You’re treating the trust fund as if it were a real debt, but not a real asset. But logically, if there’s a real debt that means someone somewhere must have a real asset. The money must be owed to someone. To that person, it’s an asset - just as, to the debtor, it’s a liability.
So the question is, if the trust funds are a real liability, who is holding the asset? Who is the creditor?
I guess the closest you could come to it would be “future SSN recipients.” It’s their asset. But the same entity, the U.S. Federal Government, can’t own both ends of it in any event.
And it is a real debt. It will have to be paid, with interest. And, again, the money that “purchased” this obligation is spent and long gone.
Why, if the $10 in trust fund instruments were, as you say, “purchased”? Doesn’t that mean that the trust fund received $10 for the $10 worth of “trust fund instruments”?
Can you go through this using columns to indicate what money goes where?
The trust fund received an IOU that the government will honor, with interest. But that’s all it is, a special Treasury issue that basically says, “We promise to pay $10 with interest when due.” The actual $10 goes to the general fund and is spent.
Using the same analogy that LinusK started, assume that the Feds received $100 grand total and had $90 in expenditures. A $10 surplus.
Of that $100, $30 was SS tax revenue, and the SS expenses in that year were $20 (hence the $10 surplus; please note, since 2011 SS surpluses are a thing of the past). So in this example, the entire surplus of $10 is attributable to SS–received $30, only needed $20.
The Feds “pay” the Treasury $10, which actually puts the money in the general fund. In return for this “payment” the Treasury issues a special instrument, an IOU that has no cash or asset to secure it, nothing other than the government’s promise to honor it. That IOU is what is in the Trust. The $10 in the general fund gets spent.
So, at the end of this exercise, the Feds have received $100, they have spent $100, and they assumed a debt of $10. Again, it’s academic now because SS no longer runs a surplus. And a more realistic $100 scenario, even if we conjure up an impossible SS surplus would be this: Government receives $75 ($25 is SS tax revenue). Government spends $100 ($20 is SS payments).
In this scenario, we spend $100, supported by only $75 in tax revenue. But not to worry, before we spent the last $5, we “purchased” $5 worth of SS Trust Fund instruments because of the SS surplus, put that IOU in the vault with all the other unsecured promises, then spent the $5.
This might help people think through this: Picture the cash from an SS surplus purchasing $10 in Trust Fund securities. The $10 goes into the general account, the IOU goes into the top drawer. Before we spend the $10 (and we will), has the government doubled its assets, turning $10 into $20 worth of balance sheet items ($10 in the not-yet spent cash sitting in the general fund, $10 in the Trust Fund)? Of course not. They have $10 in cash (for the moment). A minute or two later, they have nothing but an obligation to pay $10 with interest.
The trust fund is owned by the Social Security Administration, not by recipients. Recipients might be thought of as beneficiaries, but they’re not owners.
The fact that money has to be paid in the future does not make it a debt. I have to buy food and clothing in the future (unless I stop eating and dressing), but that doesn’t mean I have a food and clothing debt.
The government will have to pay for things like national defense and prisons in the future, but that doesn’t mean there’s a national defense and prisons debt. Similarly, there’s no debt for social security payments.
What there is is a trust fund. The government owes money to the trust fund. But it also owns the trust fund. Which means the amount it owes itself is the same as the amount it is owed. The government can, and does, own both sides of the transaction.
It’s a silly arrangement, but the silliness of it doesn’t justify counting the trust fund as a real debt without also counting it as an asset.
In the second paragraph you say the government received 100 and spent 90. But then a couple of paragraphs later you say the government spends 100. What happened? Where did the extra spending come from?
Because I’m sure we both agree if the government gets as much as it spends there’s no surplus.
On the other hand, suppose the government collects 100 and spends 90. But before they spend the 90 they lend it to themselves. Now the spending is still the same, and so is the income. The only difference is the loan. Does the loan transform the surplus into a deficit?
If I lend a billion dollars to myself, am I a billion dollars poorer?
Don’t get so caught up in the numbers and what buckets they fall in. We tend to focus too much on the minutiae of accounting and tend to forget that these numbers represent something real in the economy.
Let’s construct a factually accurate and useful description of the government’s 1998 finances, forgetting trust funds and Treasuries, and all that stuff for a minute. And let’s put all revenue and spending in the same bucket, instead of having some ‘off-budget’. If we do that, this is what we find:
In 1998, the government collected a total of approx 1.72 trillion dollars in tax revenue. It spent a total of 1.65 trillion dollars on various programs. In addition, the government incurred a liability of 99.2 billion dollars, in terms of promises made to future retirees (this is the amount that would go into a ‘trust fund’ if this were a private business).
So in terms of the government’s overall fiscal soundness, it finds itself 29 billion dollars behind where it was a year earlier. It doesn’t matter whether that 29 billion was borrowed from future retirees, or whether it was borrowed from Chinese investors - it’s a new liability the government has incurred in that year.
Now, let’s ask which number the government puiblishes is the most reflective of this basic situation: The White House’s number, which claims a $69 billion dollar surplus generated by the government in that year, or the ‘on budget’ deficit, which happens to be -29.92 billion? The latter, obviously.
If we really wanted to be accurate about it, we’d simply treat the trust fund as another source of loans, just like the Chinese are, or Americans who purchase Treasuries for their retirement.
In that case, you’d break out the finances like this:
"In 1998, the government brought in operating revenue of 1.3 trillion dollars, and spent 1.33 trillion, leaving an operating deficit of 32 billion dollars.
The 1998 Social Security trust fund raised 415.8 billion dollars, of which 316.6 billion was paid out to current retirees. The remaining 99.2 billion dollars was used to purchase U.S. treasuries, which will be cashed in as needed when the yearly operating budget of the trust fund starts running deficits."
So if you think of the trust fund as a completely separate entity which just happens to invest in U.S. treasuries, then suddenly it’s no different than any other claimant - when China lends the U.S. money, it does so by buying treasuries, just like the trust fund. But Chinese money is not treated as revenue to be used to offset the deficit number, and neither should the social security trust fund. They are the same thing in the sense that every dollar in treasuries that are in that fund are a promise by the federal government to pay out that amount, with interest, from taxes raised in the year that the treasury is cashed in.
We should always look at the ‘on-budget’ deficit to really understand the health of the U.S. government. The number the government pushes is, if not dishonest, highly misleading.
So, to put it in terms of household budgeting (which I usually would insist is a bad idea when thinking about national budgets since AFAICT they’re very different animals, but in this case I think it can work,)–
If I have $100 income for a week, and I spend $90 on groceries, I have $10 left. I could put $10 in my “petty cash jar.” And if I had a rule which said I could only spend money on groceries and any leftover had to go to petty cash, that’s what I’d do.
But if I had a looser rule that said that, after groceries, any leftover is owed to petty cash, but need not immediately be moved over into that jar, then I might write an IOU to petty cash for ten dollars, then spend the $10 in hand elsewhere.
In this second case, I gained $100, and I spent $100, and I also have declared my intention to place $10 into petty cash at a later date.
This does not sound like a deficit or a debt to me. It sounds like I broke even, and made a promise to myself to perform a particular action with my next week’s paycheck. I don’t owe anyone $10–not even myself–but rather, I have created an expectation that I’ll be saving $10 next week.
Does this parallel seem accurate? If so, why would you call this $10 IOU a debt? I know it’s called an “IOU” for lack of a better term, but no one actually owes anyone anything. It’s just a declaration of what I intend to do with my future money.
If I keep writing these IOU’s, though, eventually I’m going to have promised all my future paychecks to petty cash. That does seem like a problem. But it’s not a debt problem. Does everyone agree that it’s a problem regardless of whether it involves a debt? And if it’s a problem, does it parallel a similar problem with the social security trust fund even if that problem also doesn’t involve a debt?
Thanks for any help you can offer on this…
Nail on the head, except for the part about the IOU not being a real debt. If you mean to make this analogous to the securities in the trust fund, then the cash jar should be for your cell phone bill, you MUST put $10 with interest in it at a pre-ordained date, and that money will immediately be paid against your cell phone bill. It’s a promise to pay something OUT of your household at a later date. If your household had a balance sheet, this would be a liability, not an asset.
IMO, it’s a minor point (whether this is a debt or not) because in reality the stream of SS payments that will come due would dwarf the trust fund. It would be consistent to just spend the money, and don’t count it as a future liability, just as we don’t count the rest of the payments we’ll have to make as a current liability. As Sam noted, the Feds get to use accounting that would send a CEO rightly to jail. All this accounting debate is noise. Bottom line, we spend it all as it comes in (and more), the trust fund does not reduce our debt problem (it exacerbates it), and we have no way of making future payments without issuing new debt (barring some miraculous surplus emerging).
That is the very definition of a debt.
No, you don’t. Seriously, you have not entered into a legal agreement that requires it, that would otherwise put you in default if you didn’t buy food or clothes. You can buy as much or as little as you like (or none, and depend on the generosity of the government). But you would not be in default if you didn’t buy food. The Treasury would be if they didn’t pay off the securities in the trust fund. Because they have indebted themselves so the Feds could spend the surplus dough.
Instead of ‘petty cash’, let’s pretend that you gave the IOU to ‘Tony the Leg Breaker’, and in return he gave you the $10.
Would your conclusion be that since you now have $100, and you spent $100, that your fiscal situation hasn’t changed? What would happen if your bank asked for your financial situation, and you claimed that you were running a balanced household budget, neglecting to inform the bank of your monthly loan from Tony the Leg Breaker, because you consider that to be ‘off-budget’?
What do you think would happen to you if you signed a legal document to that effect, defaulted on your loan, and then the bank discovered that you failed to disclose your other liabilities?
And what do you think Tony is going to do to you?
Now, getting back to petty cash. Let’s say that’s your retirement fund, and you keep borrowing from it and putting IOU’s in it. Your theory is that this isn’t really ‘debt’, because you’re borrowing from yourself. But what exactly do you expect will happen when you try to retire?
This is exactly analagous to the situation the U.S. faces. There WILL be millions of baby boomers retiring in the next decade. They WILL expect to collect their full retirement benefits. A jar full of IOU’s doesn’t pay squat. So the government will be forced to do one of three things: Cut program spending dramatically, raise taxes dramatically, or cut retirement benefits.
The problem is that the government misleads itself and the public about the nature of this problem, so it has raised its own spending and the level of promises it’s making to eat up all revenue plus any additional taxes it can feasibly raise in the political environment. This means when the crunch happens, it’s going to be very hard to do any of those things. So it’ll probably do the fourth thing: Try to borrow the money and push the problem into the future. And the nature of this problem is so huge over time that that is an unsustainable course and WILL lead to a dramatic financial crisis at some time in the future.
If businesses today believe that the crisis could come within their long-term planning window, they will cut back on investment and costs, and start saving money. I believe that’s exactly what’s happening today, and there’s plenty of research that agrees with me. If that’s the case, then the more you borrow for ‘stimulus’, the more the economy will contract because businesses see the borrowing as more risk and more future taxes, and it’s coming soon enough that they have to plan for it.
The only thing that can hope to restore a healthy economy is to take steps necessary to ensure investors that the economy is on a stable footing and that there isn’t a fiscal cliff coming or massive new tax increases coming. Anything else is just tinkering while Rome burns.
I am assuming you know this is exactly what I was suggesting in my final paragraph. I’ve heard from you and stratocaster now that this is an actual problem whether you call it a debt or not.
I’m wondering if the other side of the dispute in this thread agrees with that assessment. If so, I’d say we’ve taken a small step toward clarity on the issue. If not then I’m interested in hearing why they don’t agree with the assessment.
The problem with the on-budget deficit numbers is that only the two Social Security trust funds are excluded.
There are other trust funds:
Federal hospital insurance trust fund, Federal supplementary medical insurance trust fund, Unemployment trust fund, Airport and airway trust fund, Highway trust fund, Military retirement fund, Civil service retirement and disability fund, Railroad Retirement Board, etc…
These trust funds should be treated the same as Social Security and excluded from the general receipts/outlays.
So I trust that when, in the next decade or so, Social Security goes cash flow negative and has to start drawing down on the trust fund, you won’t call the trust fund mythical, or filled with mere IOUs that the government wrote to itself. And that you will take a similar position the next time this board has a debate over SS reform issues (which seems to happen every 6 months or so). Can we hold you to that?
I am only half way through the thread, so pardon me if someone has already explained this like I am a three year old:
If receipts exceeded expenditures, and
SSTF assets balance out the related bond debt,
how DID the debt go up?
Is there another variable I am missing?
I would also like to point out that government accounting practices are not the same as business accounting practices, and lots of people who understand them both (I do not include myself in that group) have trouble with the government practices. So, moonbat’s argument “there was no surplus” is worth discussion, even if his claims that Clinton cooked the books aren’t.
Because the “national debt” counts the government’s liabilities, but doesn’t account for government assets. If you look at “debt held by the public,” which omits US debt held by other government entities, that should have gone down.
Okay, remember, three year old - the national debt went up, but the national public debt did not? Because the national debt includes the intragovernmental debt?
And the basis of the government accounting practices argument is, the government holds that the “intergovernmental” debt is not really a liability, because it owes the money to itself, BUT people like Stratocaster and Sam Stone argue the money is actually owed to the trust fund recipients, and therefore is real debt.
Okay, if I’ve got this right, I get it, and I really don’t understand why it took me four pages to figure this out.
And moonbat is just wrong, because Clinton’s administration used the same accounting practices as everyone else.
I apologize if this was covered already. I did start reading at the beginning of the thread, but couldn’t slog through it.
Assume that, outside of SS taxes and payouts, that the budget was in balance. So now, until 2016 or so, SS receipts are higher than SS payouts, right? (this is what creates the trust fund). Those excess receipts have to be invested in Treasury bills/notes/bonds, correct?
Doesn’t that mean that the national debt would appear to be rising? At least at the point where we’d bought back all of the debt owned by the Taiwanese, Chinese, and various other entities.
Which leads to a second question - when it comes time to redeem those bonds, where does that cash come from? I’m guessing that it’s probably the magic of ‘fiat currency’ - the purchase of the bonds reduced M1 (or whichever M# it would affect).
I’d be interested too. But what we typically hear is indicative of a misunderstanding of what the Trust Fund is, as evidenced by posts in this thread (even after your last one). Phrases like “drawing down on the Trust Fund” suggest that people think of it as a vault filled with $1000 bills, wisely stashed for future use to take advantage of a surplus. Instead of what it is–a promise to pay out some yet-to-be found money that is owed, which will most likely be funded by selling more debt, since we already spent the SS surplus money.
It sounds like you get the analogy, but to play it out just a bit more, it would be like paying for the IOUs in your cash jar when they’re due by taking a cash advance on your credit card–retiring debt by issuing even more debt. In the absence of a surplus, the cycle continues and the problem becomes more and more severe. The “security” of the Trust Fund is an illusion in the context of $16 trillion in debt, ongoing SS deficits, the boomer need for expanding entitlements, the fact that we currently borrow about 40 cents of every dollar we spend, etc. It’s just one more debt we’ll need to find the cash for somehow. We need to find a way to make entitlements sustainable. (This will be the cue for someone to chime in with, “Sustainable? What are you talking about, the Trust Fund will keep SS solvent for another 25 years.”)
And so, we come back to the topic of the board, elections.
In order to support the system people have paid into their entire working lives, we have to raise taxes.
There, I said it.