What are you talking about? I am trying to explain, and to wrap my own head around, making a loan to yourself. I’m not thinking about risk here at all. The question is…when I write myself an IOU for my own money, is that IOU an asset or a debt? What about when the federal government does something similar with SS surplus?
I don’t think that the way the government makes good on its debt somehow makes it an asset. You seem to be suggesting that the bonds are an asset for the government because they can take this money from the people. That means that bonds are a debt for the people. What’s the difference?
First try to think of the reason that you’d be making a loan to yourself.
Obviously, if you have two piggy banks, the idea of loaning from one unrestricted pool of cash to the other simply makes no sense on the face of it. There’s no reason to make such a loan, so of course it is confusing.
But think about this: let’s say you have a 401(k) retirement plan that only allows you to draw down those funds upon retirement, or you can withdraw funds from the 401(k) to buy a house with the stipulation that you must repay the funds you took out of the 401(k).
You own the 401(k), and you own the bank account that the withdrawal is going to. In essence, you’re making a loan to yourself that you’re required to repay. The reason the loan is required is that you are simply not free to use the 401(k) as you see fit, you have to comply with the specific purposes of that account, including the obligation to pay back any money you withdraw to buy a house.
Now, the comparison breaks down from there, because your 401(k) is getting smaller, the cash is being spent, and you’re gaining a non-liquid asset in the form of a house. (Or at least, a percentage of the value of the house.) But the obligation to pay back your 401(k) is real and the reason why you have separate accounts for your 401(k) and your checking is totally understandable. You are also gaining a liability (the obligation to repay your 401(k)) and an asset (the investment in the house).
For those who believe the Social Security Trust fund is an investment from the point of view of the taxpayer, I have a deal. I have offered it before, but now it is even better, because there is no risk involved.
You sent me $1000 this year. Next year, you send me $1100, and I will pay you back with interest. You now have invested $1000, and you will get $1100 next year.
Now, maybe that is too much risk for you. No problem - we just put your house up as collateral. If you fail to send me the money to pay you back, I will sell your house and pay you back that way.
Because your scenario has little to do with how the trust fund operates. It is as senseless as me saying that I can prove the Trust Fund operates fully in accordance with the law and standard accounting procedures by you sending me $10,000 and me promising to return it to you later with interest.
If you take me up on my offer, have I proved my reasoning correct? No.
Does my offer have any relation to how the Trust Fund operates? No, not really.
This is a great example and actually undermines I believe the point you’re trying to make…if the point is “the social security system is all roses with no problems.”
When I buy a $10,000 corporate bond they use it to build their revenue stream. Maybe not my specific $10,000, but in general corporations take on debt to build revenue. That basically means business expansion, product development etc. They do this because higher revenue leads to more profit, more profit leads to happier shareholders and higher executive compensation and etc.
You’re absolutely correct, the corporation doesn’t just hold that cash. Corporations may hold cash, but it makes little sense to go into debt to hold cash because inflation destroys the cash’s value over time and you’re paying interest to hold it. It only makes sense for a corporation to go into debt if they believe they can use that cash to generate far more money than they pay for it.
With the Social Security system, I frankly do not understand at all why people are talking about nonsense issues like intergovernmental debt, IOUs, 14th Amendment requirements to pay debt and etc. That’s got nothing to do with why Social Security is a problem.
The problem with Social Security is the promise made, it doesn’t matter what form we store this claim on our future tax revenues, the problem is the claim itself.
If I run a company with 10% annual net income growth I never have to pay my existing debt off complete, I can continually take out more debt. As long as I’m taking out debt at a rate where my debt grows slower than the company, and my debt servicing payments never grow over time as a percentage of revenue I can finance debt and hold debt forever. In fact that’s what most corporations do because it makes sense to take on some debt if you always think you can make more money than you paid for it in the first place.
Government is the same way, we never have to pay off our debt, as long as we can grow our economy (and ultimately government revenues) faster than we grow our debt, the debt really is sustainable. My problem with Social Security is that the system eventually will become unsustainable. It is a paygo system, money comes in, money goes out. When the promised money going out grows larger than the money coming in, you have to alter the money coming out or alter the money coming in. A minor tax increase here and there isn’t the end of the world, but when you get to a point where for every 2 working people 1 retired person expects to receive a wage often higher than the Federal poverty level it means the taxes for those two working people are going to get higher and higher to fund that one person who isn’t working. So at that point you either cripple everyone with taxes or lower the outgoing benefits. (I think the number is like 3.2 per 1 right now, by the way, but I’m going off memory.)
Countries like Sweden altered this system, and modified the contribution to be fixed and the benefits to be variable, and introduced “virtual accounts.” Your final benefit is based on an annuitization of your virtual account, and the annuity payments are funded from the fixed contribution of taxpayers. This also incentivizes work, the more money you make and the longer you work the larger your virtual account is and the larger your annuity.
Not really. What is the asset for the government? The bridge built with that money? You seem to suggest there is a liability in the form of the bond but what is the liquid asset if the money enters the general fund and is spent?
Martin - I follow what you’re saying, and I’m not going to quibble with it, other than two points, which I doubt you’ll disagree with:
The funding mechanism for the Trust Fund (buying bonds) does not, by itself, protect the solvency of the program. To use an example, if we cut FICA taxes in half, and raised benefits by 5% a year, the system would be broken regardless of whether revenues were invested in bonds or not. I think we both agree on this point.
The criticism that tdn is making – that the money raised by the government when the bonds are sold then gets spent right away, implying the bonds are worthless – has no bearing at all on the solvency of the system or the validity of the bond. The whole point of bonds is to receive cash up front and retire the debt with interest over time. No matter who issues a bond, the cash always gets spent up front, and that fact does not undermine the promise of the bond. (The promise of the bond can be undermined by other factors, such as if there were no legal guarantee of repayment, or if the bond issuer were to have no means to gain future revenue.)
And to answer the OP, the reason social security comes up in deficit talks is it is part of the long run deficit and debt problem.
The mechanics of the Social Security system aren’t what is really important, it’s the concept. The Social Security system is basically just a government promise, it’s a commitment. We’re saying if you work this number of years and get this many of “points” in the system you’re entitled to this amount of money. You can go to the SSA website to calculate the details of your monthly benefit.
This promise is not in and of itself a debt, because the promise is not enforceable. Now, the trust fund holds legal debt that must be repaid, but that’s got nothing to do with the promise of income stream to the beneficiaries. Those benefits can basically be amended at any time, sort of how private pension plans sort of can be (there are a lot of government regulations on those, actually–as there is with social security, but its a creature of statute and its benefit calculations can be changed by statute.)
Eventually social security will annually take in year to year until the end of time, less money than it needs to pay up to its promises. We do have a trust fund, and in truth the government debt instruments that earn interest can probably be repaid just fine. We have a clear idea as to how those can be paid. But when the fund is no longer collecting more than it disburses, it’s no longer buying more debt from the government because it simply cannot. It won’t have a surplus.
Now, it’ll receive coupon payments for all its already held securities, and those will fund the outgoing payments in addition to the ongoing revenue. But eventually those treasury securities will be exhausted and you’re just left with the stark reality that the paygo system is taking in far less than it needs to send out. At that point the only option is to pay for it with more taxes or to reduce benefits. The taxes could be higher SS taxes or they could be increased income taxes that are used to back up the system from general revenue funds (the difference means little from a macro perspective.)
The reason this is often seen as a debt is because most people assume we will never have the political backbone to say “sorry, we promised too much, your benefits are getting cut.” So it’s assumed we’ll eventually at some point face the mother of all tax increases, or a series of medium sized tax increases.
The problem with this reasoning is that it treats the government’s funding as a constant, when it’s not.
All that money from selling SS funds burnt a hole in the government’s pockets, and we couldn’t wait to spend it. If we hadn’t had those SS revenues, perhaps our budget would have been smaller? Also, if SS hadn’t been buying up so many bonds, maybe the market wouldn’t have been big enough to buy it all (at least not at the same rates).
IIRC, in the 60’s and 70’s we did slush the SS revenues into the general budget, but at some point a law was passed to exclude them. No doubt someone here has a better handle on the details.
I concede the point raised above about investing SS revenues in the stock market: it would had a huge impact, driving the market up artificially. So, while I see the “flaw” in the scheme we used, I don’t know what we could have done that would have been better, other than parking the funds in a piggy bank, or earmarked those revenues into only those things which amount to an investment in the country’s future revenue base (e.g. infrastructure).
Maybe this is off topic, but I’ve read things that would seem to indicate that the problem isn’t necessarily as bad as it’s projected to be for a variety of factors.
People tend to be healthier longer and often choose to work past retirement. They may retire from a first or second career but spend their “retirement” in some entrepreneurial pursuit for example. On the less sanguine side, many people will feel obliged to work past retirement to rebuild their savings.
The many inefficiencies in the delivery of health care could be a source of significant savings. Since the rate of growth of health care costs must factor into projections, this would have a major impact.
Means testings for SS benefits including Medicare could significantly reduce the over all cost of the programs. If implemented properly, it could raise revenue without being seen to punish people who had prepared for their retirement.
Those are just some of the ideas I’ve seen floating around. I’m sure there are many more.
How exactly do we budget for future SS outlays? If you get some extra money and want to budget it for a new car that you will need in a few years, what do you do? Invest it, right? Which is what SS is doing - in the safest investment there is. Now, if someone sees that money in their account and decides that it warrants you going on an expensive vacation because they have money in the bank, they are being irresponsible, just like Congress spending extra because of the SS surplus. But the surplus is not forcing them to be irresponsible.
Interesting question. Usually there are bonds even if you have a surplus (and I assume your scenario involves 0 debt as well) because government income over the year does not exactly match outgo. Plus, even with a surplus there might be bonds for capital projects. If not, they’d have to decide if keeping cash was safer than some other option like buying state bonds or even secure international bonds. It all comes down to what is the best investment strategy.
Reagan got a major increase in income and a decrease in expected payments through. It is perfectly possible to agree that demographics require a change in SS funding and benefits while saying that the current system of buying bonds with the surplus is not invalid. I doubt that there are too many people who think the current system is perfect as it is in terms of taxes and benefits.
Here is an extension of the mortgage example above, which is real. My father-in law lent us money for part of our house about 25 years ago. Since that time we have paid him faithfully every month. Since my wife is an only child, we will in a sense get the money back when he dies at 110 or so. He also gets a pension, and has investment income. From the point of view of my wife’s inheritance, it makes no difference if he spends money from our check on groceries and puts his pension money in the bank, or if he spends the pension money and puts our money in the bank. We registered the debt so we could deduct the interest, but there are no default penalties. Now, I suppose you can call it just an IOU also, but the interest money is kept in the family, just as the interest the government pays on the SS bonds is kept in the family (from our point of view.) From his, he sees it as a safe investment, just like SS sees its investment.
Sure the government could theoretically renege on the debt, but it could just as easily raise all our tax rates to 50%. The collateral damage from me defaulting or the government defaulting is too great to be practical.
We could do a similar example if I get a lump sum payment and use it to take over my mortgage, keeping up payments to myself to build for retirement. But this isn’t as hands-off a situation as the SS one is.
Which would equal zero for the federal government if the money was not spent. Since it is spent the bonds represent a liability for the government as a whole
You are missing the point. I would not return the $10,000. I have already spent it. You need to send me the $10K, plus interest so that I can pay you back. Just like Social Security.
Yes, really. My offer is the same thing.
You send me money, and I spend it. I replace that money with a promise to make you send me more money later, plus interest, to replace the money I spent. You think of that “promise” as an “investment”.
The government took money away from the taxpayer in the form of Social Security taxes. They then spent the money on things unrelated to Social Security benefits, and replaced the money with a promise to take more money away from the taxpayer to pay Social Security benefits later on. You want to describe that promise as an investment.
It isn’t an investment; it’s a loan that has to be paid back twice.
Is the Social Security Trust Fund part of the government as a whole? Of course it is. The problem is that you’re ignoring it and insisting the the country’s debt as the only measure here.
For the government as a whole, the debt issued by intragovernmental bonds in this case are offset by the increased asset in the Trust Fund. There will always be an inverse relationship between the two: the larger the Trust Fund, the more intragovernmental debt outstanding. As the Trust Fund shrinks, the intragovernmental debt will shrink.
How can your analogy be the same thing if you imply that your offer is a rip off but Federal bonds are constitutionally guaranteed to be paid back?
Okay, let me ask this. Suppose there was no trust fund. Suppose the government was not accumulating a surplus and was not buying treasury bonds.
It’s now 2033. Not having any trust fund full of treasury bonds, the government has to fund the social security program directly out of taxes, like it’s doing now.
Now explain what the difference is between the government collecting taxes to pay for the social security program and the government collecting taxes to pay for the treasury bonds in the social security trust fund. Won’t the government be collecting the same amount of money in both cases?
Basically, yes. The cost of Social Security would be the same.
However, there is a twist. Because the Social Security program is functionally separate from the rest of the government (because it has its own revenue stream), many believe that Social Security will not have to compete for resources compared to a case where there was no payroll tax and the entire program was funded through income taxes.
Why do some people prefer this model of a dedicated funding stream? Look at the Highway Trust Fund, which is funded by gas taxes. Proponents like the idea that certain revenues are guaranteed to a particular purpose, meaning a consistent funding stream, meaning a way to minimize year-to-year budget disruptions. Local governments do similar things: here in DC, there’s a 5 cent plastic bag tax that goes only to cleaning up a nearby polluted river. The thought is that road maintenance or river cleanup are long-term programs that could be seriously harmed if they had to compete with other programs funded by general revenue.
Now you might say that those programs would be protected if legislators today and in the future simply voted to protect them. However, providing a separate stream for revenue for these programs does make it harder for legislators to make cuts to those programs, for both structural and political reasons.
If the government chose a different funding mechanism for Social Security, road improvements, or river cleanup, would that substantially alter the overall budget picture of the government? No, there is no impact on the fiscal health of the country either way. Nobody is arguing otherwise.
What is different is that in the future, as the Trust Fund needs to draw down to pay future beneficiaries, there is a guaranteed source of funds for those benefits so long as there are assets in the Trust Fund. If there were no Trust Fund, there would not be a guarantee of funding for any benefits at all.
To say it another way: with the Trust Fund, we have a way to track the health of the Social Security system and whether it is sustainable or not. So long as we can project how much revenue comes in through FICA, and how quickly the Trust Fund is drawing down, we know with decent confidence that Social Security will be solvent until (x) date. If there were no FICA tax, and there no Trust Fund, there simply would be no issue of solvency of the Social Security system. There would be no way to objectively measure when Social Security runs out of money, because it would be just as senseless a question of asking, “When does the Department of Defense run out of money?” Well, never. DoD funding may go up and down, but it will never “pay for itself” nor can it “run out of money.” DoD is simply one of a kajillion government programs that competes for annual budget resources, and solvency has nothing to do with it.
Personally, I think it makes sense to measure the solvency of a program like Social Security by insuring it has its own revenue stream.
