I have not heard an answer to the question of where to invest the money if not in government bonds. Gold? Piles of cash will lose value due to inflation.
It is a fundamental rule that return is proportional to risk, and choosing a strategy which reduces risk seems prudent. Plus, given the amount of money involved, investing in the ordinary markets will distort them, no doubt raising stock prices beyond what the fundamentals call for. Any selective investment strategy is even more likely to distort the markets.
I understand the mechanics of the process just fine. What I don’t understand is why the bonds held by the trust fund are considered assets…they were sold to the government and the money was spent. Future taxes will be used to pay off those bonds. I fully understand that if there were a “lock-box” ala Al Gore, we would just have to borrow money from elsewhere in order to make up the difference. Hence, the deficit would be the same either way.
Let’s look at this another way. Say there was no debt or yearly deficit. The money coming in to the treasury is spent until we reach zero and that’s it. Now, let’s say any extra money from surplus SS taxes are set aside in a “lock-box”. That would be real money sitting there and the government would have a surplus for the year.
Contrast that with the government in this same scenario buying bonds with that surplus but we don’t spend any extra money that year…money is just transferred from one department to another so government as a whole has a surplus for the year. But if the government spends the money from the sale of those bonds then the government breaks even and still owes the bond holders (i.e. the Treasury). Hence, the government breaks even for the year but just created future debt. How can those bonds be considered assets in this scenario?
This makes sense as money will lose value over time. But, what would be the difference between keeping the assets as something tangible (ie cash or gold…assuming no loss in value) versus buying a bond that we have to pay back ourselves eventually? It seems to me that if we did not run a deficit yearly these two scenarios would result in different outcomes. Since we do run a yearly deficit I think the results would be the same.
It’s not an issue of whether the promise is good or not - that’s a straw man.
The issue is simple: where is the money coming from? At some point the money for an IOU has to come from an external source.
If I buy a million dollars of treasury bonds, I’ve made a genuine investment. When the bonds mature, the United States government will give me a million dollars. But if the United States government buys a million dollars of treasury bonds from itself, there’s no genuine investment. When the bonds mature, all that happens is the United States government gives itself a million dollars.
If anyone claims this is an irrelevant point, let me ask them this: why doesn’t the United States government issue itself special high-interest bonds? These bonds can only be bought by the government but they pay off at a thousand percent annual interest rate. So the government can just buy ten billion dollars of these bonds this year and collect a hundred billion dollars next year. We just made a profit of ninety billion dollars in a single year! It’s like free money! And the government can buy all the bonds it wants to! We could finance the entire federal government with these bonds!
In this exaggerated example, the flaw in this plan should be obvious. But it’s the same principle being used in our social security program.
The bonds are considered assets for the same reason the money in my bank account is considered an asset. I gave my money to the bank and they loaned most of it out to other people who spent it leaving me with nothing but a number that comes up when I log into my bank’s website and a promise that the bank will come up with some actual money when I need it. And we all know what promises from banks are worth, am I right?
Well actually it turns out that promises from banks are worth quite a lot. And as much as people gripe about spending, promises from the US treasury are also worth quite a lot.
You can’t consider the government as a whole while at the same time looking at different pieces of it. I know politicians do that to make the deficit look smaller. If the government was break even, but then issued bonds not covered by current revenue any more, it wouldn’t be break even any more, would it? It doesn’t matter if the bonds were sold to SS or to China. Similarly, if SS takes in more money than it spends in a year, it has a surplus no matter if the assets it buy are US bonds or Grand Fenwick bonds.
Companies making money still issue bonds, so there might well be government bonds even in a surplus situation. Does someone know the laws regulating the accounting of SS versus the rest of the government?
It’s coming from a source external to the Social Security system.
Let’s say that you hold two jobs: one at a bakery and one at a shoe factory. For whatever reason, and by whatever mechanism you can dream up, you make a commitment that your mortgage payment can only come from the pay from your bakery job. There is a legal wall that prevents you from taking your shoe factory pay and using it for the mortgage: even though all your pay may end up being deposited in one checking account, you are legally required to maintain separate books to demonstrate that your bakery pay goes to your mortgage, and no other funds do.
For the purposes of the holder of your mortgage note, how can you claim that your shoe factory pay is not external to the income you use to pay the mortgage?
No, the fundamental rediculousness of your scenario holds whether the purchaser of the bond is the US government or a private individual: it’s patently bad business for the US Government to pay a three thousand percent interest rate to ANYONE. Whether it is paid to a nearly autonomous arm of the US Government or China, your scenario makes the US Government a loser.
The asset held in the lock box offsets the liability by the bond issuer. There is no future debt to the bond issuer without a future asset for the bond holder.
The scenario works one way because the government is spending more than i takes in, so it will borrow what it does not get by taxes. If, say, Clinton were president like before and we had a surplus like back then, then in fact it would work the other way… Instead of borrowing SS money, the government would be paying off its debts and SS fund would be looking for alternative places to invest. It’s just in the last few years, what’s more important? Invading Iraq or cutting the deficit? Keeping all those Detroit workers employed, or cutting the deficit? A global economic depression worse that 1930, or cutting the deficit?
Anybody who’s had a cookie jar, or a college fund, or a piggy bank understands the idea of multiple pockets belonging to the same individual. Borrowing from that piggy bank and promising to pay it back is worth as much as the promise is worth.
As others have been pointing out, the US Government’s word is actually worth a lot more than many other possible places to park money.
Look at it from the point-of-view of the Treasury - it needs to pay for government spending. It can (a) issue debt to the SS Trust; (b) issue debt to some outside party. It will pay this debt using future taxpayer money. From the point of view of the Treasury, how do options (a) and (b) differ?
Actually, the Social Security Trust Fund would still be investing in government securities. It’s required to. And the government would not be paying off intragovernmental debt if it had surpluses.
The money was spent. It was not invested. It was spent.
The money needs to be re-raised from taxes. That is the issue people like the OP need to understand. Raising money, spending it, and then having to raise it again is really strange.
Investing in say, Scrooge McDuck’s Special Bonds means that Scrooge McDuck is responsible for paying it back. Not the taxpayers!. Note the big difference. Now Scrooge can invest in real estate, stocks, gold, whatever. If the US government has done this, they would have been unable to spend the SS trust fund no more than I can both spend and invest in my IRA. Spending the SS trust fund is not anywhere near the same thing as investing.
It was sad but hilarious to see people arguing a few years ago about whether the SS trust fund was going to run out in 2045, 2060 or whatever. All those people failed to understand the worthlessness of an IOU to yourself. No one has this argument anymore.
I have no idea how a line in the Constitution is supposed to override a basic fact of accounting: An IOU to yourself is worthless. Anyone can write an IOU to themselves for a trillion dollars. Means nothing. Doesn’t matter one whit if it’s a government, a business or a person.
Go write yourself an IOU to yourself for a trillion dollars. Then sue yourself to make good on the IOU. No court will entertain your case.
If the government issues a bond to the Social Security Trust Fund and fails to make good on it, it is plainly obvious that the courts would act to enforce the 14th Amendment. That’s the whole point of that clause of that amendment.
So, entirely different things: your IOUs to yourself are probably worthless. That doesn’t mean government obligations are. The fundamental difference is that you are not a government, and therefore you have different obligations, rights, and responsibilities than a government.
But there is one big difference: The creditor (the SSA trust fund) and the debtor (the US Treasury) are controlled by the same entity.
When the SSA presents bonds to the Treasury to be redeemed, I 100% agree that the Treasury is obligated to redeem them, no questions asked.
But Congress can look at the books and say “Hold on a minute. The SSA is redeeming too many bonds! We don’t want to raise taxes or borrow more to pay for all those redemptions. We’ll lower Social Security benefits or raise the retirement age. When we do that, the SSA will stop redeeming bonds and we won’t have to come up with the money to pay them off.”
Congress can remove the need to redeem the bonds. It can lower the Social Security benefits to make redeeming the bonds unnecessary. Lowering Social Security benefits does not violate the 14th Amendment. Getting back to the OP, this is what they are talking about doing.
I think it’s far from clear that the SS Board of Trustees can sue the Government; one of the Trustees is the Secretary of the Treasury, after all.
Even accepting that such a suit is possible, it’s beside the point. Suppose the SS Trust Fund were due to fall short such that it would have to start redeeming its Treasury bonds for funds, but Congress decided that the Treasury’s general financial state was sufficiently bad that Treasury should not be paying money into SS to redeem bonds. Congress could simply cut SS benefits to the point where the shortfall disappeared; the need to redeem the bonds (and any question of default) would likewise goes away. That’s why the exchange of bonds is simply an accounting formalism – not because the Treasury can or cannot default on its obligations to the SSA, but because Congress can legislate around those obligations at its discretion.
That’s a pretty bad analogy. If I have a job with a bakery and a job with a shoe factory, I have two independent sources of income.
This doesn’t apply to the Social Security system. Its source of income (taxes) is the same source of income that is used for any other federal government program, including the one that pays treasury bonds.
So you’re comparing apples and oranges. In your analogy, you’ve got one entity with multiple sources of income. In the reality of government spending, you’ve got multiple entities with a single source of income.
This is the straw man argument I mentioned above. I’m not saying that the government won’t pay for the social security program when it’s time to mail the checks. I think it will pay for the program.
But what some people are claiming is that the government has already paid for the future expenses of the social security program and that’s not true. All the government has done is make a promise that it will pay for the program in the future.
Even if we have no reason to doubt the promise, we should recognize that a promise to pay a bill in the future is not the same as having paid the bill.
From the view of Social Security, it is invested. Just like $10,000 you put into a government bond is invested. From the general government it is spent, just like bond money purchased by Aunt Sally.
As people have said over and over again, just as of the bond had been sold to Aunty Sally.
And what is the safety of the Scrooge McDuck Bond? What interest rate does it get? I bet higher than treasury bonds. Stocks may tank, real estate values go down. We can take risks like this in our 401Ks and IRAs - let’s not do it for Social Security. Or do you claim that the treasury bills are less safe than McDuck bonds? If so, the market disagrees with you.
The trust fund running out has everything to do with demographics and the Social Security tax rate and nothing to do wit IOUs to ourselves. It being GQ, I won’t comment further.
Take a look at your pay stub some time. You will notice that Social Security is a separate line item. That should be a clue.
My father worked for the UN. Since the UN was not on US territory, he had to pay self-employment tax. The UN had a policy of reimbursing federal taxes - useful for employees from abroad who still had to pay their home country taxes. He fought for ten years to even get SS classified as a tax.
What other tax does your employer match - or you pay double if self-employed?
Money going to the military or to the National Parks comes from the same source, agreed. SS clearly comes from a different one.
I think a better analogy would be to cash your paycheck, write an IOU to yourself and blow the check on a new flat screen TV (or anything else). That IOU is not an asset because you loaned the money to yourself and the only way to pay it back is to make more money. Thus, your IOU is a debt.