificates have no more financial value than the ink with which they are printed.

"The paper is symbolic," Bureau of Public Debt spokesman Pete Hollenbach explained in a February 26 Associated Press dispatch.

As a 2004 Congressional Budget Office report observed, the trust fund is an "accounting mechanism" with "no economic resources."

The key reason these notes have no value is that the money that should be behind them — the excess payroll taxes not devoted to today's retirees — instead gets spent by Congress on everything from farm subsidies to national parks to armored Humvees.

In fiscal year 2004, Cato Institute scholar Michael Tanner reports, the Treasury collected $570.7 billion in payroll taxes and credited Social Security with $89 billion in interest. Social Security recipients received $501.6 billion in benefits. This $158.1 billion balance — which could have funded personal-retirement accounts — instead flowed into general revenues. Congress spent that amount no differently than income-tax proceeds. In corporate America, this misallocation of funds is punishable by law. In Washington, it's the law.

Even worse, these special-issue bonds are not traded in the capital markets, where investors could infuse them with cash value. They are merely IOUs under which future Congresses will have to finance the Treasury's Social Security checks by raising taxes, authorizing increased federal borrowing, or cutting retirement benefits or other programs.

Put another way, it's the strength of the economy in the future that will make Social Security secure, although the excess burden of the payroll tax manifests itself in reduced economic growth rates. It is that manifestation of the excess burden, rather than the on-budget or off-budget accounting, that merits closer discussion in any reform or partial privatization plan.

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