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.
5 replies on “Taking the trust out of trust fund”
Jesus, talk about tilting at windmills – you think anyone’s going to bother to care about all this until the SSA has to cut benefits or means-test? No, everything will be fine until suddenly everyone will be shocked, SHOCKED to discover that the “surplus” going into Social Security basically was going straight into the general revenues column and got spent on the Strategic Helium Reserve or a new statue of Judge Roy Bean for Asswipe, Oklahoma, and the only thing in the Trust Fund is a little note saying “IOU 1.2 Trillion, xoxo The Feds.”
There’s gonna be rioting at the Old Country Buffet on that day. That’s why all my money is in Amalgamated Whale Oil and Corsets.
Gary,
I strongly suspect that there’s a few flaws in your reasoning here, but I’m going to go off and do some research/thinking to back myself up–I try not to talk out of my ass too much. Forgive me if I don’t get back to you on this right away, I’m a busy fellow these days.
As a preview, and maybe so anyone else who is interested can do some of the heavy lifting, I think that my initial line of inquiry is going to surround the fact that very law created the Trust Fund somewhat obviates your point. Yes, there is no “lock box,” the funds have been “raided,” but the very existence of the Greenspan Commitee’s solution and it’s ensuing enactment into law creates a de facto trust fund with full legal (and more importantly) moral force. In short, this is the deal we all agreed to, now we have to pay up.
Now, if you want to say that the federal budget, it’s associated deficits and future projected deficits, and by extension the current account balance and everything else associated with the economy are just fucked three ways from Sunday barring some radical measures, well, then, I think we’d be in agreement. But I think it’s a *real* mistake to just say “We done spent all the money! Sorry Gramma!”
(Of course, I think we’d immediately begin to disagree again, because to me the obvious solution is to start raising taxes to get revenue in line with expenditures…)
Anyhoo, it’s interesting. More later (either here or over at ParanoidAndroid, or possibly at my own blog that I never update).
–Geof (note the single ‘f’)
I’m not really using any reasoning because I’m not making an argument. The trust fund is just debt. It’s a fact. I’m not saying they can’t come up with the cash, I’m just saying they will have to come up with the cash.
They will have to deficit spend to get the money, just like any other program.
Resorting to a law and moral authority doesn’t do much good when you are trying to come up with cash. To use an overused phrase “money talks and bullshit walks”.
Moreover, the US isn’t the only country in this boat. Europe arguable has it worse than we do. They have more rapidly aging populations, lower growth, and higher levels and debt and obligations per capita. They also have a much harder time assimilating immigration.
The full faith of the Federal government isn’t infinite. If they can’t get people to buy their notes, they can’t raise the cash. While it might be difficult to believe with the US at the height of its power, but nothing lasts forever. Japan might find itself having to default on their debt within 10 years.
When the government tries to raise that much cash via debt a few things can happen.
1) They increase interest rates because of the crowding out effect. This has been minimal so far due to foreign investment and the social security surplus.
2) The retard growth rates because they have sucked up so much investment capital.
3) Inflation goes up because they ultimately have to inflate their way out of the problem.
I personally think some combination of the three to some degree will have to happen. If we keep running up deficits like we have been the last few years, it will be more and more likely.
Yeah, we’re really going to wind up talking past each other on this one. You’re right, the Trust Fund is in essence “just debt,” there are some real problems with both current and projected deficits, etc. That doesn’t remove the obligation to repay the debt.
And loudly and repeatedly claiming that the Trust Fund is “just debt” “a bunch of IOUs” etc. is an attempt to propagate the notion that there is no obligation to pay the debt, and thus part of an overarching attempt to destroy Social Security. I’m not saying that *you* are making that attempt, Gary, but make no mistake, the people on the national stage making this argument *are.*
Why is acknowledgement that something is debt trying to say there is no obligation to pay it? If there was no obligation to pay it back, it wouldn’t be debt.
Moreover, I can’t think of anyone who advocates defaulting on our debt. It would create an economic disaster.