Social Security and the Deficit

Great Debates
101

Whether the federal govrnment is spending general revenues wisely or not, is irrelevant to the whole SS-fund-as-bonds argument.

the analogy I like is, “is the federal government borrowing money to buy a house (investment) or borrowing moeny to buy groceries?” Building roads, bridges, air traffic control systems, subways in big cities - all these add value to the economy that has very long term value, long after the money is spent. Financing education? you are straying into debate territory, simple answer is it depends. Borrowing to pay welfare? Recipe for disaster.

Sorry if this is straying into GD territory, but the probelm is this - it is a good idea for the government to deficit-spend during bad times to prop up the economy, but this Keynseyan doctrine has been re-interpreted by politicos that they have a license to spend, and the occasional surplus (like Bill Clinton’s) seem to be more an accident of good times than government policy.

As the saying goes, “if things can’t keep going on like this… they won’t”.

So the current arrangement is a simple one - the SS fund is a separate entity/pocket/account/whatever. As long as the government reliably pays back its loans, those bonds are good and SS has nothing to worry about except demographics.

however, the feds are quick to add spending and slow to stop it. SS has become as much a welfare payout for the poor and disabled as it is a real pension plan and politicians with a 4-year time frame (or 2 years) are happy to buy votes and let someone else deal with the consequences 10 years later.
but the problem is a different one - SS is the least of the problems, since all the money the government borrows goes into other spending. The SS fund is just the enabler, making it far easier for the government to borrow.

over time 2 things will happen:
-the pool of easy funds will stop being avilable as demographics change.
-the government will either have to spend responsibly, or use inflation to reduce the cost of past debt.

the chance that the government changes the rules is always there. Reducing payouts is politically difficult but can be done; I’m sure with the right incentives, the states will agree to a constitutional change too (we’ll give you the right to cancel your debt…).

(The first step to reducing debt is clawback from people making progressively lesser decent incomes. Once the SS payout is irrelevant to the middle class, they don’t care what the government does with it.)

however, all that is irrelevant to the discussion at hand.
the simple answer is this:
-if you account for the Social Security fund as a separate entity, then the bonds are meaningful.
-if you are talking “total for all govenrment spending” then the bond as asset and liability cancel each other out, yes.
-government spending outside SS is counted as a separate entity - and that entity would have the same issues whether they borrowed from the SS fund or the Chinese. The difference is the fund is a much more friendly and easily manipulated lender if it come to the crunch.

102

I think you are completely missing my point. I’ve given a number of hypotheticals to explain my point. In the real world the bonds in the SS trust fund are an asset. The money used from the purchase of those bonds was spent on things not related to SS. So now you have an asset that is backed by nothing but the full faith and credit of the US government. Not to suggest this is worthless but this is hardly a tangible asset. It just means the US will make good on it’s debt somehow. Thus, the bonds in the SS trust fund represent a liability to the government as a whole even though they are an asset to the SS trust fund. Considering the SS trust fund an asset seems to be nothing more than an intragovernmental shell game.

103

Okay. So if the future cost of the social security fund will be the same, then would you agree no investment towards future cost is being made in the present? After all, if we were presently investing money towards our future costs, then our future costs would be lower.

104

I disagree. I agree that funding for the Social Security program is legally separate from other government funding. But it’s functionally the same. Funding for social security and other government programs are all ultimately coming from the same source.

I understand your point about dedicating certain streams of tax revenue to certain programs - for example, having a specific tax that funds social security.

But it’s not happening. As you’ve said, the future costs of social security will be unchanged by present social security taxes. So the excess social security taxes we’re paying in the present are not being used to pay for social security costs.

105

No, you’re using “investing in future costs” in an overly liberal way. There’s no way to lower future Social Security costs today. Even if there were a windfall into the Social Security system today, it would do zero to lower the cost of the program even next year.

Since the cost of the program are based on how many people are claiming benefits each year, the issue is how to shift assets in time to meet future needs. No matter what funding mechanism is used – FICA, income taxes, lottery tickets; whether the system is on or off budget, or whether surpluses go into personal accounts, the stock market, or they buy bonds; there is literally nothing than can be done to lower future program costs other than reducing future benefits. The only question here is if, and how, we store current assets for the time needed before they will be paid out for future benefits. The method used today, buying bonds, is literally the textbook definition of investment.

No, it isn’t functionally the same. The General Fund in the Treasury can be used for almost any purpose. The Trust Fund can only be used for one purpose, and it can’t be “raided” in any factual way. Once an asset goes into the Trust Fund, it can only come out for one reason: to pay benefits.

If you want to insist that all government revenue comes from the same source, taxpayers, I’ll stop arguing with you. Yes, virutally all revenue comes from taxpayers. Fine. Let’s forget the gas tax: that comes from taxpayers. Let’s forget excise taxes: that comes from taxpayers. Let’s forget corporate income taxes: that comes from taxpayers. And of course, let’s forget payroll taxes: those come from taxpayers. We are both right, and left with the unprofound conclusion that you say all taxes come from taxpayers, I saw that excise taxes are different than payroll taxes. We’re all geniuses.

But… FICA has always first gone to current benefits. Always. So Social Security taxes have been used for current Social Security expenses in the past, and FICA will totally go to Social Security benefits in the future. Every single cent of them, in fact, until things change and surpluses return.

106

The most glaring aspect of all this is so simple I don’t understand why people miss it.

We raised taxes to increase the SS trust fund for the future retirement of baby boomers.

The baby boomers are retiring and we are now faced with find more tax money to replace the money in the SS trust fund that was supposed to be there but isn’t.

No investment works this way. You never put the money in twice.

Everything changes on an IOU when the name of the loaner and the name of the borrower is the same. It is no longer anything of any significance. It’s not a loan, it is not a debt, it is not an investment. It’s nothing at all. That is one of the many reasons it is not the same as investing in a company bond or some such.

107

The payback for bonds sold by SS to the government’s general fund, are figured into the current requirements for non-SS spending. Despite teabagging doomsayers, the feds are nowhere near the point where they cannot afford to pay the money back to the SS fund. They are NOT at the euro/Greek level of financial meltdown. Actual debt repayment and interest - including the allegedly imaginary bonds - is much less than 10% of the budget - 4.63%of spending in 2010 according to Wikipedia if the 20% for SS is included.

This is not to say they can’t make it to Greece if they fail to show some restraint over the next decade or three. (Like the joke about the multimillionaire whose accountant tells him “You playboy son blew $200,000 gambling last year! How long do you expect he can go on like that???” The fellow thinks, then replies “About 85 years…”)

Current calculations suggest that it will take 30 years (assuming the government repays itself those bonds as the constitution mandates) before the fund has a problem, and any number of modifications - raise the tax a bit, reduce payments or COLA changes, etc. - can stop that problem.

108

I don’t think the point being made is that the government will not pay back the SS funds. Many here are claiming that the bonds held by the SS trust fund is an asset when, in fact, they are a debt owed by the government. I don’t see how something can be considered an asset for one part of government, a debt for another part, as well as a debt for government as a whole.

109

That’s not only not how governments work, it’s not how businesses work, either.

Our division of the company does business with external clients. We also do the same sort of work for a different division of our company. By rule we currently charge them cost + 25% for the work (it used to be strictly at cost - the rule change was to bring us in line with the rest of the industry).

For purposes of profit/taxability issues, that money is counted as income for our division and a cost for theirs. Our division is profitable. Theirs is not currently profitable. That makes an immense difference when it comes time to discuss spinning off divisions or determining where to save money or spend money. It also makes a difference in tax computation and bonus money for employees.

And yet the same person/company writing the check is the same person/company cashing it in these cases.

110

You’ve already acknowledged this isn’t true. Money collected by FICA taxes is being used to fund Social Security - but it’s also being used to buy treasury bonds. Once that money has entered the treasury, it’s just used as general revenue.

But you’ve already conceded the money isn’t being stored. When we need to pay for those future benefits, we’ll have to collect taxes to do so.

It’s an important point. The argument used to justify this whole program was a supposed looming crisis in the social security program. We were supposedly facing a situation where there were going to be too many people collecting social security and not enough people paying into the program.

So explain how the problem has been solved. If future taxpayers weren’t going to be able to fund social security through FICA taxes how are they going to be able to fund the treasury bonds that will supposedly be used to fund social security instead? Putting a different name on things won’t change the amount. If FICA taxes were going to be too large to be sustained, then other substitute taxes are going to be too large as well.

111

Say Canada had as many people as we do and a similar retirement program. The surplus for each country is identical. We put our surplus into buying Canadian government bonds. They put their surplus into buying US government bonds. Is that situation storage of the money in your eyes? Is it any different in principle from what we have today?

112

You’re missing one aspect. Let me illustrate with a bad Monty Python sketch:

Let’s say The Taxpayers go to Uncle Sam’s Bridge Building and Pension Company, Inc and say: “We would like a bridge. How much will that cost?”
US: “$1 million”
TP: “OK. How much for a bridge and a pension plan?”
US: “$1 million”
TP: “Um… The same price? How does that work?”
US: “Simple. I’ll use the $1 million to build the bridge and I’ll give you a $1 million bond promising to pay your pension.”
TP: “Well, a bridge and a pension for $1 million sounds a lot better than just a bridge for $1 million, doesn’t it now? I think we’ll take that.”
US: “Excellent. I’ll start the paperwork.”

30 years later…

US: “Hello. How can I help you?”
TP: “We’d like our pension now please. Here is our bond.”
US: “Very good. I’ll need $1 million please.”

This illustration isn’t quite accurate since “The Taxpayers” in the first part is not exactly the same group of people as “The Taxpayers” 30 years later and Social Security tax payments go to fund current benefits with only the excess being invested in bonds.

There is no free bridge, of course. You aren’t paying twice for your pension. You are paying for that bridge and paying for the pension. When the bonds were issued, taxpayers wanted a bridge, but didn’t want to pay for it. Taxpayers 30 years later are paying for the bridge under the guise of paying off pension obligations.

But unlike in my example, Uncle Sam is becoming reluctant to ask for the $1 million needed to pay off the bond. Unlce Sam is kind of hinting “Gee, you don’t really need a $1 million pension, do you? You could do perfectly well with a $900,000 pension, couldn’t you? How about if I exchange that $1 million bond for $900,000 plus a $100,000 bond?”

113

No, “it” is not paying for “itself.” I am paying for retirees. When I retire in 40 years, there will be no one to pay for me. That’s the alarm.

Hold on to your hat, it’s worse than that! Today, in 2013, there are but 2.8 workers per SS beneficiary.

The problem is you say “nowhere near” and then you say 30 years. 30 years is right-fucking-now in terms of taxation and retirement! 30 years is practically today.

Right, exactly. Any number of modifications, like raising the retirement age to 68 so those old geezer baby boomers actually work long enough and die soon enough that people like me aren’t paying for their Orlando golf resorts.
Naturally, though, the baby boomers are going to rabidly resist any change to social security while they’re still alive and leave the Millennials holding the bag. Once they’re all dead and I’m about to retire, it’ll all of a sudden become imperative that we raise the retirement age and means-test the system. “Gee, we’re real sorry about that, Millennials, but all the people who made out like bandits are already dead. What are we supposed to do now?”

I’ll say it again - 30 years is practically today. We need to fix it today so old people can’t screw me over.

114

Moderator note:

Try to use Teaparty instead of a disparaging term like teabagger.

samclem, moderator

115

The SS trust fund isn’t going to run out of money in 30 years. It has run out now. Regular US tax dollars are starting to be used to fund SS. The original SS tax dollars that was supposed to be used at this point are gone.

No one takes the “run out in 30 years” line seriously anymore. Once the regular budget started helping to pay SS, people finally got the point.

Another example:

Rufus T. Firefly, the newly appointed leader of Freedonia is going over the country’s books on behalf of the wealthy patron Mrs. Teasdale.

As a first pass, he is putting things into two piles: debts and assets. He has a bond from Sylvania made out to Freedonia so he puts that in the asset pile. He has a paper noting that the Bank of Chicolini holds some Freedonia bonds. That goes into the debt pile. Everything is fine until …

He sees that there’s a $2 trillion Freedonia bond currently held by Freedonia. Where does Rufus put it? It’s not an asset since it’s a Freedonia bond. But it’s not a debt since Freedonia is the payee.

If it’s not a debt or an asset, what is it?

Rufus dithers for awhile. Eventually he goofs up and his cigar catches the bond on fire and is completely consumed. This was the only record of it.

Rufus wonders? How does this affect Freedonia’s finances?

It doesn’t. It was never a debt or an asset in the first place. It was worthless.

116

Oh my. I had a pile of banknotes I was about to use to buy a pickup, but decided to think on it for a few weeks. I put the banknotes in my bank account.

When I went to buy the pickup a few weeks later, the original banknotes that were supposed to be used were gone. :frowning: I had to withdraw new ones from the bank account.

I’ve asked the following question before, but the Ponzi worthless-self-debt faction has never produced an answer. I’ll give you guys one more chance. (The reason for the question is that analogies are useless unless they’re purposeful; I’m assuming you think the self-debt analogy has some prescriptive value.)

If the “self-debt” U.S. Treasury bonds were ill-advised, what alternative “should” SSTF have invested in?

In trying to answer the question you may come up with answers like “The non-SS portion of U.S.Government shouldn’t have been running a deficit in the first place.” Such answers may be worth debating. But they have nothing to do with SSTF’s decision to buy U.S. bonds instead of Zimbabwe bonds. (The Zimbabwe bond example is a place holder for illustration – “your team” still hasn’t figure out what alternative investment you espouse.)

117

It hasn’t been established that the government should be trying to make investments. So arguing over a method is premature - and like the risk issue, it would would be a diversion off the important topic.

Which is that regardless of whether or not the government should be investing, what they’re doing now is wrong. They’re collecting money from us for the alleged purpose of making investments and then they’re not making those investments.

Depending on whether or not investing is a good idea, the government should either start making real investments or stop collecting money for supposed investments.

118

Government investments would be the topic of a different, more complicated and more interesting thread. That’s not what we’re talking about in this subthread. We’re talking about what the SSTF should do with the surplus it accumulates. Apparently the word “invest” throws you off, but what should the SSTF do with its surplus? Keep banknotes under a mattress?

You seem to suggest that SSTF shouldn’t accumulate a surplus, that the tax rate should be lowered to break even in any year. This will come as a big surprise to those with knowledge of the impending Baby Boomer Retirement – their worry is that the accumulated surplus is too small, not that it exists at all! :smack:

119

Those of us with more knowledge are even more worried. Because we know there is no accumulated surplus. So if the problem is that the accumulated surplus isn’t large enough, then yes, I agree zero is too small.

And you’re also right that apparently this is going to come as a big surprise to some people. No doubt they’ll complain that somebody should have explained the situation to them back in 2013.

120

Keep in mind that this is a misnomer. The SS Trustees make no decisions as to what to do with the SS tax surplus; they have no authority to do so. The disposition of those funds is directed by Congress.

You’re not getting a satisfactory answer because it’s not a meaningful question. It’s not that depositing the surplus into Treasury versus sending it somewhere else is a good or a bad thing; it’s that it doesn’t matter. The SS tax is a federal tax like any other. It was created by Congress and the funds that it brings in are wholly in the control of Congress. Just like with the funds gathered from the income tax, it can spend that money on anything it wants right now, or it can pay off past borrowing, or it can hold it in the Treasury or anywhere else for future years. It buy stuff with it, borrow against it, or bury it and budget around it. This is as true for SS tax money as it is for income tax money. There is no more significance to the SS tax being deposited in the Treasury than there is to the income tax being deposited there, and no more significance to the payment of SS benefits than there is to the payment of any federal budget item.

What this means – what we keep coming back to – is that there is no relationship between the amount of SS benefits paid in any given year and the amount of bonds held or redeemed by the TF in that (or any other) year, just like there is no relationship between the amount of SS benefits paid in any given year and the amount of SS tax taken in. Congress will decide on the amount of SS benefits to be paid (or will allow previous decisions on benefit levels to persist) in any given year based on the political goals and financial constraints faced by the entire federal government in that year. The amount of bonds held by the TF is now and will in the future be entirely irrelevant to that determination, whether they’re earning interest from the Treasury or the Bank of Zimbabwe.