What’s the relationship between social security and the deficit?
Every time somebody on the radio talks about controlling the budget deficit, he starts muttering about entitlements like medicare, medicaid, and social security. I understand medicare and medicaid, but I don’t think social security is even part of the federal budget. It has it’s own income from SS payments, and it’s own trust fund. Unlike the federal government, the social security administration is currently in the black. If we ignore the questionable investment decision to loan the entire trust fund to the federal government, the trust fund is in fair shape, with another decade or two to run before it’s depleted. So while I understand that some changes will have to be made to keep social security solvent in the long run, how will that help reduce the deficit? If we eliminated all social security payments today, would the federal deficit go down by even one dollar?
I’ve never understond the alarm about Social Security, the one government program that is currently paying for itself. SS has it own special tax, so it’s easy to balance the income and the outgo and see if the that single program is paying for itself. Then politicians get involved.
It surplus that SS takes in has to go somewhere and it can’t go in Senator Bob’s sock drawer, so it gets loaned out to the government. That means SS is dependant on the USA government’s ability and willingness to repay its loans. I think that is a safe bet, others are more sceptical and not without reason.
Sometimes politicians like to lump SS into the general budget. Because it is running a surplus, it helps make the deficit look smaller if they talk about ALL government income and spending. One of many tricks our leaders use to cover their overspending.
Then the recent “tax relief” where our SS payments were reduced by tow percentage points for two years. This was blatantly taking money straight out of SS for other purposes. If they can do that so easily it really shakes my confidence that the SS system is as independent as I have always thought.
But as Social Security has run surpluses for so many years, and the surplus funds were rolled over into government securities that comprise the Trust Fund, the government was the beneficiary of the surpluses. The money from selling the special bonds for Social Security went into the Treasury. Because that was government revenue, it offset the need for the government to sell additional bonds to finance all the other areas of government.
As Social Security taxes become insufficient to pay for current beneficiaries under current law, the bonds in the Trust Fund will be redeemed with the government. Then, money will go from the Treasury to Social Security (with interest of course) to pay for benefits. This outflow of funds will make the deficit larger in the coming years, just as the deficit was smaller in past years.
It is important to note that the system was designed this way in order to invest the Trust Fund into the safest securities there are. The idea that the Social Security surpluses were squandered isn’t correct.
In the 1980s, to prepare for the retirement of the baby boomers, the SS tax was increased. This soon led to a huge pile of money lying around. What to do with it?
Well, spend it of course. So they did. Star Wars, a lot ships that saw little use, and a bunch since then.
How to cover up the fact they spent it? Write it down as borrowed. Note that this is Uncle Sam writing an IOU to himself. It is as worthless as anybody’s IOU to themselves. Especially since the money was spent.
The SS fund is now running out of money. The baby boomers need SS checks. So the difference is now paid for by regular tax dollars. This is a significant additional load on the federal budget.
What is worse, is that SS is less an issue than Medicare. That is going to be an even bigger load on the system.
Note that a lot of people over the years complained about the spending of the SS trust fund. Daniel Patrick Moynihan in particular crusaded against it when it first started.
The number of people who think that the IOUs are actually worth something is rapidly diminishing, but remarkably still not zero. It’s basic Accounting 101. Anybody can write an IOU to themselves for any amount. Governments, individuals. No accountant would take them seriously.
Whether one would say it was “squandered” is a judgment call. But it was definitely spent for a purpose other than which the tax increase was intended.
And they were absolutely, positively not invested. You cannot call an IOU to yourself an investment. Economics does not work that way. Especially when the money was spent by the “investor”.
Completely factually wrong. The excess funds from Social Security buy US bonds that are constitutionally guaranteed to be paid off. It is not “as worthless” as “writing an IOU” to yourself. You don’t have a constitution that legally requires your IOUs to be made good on.
The excess receipts were also not spent on star wars and the military. The funds were used to buy bonds – see above. The cash gained from selling the bonds went into the Treasury, just like almost all other government revenues. That cash didn’t “go” to buying anything, it was simply revenue from the sales of bonds.
No, income tax dollars go to paying off all government debt, whether it is a bond purchased by the Social Security Trust Fund or a $50 savings bond bought by little Timmy. The redeemed assets in the Trust Fund will be paying benefits, not your income taxes.
As mentioned before, the 14th Amendment is the constitutional guarantee that debt will be redeemable. The Constitution literally requires that the bonds in the Social Security Trust Fund will be worth something. Go ask your accountant if government bonds are worth anything: he will look at you like you have two heads. Of course US bonds are worth something, and they’re worth just as much to a junior saver as a retiree as a corporation as a country as a government trust fund. There is literally no difference at all in the validity of government debt payable to any customer, and it is factually wrong to suggest otherwise.
The concern with Social Security is that as demographics change, tehre will be more and more old folk (baby boomers) collecting nice SS cheques while fewer people are working to add to the pile of money. At a certain point, barring changes, the pot will start shrinking and eventually go negative.
IIRC this is about 25 or 30 years down the road depending on whose numbers you believe. But basically, we are going from 10 people supporting each recipient to 2 workers for each recipient. Recipe for broke…
This is the part I don’t understand. The money from the sale of the bonds goes into the Treasury and is used just like money that comes in from income taxes, etc. So, the money from the surplus is indeed spent but we have a Constitutional requirement to pay that money back. Am I looking at this the wrong way or has the SS surplus money been spent?
I realize that even if the money was “saved” in some account the deficit numbers would not have changed one bit (I think). It seems to me, though, that if that money were set aside in some cash account (I realize this is not done) it would be more legitimate to say that the money wasn’t “squandered” or that we are still in the black because we have all these T bills sitting around. It’s hard for me to get my head around.
No, ftg is right. The important point is that the United States government sold those bonds to itself - which makes them worth no more than IOU’s. When it comes time to disperse the money to SS recipients, where do you think the money will come from?
Are the bonds worthless? No. The United States government will pay them off. But they’ll do it through collecting new taxes not from some asset that’s sitting in a bank waiting to be spent.
I realize this comes very close to being a GD or even Pit post, and I do not mean it as an insult to any one person (in particular those who have advanced the concept in this thread).
But it is my considered opinion that anyone who maintans, in the face of argument, that borrowing against the Social Security Trust Fund by the Federal Government General Fund is akin to “borrowing from yourself” or “moving money from one pocket to another” should be legally barred from holding any fiduciary position, inluding payee-of-record for any benefits for the benefit of another.
If they are unable to discern between moneys spendable ad libitum and moneys held in trust on an Internet message board, with nothing at stake but their own opinion, they should not be entrusted with moneys due to another – whether an individual or a class such as those entitled to Social Security benefits.
And if this leads to massive unemployment among ex-bankers and ex-lawyers, well, that’s an unfortunate but necessary consequence of the circumstances in which we find ourselves.
Particularly in view of the (reasonably factual) assertion that there are several near-painless ways in which to make the SSTF solvent for the foreseeable future, most notably by raising or removing the Social Security taxable-income cap.
That’s true, in part, but it’s also where the debate kind of goes off the rails.
It’s disingenuous to treat US government debt (or “IOU”, I guess, we’re calling it) as worth no more than the personal guarantee of Joe Q Public on the street.
The part ftg gets wrong and people try to hand-wave away is that, while ultimately repayment into SS from the general budget will have to come from somewhere, the basic point is that the SS system itself isn’t the issue. The general federal budgeting process is the issue. SS itself is and has been solvent. Even the recent “shortfall” required a recession the likes of which we haven’t seen in 80 years, and we don’t project any long term problems for 20-30 years.
One can always oversimplify a situation to an extreme degree, but it serves no realistic purpose. It’s only a tactic to claim whatever equally oversimplified conclusion people wish to draw from it.
No, you have it right. We collected the money and bought treasury bonds with it. Then we spent the money we got from selling the treasury bonds. In the future, we’ll have to collect new taxes when the bonds come due in order to issue the social security checks.
To illustrate the point, let’s say we had bought Canadian treasury bonds with the excess SS taxes instead of American bonds. In that case, we wouldn’t have had the money to spend that year because it would have been the Canadian government receiving the money from the bond sales. But when the bonds came due and it was time to collect, it would be the Canadian tax payers who had to raise the money owed. As it is, it’s American tax payers who’ll have to pay off those bonds when they come due.
I give some leeway to people who do not put trust in the bonds, as they also tend to not have much trust in the US government’s ability to pay, period.
I, however, draw the line at the people who not only discount the SS bonds, but also think that the debt is $16 trillion rather than $11 trillion. That’s double dipping.
But it’s a real issue. Most people don’t understand that the extra SS taxes we’re paying now won’t actually be available as an asset in the future. People are just going to have to pay a bunch of new taxes anyway.
If the growing size of social security payments is a future crisis, we’ve done nothing to avoid it. All we’ve done is turn the future social security budget into a future treasury bond payoff budget. The amount of money we’ll be paying is the same (actually it’ll be bigger due to interest).
To cite a specific example, in 2007, in the depths of the banking crisis when people were desperate to find a risk-free investment, they bought up US government debt to the point where yields on that debt went negative (i.e. investors said, “we don’t care about interest, just keep our money safe, in fact we’ll pay you to do it”). People talk smack about government spending, but when push comes to shove the solvency of the US government is less doubted than the solvency of any other entity on the planet.
But this has nothing to do with Social Security, it has to do with government borrowing for other programs. If congress had borrowed the same money from someone else (China, Canada or me) they would still owe that money. As it is, they borrowed some of their overspending from the SS fund, some from China, some from private citizens. Basically from anyone who will loan them a few bucks to pay their rent this month. When it’s time to repay any of those the government will have to come up with the money, through new taxes or new borrowing, wherever the loan came from.
If you are saying congress is playing some kind of “hide the debt” game with the SS surplus I’ll agree with you in principle. It won’t be the first time they’ve used a tricks to hide spending. But the SS fund is not responsible for the poor spending habits of those who borrow from it. If they had invested the surplus in Chinese bonds there would be an even greater outcry, as there should be.
What is your definition of “IOU?” Is it an easily disregarded half-promise written on the back of a napkin that has no legal standing? Or is it a contractual agreement protected by the Constitution to guarantee payment of principle and interest?
Frankly, it depends on how you are phrasing the question.
If you ask, “Has the Social Security surplus been spent?” the answer, as a simple matter of fact, is that the surpluses have been spent to buy bonds that pay back principle and interest when redeemed. In more common and accurate language, the Social Security surpluses have been invested. The SS system spends money for the promise of more money in the future – not on Star Wars, not on bridges no nowhere: on government bonds.
If you ask, “Has the money raised by the Treasury by the sale of bonds to the Social Security Trust Fund been spent?” the answer is yes, regardless of what kind of bond is in question. If the government sells a $50 savings bond to Little Timmy, the money that Timmy pays for the bond gets spent right by the government right away. That’s equally true if the entity buying the bond is a corporation, a country, or the Trust Fund.
In every. single. case. that the government sells debt, no matter who buys it, the revenue from the sale of debt gets spent. In every. single. case. the government must expend money in the future to repay that debt with interest.
From the perspective of the national debt, it doesn’t matter one whit if Social Security surpluses were used to buy bonds or if they were stashed in a Scrooge McDuck like vault as actual coin. Because if the US Government didn’t have the revenue from sales of bonds to the Trust Fund, what would it do? It would simply sell debt to other customers in the same amounts. To put it another way, if you took away from the government all the revenues in the 1980s (for example) that were generated by selling bonds to the Trust Fund, the government simply would have sold bonds to other entities (Americans, Japan, UK, etc) to finance the deficit spending that was occurring.
And when that debt would have come due, we’d simply be paying Americans, Japanese, British, etc. bondholders the money that would otherwise go to the Trust Fund.
And I am likewise mystified that someone who is otherwise educated and astute could hold such an insupportable view.
Every year, the federal government takes in a mix of funds via the income tax and the SS tax. It pays out a mix of funds for general operations via the Treasury and funds for SS benefits via the SSA. None of those amounts is necessarily equal to another in any year, and all of them are fully adjustable by Congress according to programmatic and political needs.
If Congress does not alter the SS tax structure when the SS tax inflow falls below SS benefits owed, it will either cut those benefits or pay them out of the Treasury. If it does alter the SS tax structure to keep it in surplus, it will continue to direct the surplus funds into the Treasury.
The distinctions between these amounts are purely a matter of intra-governmental accounting. Any attempt to characterize them as something else is empty formalism.
So how do you think it should work? Should the SS Trust buy bonds from non-US government agencies only, and the Treasury should issue bonds only to non-US government agencies as well? How would this be a better setup?
Ok suppose that the SS Trust decided to never run a surplus, or chose to invest the surplus outside of the US federal government - what’s the Treasury going to do, NOT issue debt in order to pay the federal government’s existing obligations?
