You’re right – that is a perfectly acceptable alternate funding model for SS. What’s your point?
So we have a clear record of the amount of money the middle and working class have devoted to subsidizing lower tax rates for the rich over the last 30 years.
Wow, I thought we were making progress, and then Nemo and jtgain show up with more innumerate nonsense.
The idea that someone can call US T-Bills “not real investments” or claim that the T-Bills in the SS Trust Fund can’t be sold (unlike every other debt instrument in the world, apparently) boggles the mind.
Here is the question I want answered, just once, by Shodan et al. Suppose that tomorrow Social Security is voted out of existence. All T-Bills owned by the Trust Fund are sold on the open market and all proceeds are payed out to every American over 18 in equal share. All future liabilities are declared null and void. Is the US budget deficit for Fiscal Year 2011 larger, smaller, or the same?
SS won’t be cashing them in wholesale, either. In fact, unlike China, SS will be cashing them in in relatively predictable amounts. That sounds like a good thing to me.
And let’s clarify a few things. Treasuries have fixed maturities. What does it mean for China to “keep them and take the interest payments”? It means that when a particular issue matures, they will simply buy a new bond. In other words, one bond “goes away” and the US sells a new bond to cover the principle, that China then buys. Exactly the same thing can happen with the SSTF: when the bond matures, it “goes away,” and the US will just sell a new bond. It makes no difference whether or not that bond is sold to the SSTF or to someone else[sup]*[/sup]. Again, for most practical purposes, it makes no difference to the US government, or the American taxpayer, whether the SSTF holds a particular bond, or whether China holds that bond. All that matters is the total amount of bonds outstanding.
[sup]*[/sup] Provided there is a buyer. But this is merely a matter of their being enough demand for T-bills. This is one of the true effects of the SSTF investing in T-bills rather than, say, Australian bonds: it boosts demands for T-bills in the present.
[quote=“L. G. Butts, Ph.D., post:58, topic:572042”]
[li] The US government debt is the sum of all the bonds it has issued. This includes the bonds sold to the SS trust, the Federal reserve, and China. The fact that social security has been running a surplus has NO EFFECT on the debt calculation. If social security operated hand to mouth and the government instead sold the bonds to Saudi Arabia, the debt would be exactly the same.[/li][/QUOTE]
You are correct as to the total change in US debt, but incorrect as to the figure that is commonly referred to as the federal deficit. In general, the Treasury does indeed distinguish between “debt held by the public” and “intergovernmental debt.” T-bills sold to China are in the former category and T-bills sold to SS are in the latter. The figure commonly reported on as the deficit is lower than it otherwise would be because the SS surplus is counted as an offset. The total change in US debt, however, would be the same either way.
[quote=“L. G. Butts, Ph.D., post:58, topic:572042”]
[li] In 2015, Social Security will stop running surpluses; the amount collected in taxes will fall below the amount that it is paying in benefits. This is not too much of a problem as the bonds that the social security trust fund holds is enough to keep it solvent (with no raise in taxes or decrease in benefits) until 2037 at which point it will have sold all of the Treasury bonds it holds or had them paid off and it will either have to raise Social Security Taxes or lower benefits. It cannot run a deficit as it is illegal for it to borrow money…[/li][/QUOTE]
This is all true. However, the figure reported as the overall federal deficit will be rising because the offsetting SS surplus will be lower.
Larger, according to what Treasury generally refers to as the federal deficit. The overall change in US debt, however, stays the same.
Then it will pay 80 percent. It can and should be tweaked to make it work at par again. Even then it will not be adding to the debt since it was made that way by law, when it was created.
I think I understand the source of the disconnect. I see the problem with the government borrowing and spending money. It is bad, short sighted, and is going to put all of us in a world of hurt if we continue to behave this way. But this really has nothing to do with where social security invests its money. It has nothing to do with where China invests either. If social security did not invest in US government bonds, they would either have to keep the surplus in a warehouse somewhere (where it would be devalued by inflation) or invest in an (arguably riskier) vehicle like corporate bonds, mortgage backed securities (where the EU invested a lot of its surplus), or maybe a foreign government bonds. With the amount of money the trust fund has, it does not really have that many choices on investment strategies.
I guess an argument could be made that if the trust fund did not buy the bonds, it would have made it more difficult for the US to issue the debt, but I kind of doubt it. The US government over the last decade(s) was on a spending spree with the tax cuts, two wars, increased domestic spending (especially with Medicare and the drug benefit), TARP and the two stimulus bills, etc… The Republicans in control of the house and senate, with the approval of the Bush Administration, and the Democrats with the support of both Presidents Bush and Obama, had no problems issuing the debt and if the trust fund did not buy it, the interest rates on the bonds would have just increased until they became competitive with investments like mortgage backed securities and other people would have bought the bonds. This is not a problem with Social Security, this is a problem with the budget.
Chinese here is a placeholder for any foreign government buying our bonds. All bonds pay interest. Bonds held by SS go into the trust fund, and help fund retirement benefits. Interest on bonds held by the Chinese go to China, and fund, say, missiles aimed at us. If we had fewer bonds owned by SS, we’d have more owned by China, I assume, and thus more of the interest payments go to them. Or England, France or Greece, though mostly they don’t have extra cash to buy our bonds.
To be accurate, the Treasury is very careful to distinguish between the on-budget and off-budget deficit, but the general public is not at all careful. The number that typically gets thrown around in the media is the overall deficit, which represents federal borrowing minus any trust-fund purchases of bonds (which is why the media reported the government as being in surplus in 1998, even though there was an on-budget deficit).
In one technical sense, the SS doomsayers are correct: the total budget deficit will start to increase as the SSTF starts to be drawn down. This is because we will no longer be able to offset some of the general fund deficit with SSTF bond purchases. But if you want to treat the federal budget as a single, unified pool, it also makes no sense to talk about the “Social Security problem” as distinct from the “federal budget deficit problem.” And it makes even less sense to talk about bringing Social Security into actuarial balance as some problem isolated from the overall government’s finances.
I didn’t say that T-Bills are not a real investment. I said that when the government buys T-Bills it’s not a real investment. You can’t invest money by loaning it to yourself because the money you borrow is equal to the money you owe.
When China cashes in its bonds in 20 years, the ones which come due then, where is the money going to come from?
But, as we’ve said over and over and over again, the money you lend to yourself from the surplus reduces the money you have to borrow from outside.
The Trust Fund does not own T-Bills. It owns special securities issued by the government solely for purchase and redemption by the Trust Fund. These special securities cannot be sold on the open market. They can be redeemed when the SSA needs money to pay benefits. When they redeem them, the treasury has to pay the SS Trust Fund. If the Treasury does not have enough money to do so, then it will have to issue and sell bonds elsewhere, e.g. to China.
In that sense you’re correct, Social Security isn’t adding to the deficit except in the sense that any government obligation adds to the deficit. But realistically what’s happening is we have a huge future obligation that we’re pretending doesn’t exist. And when it comes due and we have to start paying it, we’ll become aware that the deficit is much larger than we’ve been pretending it is.
So I guess Social Security isn’t affecting the deficit. It’s our self-deception about how we’re going to fund Social Security that will affect the deficit.
Why can’t both positions be right?
Both look correct to me.
Hmmmm. I guess I was mistaken on some of my understanding. Pretty lame that they are counting the surplus toward the deficit calculation. Does not really change the overall picture though:
[ul]
[li]It is bad the government borrows so much money. [/li][li]If the trust fund did not lend it to them, someone else would (interest rates would rise because of reduced demand until someone bought the bond).[/li][li]The government cannot selectively default on the instruments held by the fund without throwing the entire world economy into chaos.[/li][li]The debt is the debt, and is independent of whether it is held by the Social Security fund or by someone else.[/li][li]Social Security is not that much of a problem (it is solvent for quite some time), the problem is Medicare, Medicaid, Defense Spending, especially Medicare. Actually, the real problem is that the government is willing to spend money it does not have. (Social Security DOES NOT fall in this bucket. It is not allowed to run a deficit, it MUST either cut benefits or raise taxes when it runs out of money.)[/li][/ul]
I expect that some of the bonds are being cashed in today as they come due. There always will be revenue coming in, so the amount cashed in will depend on the delta.
Now, you act like any depletion of the trust fund is bad. But consider the trust fund as analogous to your retirement savings, assuming you don’t have anyone you want to leave the money to. You have a surplus during your working life, and add money to your savings. When you retire, you get some revenue from interest and stuff,. but the difference between that and your cost of living needs is made up by reducing the amount you have in your retirement fund, and there is nothing wrong with that. If the surplus went on forever, even considering the baby boomer bump, SS taxes would be too high. You need to fund it from the trust fund and revenues, and not the general fund, forever, but there is nothing wrong with the surplus stored in anticipation of the retirement of us baby boomers being reduced. That’s why there was a surplus.
The hidden fear here, and perhaps the hidden agenda, is an implied assertion that the government won’t be able to pay off bonds for SS or anyone in 30 years. Is that the case for you? Let’s get this out in the open.
I’m just not seeing how this isn’t a three card monty accounting trick.
I could do it in my personal budget. I could live well beyond my means, but structure my different accounts so that my “boat fund” ran surpluses every year but my “food and shelter fund” ran massive deficits way beyond what was in the boat fund. In fact, I could borrow a little bit from my boat fund to buy food, replacing the money with bonds of course, and go to the bank for the rest. Saves me money in the long run by not borrowing it ALL from the bank, no?
But is it legitimate that when my wife comes asking to cut expenses to say that it’s not the boat fund’s fault? Should I say that it has been running surpluses every year? When it’s time to buy a new boat, can I just use the bonds from the food fund? After all, my word is good and those IOUs are just like money. Is my boat fund solvent? Should anyone who suggests that I might need a smaller boat next year or take on a second job to pay for the boat maintenance be dismissed as not understanding my economic system? Isn’t something else the problem other than the boat fund?
What is the difference between my hypo and what the feds are doing with social security?
No. I think we will still be solvent in 30 years. But, it’s dishonest to say that Social Security is doing great because of the trust fund that backs it.
No, the total budget deficit is exactly as large as we’ve been pretending it is. Social Security drawing down the trust fund will not make the deficit increase any faster than if we had always considered SS to be part of the overall budget and never built up the trust fund. As long as we’re careful to always talk about the same accounting value, the deficit you’re talking about is (ignoring the other trust funds):
(General fund balance of payments + Social Security balance of payments)
That number has always been equal to:
(General fund receipts - General fund outlays + Social Security receipts - Social Security outlays)
Note that the purchase or redemption of SSTF bonds does not figure into that equation. If you want to add them in, you can do so, but the numbers immediately cancel out. When the SSTF is in surplus, the identity (Social Security receipts - Social Security outlays - payments for SSTF bonds = 0) has to hold:
(General fund receipts - General fund outlays + receipts from SSTF bond purchases + Social Security receipts - Social Security outlays - payments for SSTF bonds)
When the SSTF is in deficit, all that changes is the signs of the terms “receipts from SSTF bond purchases” and “payments for SSTF bonds,” but they still cancel out.
In other words, if you want to talk about the total budget deficit, redeeming the SSTF bonds has no effect on the deficit.