That Wonderful, Magical Social Security Trust Fund
Several blogs have pointed out this February editorial in the USA Today by Jacob Lew, head of Obama's OMB. In February he told us, no, in true Obama Administration fashion, he lectured us like little kids that:
Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.
When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due. We have just as much obligation to pay back those bonds with interest as we do to any other bondholders. The trust fund is the backbone of an important compact: that a lifetime of work will ensure dignity in retirement.
According to the most recent report of the independent Social Security Trustees, the trust fund is currently in surplus and growing. Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.
As many have pointed out this week, if this is the case, why does the debt limit even affect the ability to pay or not pay Social Security to grandma? Because Lew was spouting complete BS. Social Security has generated surpluses in the past, but these have been spent and replaced with IOU's. And we are finding out right now how much those IOU's are worth - zero.
jt:
I'm probably missing something obvious, but if these are "real" Treasury bonds, can't they be sold to raise some quick cash? And it doesn't seem to me that selling these bonds would be generating new debt to the government.
Of course, if Turbotax Timmy says these bonds can't be sold for some reason, I guess that means that the assets in the SS lockbox aren't as real as he pretends...
July 18, 2011, 11:34 amTed Rado:
If the USG idiots really believe that you can borrow from yourself, give yourself and IOU, and the money is still there, we are in deep trouble. The alma maters of those people should revoke their degrees. They should all be fired for gross stupidity.
July 18, 2011, 11:48 amRob:
my understanding of the social security trust fund is that it is considered part of the national debt, thus subject to the debt ceiling. in treasury reports, social security is the bulk of debt not "publicly held."
however, the fund is not treasury bonds, nor anything that can be sold on any market. it can only be redeemed by the treasury.
given this, i still haven't figured out why the debt ceiling factors into redemption of these limited-bonds. the treasury could simply use current cash to pay down these bonds (which would lower overall debt), and then sell equivalent treasuries on the open market for approximately the same amount (which would then bring the total debt level back to where it was before the social security redemption).
the net effect of this would be more or less zero.
this, essentially, is what the government must be doing on an ongoing basis, anyway. they take the cash from social security, replace it with IOUs, and spend the cash. when the time comes to pay it back, they are getting the cash to repay by borrowing from the open market because they're running a deficit.
the funny thing is, this method creates a sort of "double taxation" to manage the fund - the first payment is the actual payment into social security via payroll taxes. Then, when the treasury pays off the debt it sold to repay SS, it's also paying interest paid, of course, by taxpayers. we're all paying a little bit of money so that retirees can withdraw what they deposited in good faith.
July 18, 2011, 12:17 pmMJ:
the funny thing is, this method creates a sort of “double taxation” to manage the fund – the first payment is the actual payment into social security via payroll taxes. Then, when the treasury pays off the debt it sold to repay SS, it’s also paying interest paid, of course, by taxpayers.
It is double taxation, and it severely undermines the notion that "Social Security benefits are entirely self-financing". Debt service on publicly held debt is not paid for with payroll taxes, and so is not limited to Social Security beneficiaries.
July 18, 2011, 12:34 pmRoy:
Warren's post plus the above 4 comments summarizes the first part of the story. We may debate the wisdom of OASDI investing in "secure" gov't bonds vs less secure but more likely to produce income something else. We can note the opportunities for political shennanigans. But these sorts of issues focus on only part of the story.
The rest of the story one easily sees by remembering that from day one OASDI paid out. It COULD NOT do so from savings, as there were none. OASDI never, ever was an insurance program, albeit with gov't management. Instead, it has always been a transfer program.
AKA ponzi scheme. Which works as long as the payers outnumber receivers by a large enough ratio that payers don't have too large a bill.
Both accounting reality and demographic reality trump political choice. And eventually bring disaster upon those who think otherwise. Which brings us to the punch line of the second part of the story: the train wreck collision of Roe with OASDI.
That the wreck approaches does not hinge on political opinion, does not rely upon moral observation.
July 18, 2011, 1:01 pmSpeedmaster:
A.W.K.W.A.R.D.
July 18, 2011, 5:21 pmJim:
I broke down and filed for my SS last month. First check is coming "on or about" July 27.
July 19, 2011, 4:51 amCould you guys lay off about there being no money in the trust account? I know it's a scam. I know it can't last. I know I could have done better putting the money into pork bellies. But it's my first payout! Let me dream! At least for a week. Please.
James H:
"the trust fund will continue to accrue interest and grow until 2025"
If this is true, we definitely don't need this program. Each and every one of us can write ourselves an IOU now and pay ourselves the interest each year to build the nest egg. It's so much better than saving, where you have to put actual money away now to earn interest.
July 19, 2011, 6:09 amel coronado:
back in the '90's, i think it was, the whole country of albania was entirely wiped out by a ponzi scheme. true, albania's GDP at the time was 4 goats and a whore, but still: the *whole country* was in on it, and went bust. won't be long before we're making those albanians look like the backwards pikers they are.
and how come, amidst all the blame & finger-pointing, how come no one ever damns the architect of the whole mess? true, the terms of the deal have altered somewhat since the sainted FDR rammed it down our throats - "mandatory" social security? show me where it says "mandatory" anywhere in the constitution - and being the "master politician" he was (who else could turn a bad 5-year business cycle downturn into a 13-year hellish nightmare?), he KNEW his fellow democrats would be using it to buy votes for the rest of time.
may his screams of pain brighten the halls of hell for eternity.
July 19, 2011, 7:10 amParatrooperJJ:
They are not Treasury bonds, they are Social Security bonds and can not be sold on the open market. They are actually words documents printed out and signed.
July 19, 2011, 8:14 ammarco73:
I have 17 years until I can retire with full SS benefits. Not wanting to worry that long, I just wrote a post-it note IOU to myself for $10 million, payable in 2028. Now I'll be able to sleep at night.
That isn't half as crazy as what O'Scama has been telling us.
July 19, 2011, 9:52 amMJ:
Jim,
You're probably smart to take your money now. A check in hand is worth about 1,000 IOUs in a "lockbox".
July 19, 2011, 10:37 amBenfromMO:
The entire concept of SS IOU's goes back quite a long time ago. Various budgets would be balanced and/or new spending would be authorized by borrowing from SS at large amounts. This was not well spelled out, but the main gist of this is that there is NO lockbox on SS and there hasn't been for over 30 years in our country.
The problem as shown is obvious, you borrow money from yourself, and that money is pooof, gone forever. There is not really any president that is exempt from this, as all presidents and every congress borrowed more and more from SS as time went by.
At this point, its entirely possible that without raising the debt ceiling that there would not be enough money left in the "lockbox" to even last one month.
The problem comes in now when expenditures are starting to top the income in SS. Those IOU's are going to come due from our normal budget since it was siphoned off over the years to among things "balance the budget" during the Clinton years. I just name that as a good example of how this was done and how every president and every congress (of both parties) were responsible for this reckless idea of spending money that did not belong to the Government to spend.
Obviously, the lesson we can learn here is this:
The Government can not be trusted to safe-guard retirement funds.
ITs that simple. Social security will fail at some point and maybe that is a good thing since our bumbling leaders over the years never strengthed it except in paltry gestures of using it as a political tool.
July 19, 2011, 11:09 amrmark:
SS is self financing and the trust fund is a bookkeeping fiction. Social Security estimates only about 75% of benefits are payable at mid cost estimates.
July 19, 2011, 1:29 pmGoneWithTheWind:
IOU's, government bonds, trust fund, contractual agreement, fudiciary duty/liability; call it what you want to they owe it, it is a legal and enforcable contract and it is our money NOT general revenues. It is probably about $4 trillion and that ain't hay. It would probably make SS solvent for 100 years. What we need to do is get the government out of SS. Separate it from the general fund and require the administrators to manage it in a fiscally responsible way and pay recipients a retirement based on how much they put into the system and not based on other factors. If they did this the system would NEVER go broke. It is BECAUSE they use SS like welfare that it is in trouble.
July 19, 2011, 6:00 pmel coronado:
excellent idea, GWTW. but who will bell the cat?
July 19, 2011, 8:35 pmjj:
There are two equally accurate ways to look at it:
a) The trust fund contains $3.6 trillion, and the US debt is $14.3 trillion.
b) The trust fund contains $0, and the US debt is $10.7 trillion.
Either way the federal govt has to cough up $14.3 trillion at some point.
July 20, 2011, 7:39 amel coronado:
"**has got to** cough up $14.3 trillion"??
that's the best laugh i've had in awhile. thanks. perhaps you've noticed the FedGov and its minions are the world champs in the art of 'when the going gets tough, the tough change the rules'. they'll cough up what they decide to cough up, and not a penny more. what are us serfs gonna do about it? sue 'em? seize their solid-gold pensions? LOL. throw them out of office? not likely: the re-election rates for incumbents is still above 95% last i checked. and they know it.
July 20, 2011, 7:48 amGoneWithTheWind:
El coronado: You are correct. I do not expect anything to get fixed and I fully expect the federal government to continue using SS as their private slush fund. I do believe we are doomed. I merely want to point out that it doesn't have to collapse like a house of cards. We (our politicians) made choices that got us to this point. We (the voters) could throw the bums out but we are too stupid/lazy/uninformed/bought to do it. So we will indeed go through another great depression with a little hyper-inflation thrown in for good measure.
July 20, 2011, 6:49 pmjj:
el c: sorry, replace "cough up" with "is liable for". That wasn't at all my point though.
July 20, 2011, 10:28 pm