Social Security Money Piled Up Somewhere?

[Gfactor]

@js_africanus

You are using a bad analogy—it is not like that at all. If an individual buys a bond from the government, then it is an investment. It doesn’t stop being an investment because some subset of the government borrows from another subset. The money paid for the bonds is used for spending on the items worked out by the executive and legislature. The notion that the money can just sit in Scrooge McDuck’s basement is a non-starter.

Well now, perhaps you are right. The money can’t sit in McDuck’s basement because if McDuck were a trustee, he would have to invest the money like a prudent investor. And he would have to invest it for the beneficiaries of the trust. That would mean that he would have to earn interest for the trust beneficiaries–not cause them to pay interest. And while volatility is *a * factor in prudent investing, it is not the only factor. For instance, Mr. McDuck might put the money into a bank account (or if he were concerned about the risk of a bank deposit–numerous bank accounts with balances below the FDIC limit). That way the bank would pay interest on the deposits. I’m sure, an experienced trustee could find other low-risk investments that have a higher yield than a savings account, but I’m trying to keep it simple. Because, after all, it is simple.

Why has Mr. McDuck instead invested in bonds that must be repaid (indirectly) by the trust beneficiaries? Because he is not really acting as a trustee at all. Remember, he is Scrooge McDuck. Mr. McDuck wants to borrow the money for his own use–not invest it for the use of the trust beneficiaries. And that’s what he does. He borrows it, spends it in a fashion that he finds prudent, and leaves a T-Bill in the safe. The T-Bill is a promise from the trust beneficiaries to repay the money that was put in the trust, with interest. Is this an investment that benefits the trust beneficiaries? What do they gain?

What confuses most people, IMO, is that we call it a trust, and yet its trustess do not follow the rules for trustees. And this business about the need for low-risk investment just does not make sense.

[Omphaloskeptic]

@js_africanus

@Gfactor

If it were an investment, yes. But its not really an investment. By replacing the cash with T-Bills, we have borrowed from future taxpayers, who will have to come up with the money to satisfy the T-Bills. So it’s more like taking out a mortgage in your children’s name, and then spending the money on some cool guns.

You are using a bad analogy—it is not like that at all. If an individual buys a bond from the government, then it is an investment. It doesn’t stop being an investment because some subset of the government borrows from another subset. The money paid for the bonds is used for spending on the items worked out by the executive and legislature. The notion that the money can just sit in Scrooge McDuck’s basement is a non-starter. Investing it in private bonds entails more risk. Investing it in government bonds means that some of today’s money is going to fund things like schools, infrastructure, police & defense, and so on. While you may consider those to be the equivalent of “cool guns,” their equivalence is neither a fact nor a factual explanation of the Social Security system.

I think Gfactor’s analogy is pretty good. There’s a big difference between an individual buying a few T-bills, and the government buying billions of dollars of them and expecting to finance large portions of future budgets with them. The problem is that most government expenditures are not good investments in the financial sense of being useful to support a future debt. The largest federal budget expenditures are transfer payments to individuals, interest payments, and defense funding. Defense expenditures, though they may result in new tech spinoffs, are mostly used to buy depreciating materiel rather than capital goods; they are not good financial investments. (This is not an argument against defense spending. You don’t have an army to make money; you have an army so that nobody else steals the money you have.) Interest payments are paying for past expenditures. Transfer payments only move money around and don’t create new capital either. (Schools and infrastructure are, I agree, good examples of capital investments, but they are a pretty small fraction of total expenditures.)

If I take my last $50 out of my piggy bank and put in an IOU, there are a number of things I can do with that money. If I buy a textbook (capital outlay) and learn to be a webmaster, increasing my productivity, then I can hopefully make more money and repay the IOU (“investment”). If I do something less productive like go out for dinner (consumer outlay), I will have more trouble repaying the IOU (now not really a very good investment). Note that “past performance is no guarantee of future results”: Even if I have always paid my IOUs before, the important thing in determining how likely I am to pay them back this time is how I invest the money this time.

The situation is plain and requires no false analogies from the “rightwing news” to make it more clear. The Social Security administration sets aside a portion of the payroll tax to fund future projected shortfalls. Since hoarding means a guaranteed loss, and since private investment vehicles are risky, it buys bonds from the Treasury. These bonds pay back to the Social Security administration according to a set schedule and set amounts—because they provide a reliable future income stream they are investments. That is very simple to understand.

No, it’s not quite so simple as this. There’s no law of nature that says government bonds Will Be Repaid. Governments have defaulted before, and they will probably continue to do so. The income stream is only reliable until the government defaults. And I don’t think the “government=no-risk/private=risky” dichotomy is very good. A balanced mix of private investments can have very low risk, much lower than (say) Orange County bonds have lately exhibited. I agree that hoarding is not a good macroeconomic solution; with these amounts of money, I’d expect that to be deflationary. The financially-sound solution is to make enough capital investments that their appreciating value will allow repayment of the debt. This is not a government/private dichotomy; it’s a distinction between buying consumption goods and buying capital goods.

What is apparently difficult to understand is the fact that it is so simple. I suspect that many people are consternated by their ability to grasp what they think must be very difficult, that they construct elaborate conspiracies and shell games to ease the dissonance between their expectations and their beliefs.

Yes, anyone who doesn’t agree with you is either a conspiracy theorist or an idiot. Excellent argument. I’ll just go get my tinfoil hat now.