I’m posting this on my site as a response to Geoff on ParanoidAndroid. Explaining how and why social security is screwed is complicated and justice can’t be done in the comments section.
There is no social security trust fund for all practical purposes. Despite what you might hear there is nothing saved up. Here is why…
The “trust fund” can by law only buy Treasure notes. Treasury notes are sold by the Treasury department to raise cash for revenue shortfalls. If the government is running a surplus, then the Social Security Administration (SSA) has to go to public markets to purchase previously issued treasury notes.(if you got to the SSA website, they call it special issues and private issues. Special issues are notes only available to the SSA)
At some point in the future the amount coming into the SSA will be less than the payments they make. At that point they will have to raise cash to pay cover the checks they write to social security recipients. Where will the cash come from? They will have to start selling off the “surplus” which means selling US Treasury notes on secondary bond markets. (A secondary market is for buying and selling bonds which have already been released)
So what’s the problem you say?
Conduct the following thought experiment. What would the government do if there was no “trust fund”? The same thing they do whenever they have to raise money they don’t have…..they sell treasury notes.
That is why there is no trust fund (and why I put it in quotes). They method of raising money is exactly the same as if there was no trust fund. Either way, they have to go to public markets and sell debt. The only difference is that if there was no “trust fund”, they would have auctions for new notes as opposed to going to secondary markets with old notes.
This is what people mean when they say the trust fund has been spent.
You may ask, “how is this different than if you or I go to sell a bond to raise cash?” Good question. If the bonds we sold were issued by us, it would be the same. If a company owns its own bonds, on the ledger its all cancels out. The assets equals the liability. Same for the government. From an accounting standpoint, there is no surplus, and the debt should be reduced by and equal amount. For the heck of it, write yourself a trillion dollar IOU. You will owe a trillion dollars, but you also have a trillion dollars in assets. Your net worth is the same.
Over the last several decades, the social security surplus has absorbed about 1/3 the amount of total debt that the US has accumulated. By this I mean for about 1/3 the amount of the debt the government never had to go out to public markets and sell notes because they used the money in the social security surplus to buy the notes they sold.
The surplus has acted like a buffer and has mitigated the investment crowding out effect over the last 30 years. When social security revenues stop exceeding payments, not only with the crowding out mitigation stop, but all that debt which the SSA has stored up will have to be unleashed.
This is why Alan Greenspan is going ape shit right now about the deficit.
The fact that the government honors debt and such doesn’t really matter too much. They still need people to buy the bonds in the first place, regardless of eventually paying them back.
There are a whole bunch of other issues tied up into this that I’m not going to bother to go into such as the trade deficit (which puts dollars into the pockets of foreigners to buy US debt), the value of the dollar, and the rate of spending (any deficits will get compounded with the notes sold by the SSA). All of these can effect what will happen in the future for better or worse.
I’m not advocating any particular solution, but social security is most definitely screwed.
