You seem to be forgetting where the money is coming from. The money to buy the bonds is coming from the FICA tax. if you get $1,000, and use it to pay for some of a car instead of borrowing that money, have you thrown away the $1,000?
It could be true that the debt inside the fund is rising. It just doesn’t mean anything.
I owe quadrillions of dollars of debt to myself. This is an IOU to myself, the same as the SSTF. As it turns out, the interest “burden” on this debt to myself amounts to many trillions of dollars every year. But that’s okay. I write myself a new IOU to pay the interest of those old IOUs. I know I’m good for it. I put that new IOU in my fund to accompany all those old IOUs. I get further in debt to myself every single year. I’m already quadrillions in debt, but I’m still not worried. I find myself completely trustworthy.
The SSTF works in the same way.
For simplicity we can assume there’s a trillion dollars in there right now at an average burden of two percent. That means 20 billion of interest payments annually. How can they pay that?
The same way I pay my own debt to myself. Treasury gives the SSTF 20 billion worth of those special bond instruments, and the interest burden is satisfied. End of story. The only limits on this process are arbitrarily legal hurdles. The SSTF could, just like me, hold quadrillions of dollars worth of securities and it still wouldn’t matter in the slightest. The interest “burden” could continually be paid with new IOUs, in exactly the same way that I settle my own interest payments to myself. Obviously those legalities can be politically important. For instance, the debt ceiling would have to be raised to accommodate quadrillions of intragovernmental debt. But that’s just bureaucratic foofaraw. It doesn’t make any difference whatsoever on the government’s ability to pay itself interest.
A debt owed to oneself can be any arbitrarily large amount, and there remains no actual burden. I’ll always accept a new IOU from myself to pay interest owed to myself.
I refer you back to your own statement: “the government collectively has a debt and an asset that are exactly equal to each other. I’ll leave it to you to do the math as to the net worth.” That need be changed only slightly: the government collectively has an interest payment going out and an interest payment coming in that are exactly equal to each other. You’ve already demonstrated you can do the math on that.
Writing yourself a check for a thousand dollars won’t help you pay the rent. It doesn’t buffer anything.
The Trust Fund is an accounting device. It’s a comparison of the taxes ostensibly raised for Social Security so far against the obligations paid so far, with interest paid on the balance. It has no deeper meaning. If the US government were willing to automatically slash benefits to seniors if the fund ever reached zero, then we might honestly consider the fund important in its own right and separate from the general budget. Thankfully, that’s not the way it works.
More interesting is the yearly budget balance on the fund. This indicates right now, today, whether the taxes specifically devoted to Social Security meet the obligations. It’s currently in a deficit.
That’s important right now. Today. Debt is being issued to the public by the fund to meet its obligations. The exact same situation would hold even if the fund did not exist.
I don’t really understand this question.
If I write an IOU to myself for ten thousand dollars, I have an asset and a debt worth 10k. My balance sheet today nets to 0. And here’s the important part: my balance sheet can’t possibly move from 0 in the future because the asset and the debt are equivalent, the same thing. This kind of debt doesn’t mean anything.
If I max out a credit card for ten thousand dollars and use the cash to buy gold bullion, then my balance sheet today nets to 0. I have an asset and a debt, and they’re both worth 10k. I’m not any richer or poorer today. But here’s the thing: if I mark to market next week, and next month, and next year, my balance sheet will not be zero. It will naturally change because the asset and the debt are not equivalent. They are two different things, and they will move in two different ways. It is very meaningful to hold an asset and a debt that aren’t equivalent.
The SSTF in its current form is like writing an IOU to yourself. It changes nothing. Congress could eliminate the fund tomorrow and utterly nothing would be different. Those bonds are like a check the government has written to itself. They’re an accounting device, and not a useful one. It just doesn’t affect anything. However, buying Canadian bonds (which would mean issuing more US bonds to the public rather than intragovernmentally) would be like borrowing on a credit card to buy gold. The asset and the debt are different. The balance sheet nets to zero in the beginning, just as it does under the present system, but there’s no telling what will happen in a year’s time.
The same can be said for any bond that the government or anyone else issues. There is always risk, and the market judges that risk when setting prices on bonds in the market.
Just to be clear that I am not saying SS bonds are worthless. I was pre-emptively addressing the common contention that SS is a sham or a Ponzi scheme which we see so often.
To put it in a way conservatives might appreciate: If I can reliably bully a kid in the lunchroom to give me the extra dollar the next day, my thought that I have $11 is pretty much on the money.
However the money we pay to Social Security is related to a legal obligation the government has to pay us a certain amount after we retire. (Which can be changed - so can anything.) The money you pay for life insurance premiums is being used, in part, to pay current beneficiaries. That does not lessen the obligation of the life insurance company to pay your heirs.
Considering demographics, if SS was getting more in than required either the tax is too high or the benefits too low. If it is not getting enough, the tax is too low or the benefits too high.
I believe the current deficit is from the higher then forecast unemployment rate as well as the beginning of baby boomer retirements. I suspect the unemployment caused problem is getting better, the baby boomer part is of course going to increase as more of us retire.
And if things were different, they wouldn’t be the same. There is no equivalent to the kid in the lunch room to give you anything in Social Security.
Regards,
Shodan
To the “write an IOU to yourself and see how much it is worth” crowd: I very much urge you to do this, and then sue yourself in court for the value of the IOU. I think we know what would happen: the IOU would be unenforceable, for several reasons.
Then consider what a judge would do if a the Social Security Trustees sued the Secretary of the Treasury if he failed to redeem a bond. Do you really think the judge would say that the bond is an unenforceable IOU? No? Then knock it off with the stupid analogy.
We can humor your example.
We can posit the existence of your strange crack-addled Bizarro universe where the Secretary of the Treasury did exactly what you say. We can imagine the insane court case. We can accept as given the judgment of that court case.
The court would rule that Treasury has to pay the interest.
Treasury could then issue bonds to the public in order to raise the funds to pay the interest, if they didn’t issue bonds directly to satisfy this judgment.
The Trust Fund would accept the cash. It would then use the cash to purchase the special securities that it uses directly back from Treasury.
Treasury would then use the money given directly back in order to retire the bonds it issued to start this process.
The net result is exactly the same as if the trial never happened, and in fact the net result is exactly the same as if the Trust Fund did not exist. Meaningless. The entire thing is meaningless. The Trust Fund affects nothing. And in fact, the process would be identical in practice even if the trustees for some bizarre reason held onto the cash, if it were legal for them to do so. That cash would be taken out of the system, but that would be a problem in itself. The Fed would notice that circulating monetary base was less than total monetary base, and they would purchase an equivalent number of the newly issued bonds in order to return monetary base to circulation. This is empty accounting only. The extra bonds would end up at the Fed instead of in the Trust Fund, which is just paper-pushing. FICA payments and Social Security benefits would remain entirely, completely, and totally unchanged by any of this.
This is all empty government accounting. Even given your insane court case, it means nothing.
Just because a court case is possible does not automatically mean the case isn’t fucking ridiculous.
The limitations of a hasty reader do not represent a flaw in the analogy.
What would the judge say if the Secretary said he was going to redeem the bonds with the money that was in the Social Security Trust Fund?
Regards,
Shodan
Unless my memory is extremely faulty it was their own demi-god RayGun who raided the Social Security Fund.
Evidently you didn’t read what I was responding to: the idea that an IOU to yourself is worthless. Clearly, it is not, when the IOU is a U.S.-issued security, and wisely you concede this point. Thank you for explaining, in your own way, that Shodan was wrong in his example, and that your earlier post was in error.
But to go one further, your response is factually wrong, and I’m once again frustrated that those who criticize the Social Security Trust Fund often lack the basic understanding of how the Trust Fund works. It’s a strawman argument every time this comes up. When the SSTF redeems a bond, the cash does not go in to buying securities again, as I bolded in your post. The bonds are redeemed for cash to pay benefits, not to buy additional securities. What you posted is a gross distortion, or at least a poor understanding, of why the bonds exist. The bonds do not exist to buy more bonds – that’s silly, and it makes the rest of your points a response to a strawman scenario that you created.
See my previous comment about critics of the SSTF frequently not having an elementary understanding of how the trust fund works.
Why should anyone take your comments seriously if you post nonsense like this? Would you take advice from a mechanic who claimed that your engine consumes gas, oil, and nitrogen?
No, my example is not wrong.
Do you believe there is money in the SS trust fund?
Regards,
Shodan
The SS money is indeed backed by the full faith and credit of the US government. I don’t believe that is the issue. The issue is when the SS bill come due just where will the government get the money to pay back itself. Only 3 choices I am aware of.
Increase taxes of the working folk since SS is not collected on amounts earned above 110,000 (or thereabouts)
Borrow more money.
Just print more money.
All three of these options have very negative consequences.
If we didn’t have a SS surplus, wouldn’t we have sold the same bonds to private investors? Which we would pay back at the same rate that we repay the fund. Is the difference that we could, hypothetically, declare that we weren’t it paying back with slightly less doomsday consequences?
I have a complete understanding of how the SSTF works.
I have made no claim analogous to this.
Do you believe that, if I take $10 out of my own wallet, spend it, and replace it with an IOU promising to replace it next payday with $11, that I have money in my wallet?
Do you believe that, if the government takes $10 billion out of the SSTF, spends it, and replaces it with an IOU promising to replace it with $11 billion, that there is money in the SSTF?
Regards,
Shodan
Do you believe that, if the government takes $10 billion out of a private businessman, spends it, and replaces it with an IOU promising to replace it with $11 billion, that there is money in the private businessman?
No. They’re special bonds created solely for the surplus and aren’t saleable on the open market. The trust fund is barred by law from buying regular bonds on the open market.
How did the businessman manage to swallow $10 billion, and how did the government get it out?
That’s funny. I could swear money is coming out of my paycheck and being sent to the government.