Depends on how you want to define investment. From the point of view of SS, it is earning interest, and can be compared with alternative investments made on the outside. From the point of view of the government as a whole, it is moving money from one pocket to another. Take your pick. The important thing is that the number of bonds sold by the government in a year is the same whether or not SS buys any.
I’m not saying it is doing great. There is pretty much universal agreement that the program needs some sort of modification, in additional revenue, reduced benefits, or both. That is demographics and the fact that the economy this year and last is significantly worse than forecast. None of it has anything to do with the safety of the trust fund or government debt in general.
Actually, the best thing would have been to do what any investment advisor would recommend – diversify. T-bills, but also foreign gov bonds, corporate bonds, and even equities.
T-bills are probably the single safest investment you can make; it does not follow that a portfolio comprised wholly of T-bills is the safest possible portfolio. A diversified SS portfolio would be safer, and would have dramatically increased the performance of the fund, while lessening the eventual impact on the general budget, and (possibly) creating a bit more pressure to balance the budget in the meantime.
Whenever this has been suggested, though, it’s been demagogued as “too risky.”
I agree with all of that (and my “pick” is to look at the whole government position).
You seem to have neglected that SS has an independent source of revenue, which you boat fund does not have. Say when your kids are little you’ve published a successful book, which gets royalties every year. You decide to save that money for their college. It goes into a safe savings account, paying, say 2% interest. Now, you want to buy a house. Instead of going to the bank and paying 5% interest, you borrow from your college fund and pay it back at 3% interest. You win, the college fund wins, and, assuming that you are as good a credit risk as the government, there will be money in the account in time for college. The money in the college account is not there anymore, true. It has been spent. But it is not there in the bank account either. It is only an asset because the bank is a safe depository of the money, and if you are as safe (which we will assume for this hypo) the asset of the note for the money which is now part of the college fund is just as safe.
sigh T-bills alone are the safest possible portfolio. It is not the highest returning portfolio - which is actually repeating myself. In our personal portfolios we diversify to balance risks and return. The decision was made to go with safety, not return. Disagree if you will, but don’t call it less safe.
The idea that you could invest in instruments that were both perfectly safe and high yield is exactly the cause of the meltdown. If someone offers you an investment with 10% return that is absolutely safe, he is either deluded or lying. That’s investing 101.
True enough - I was being imprecise in referring to them as T-Bills. I don’t think it really makes a difference to the question at hand. As you point out, redeeming them will just cause them to be replaced by Treasury with standard issue T-Bills.
The main point, and the answer to the OP’s question, is that SS has, if anything, a positive effect on the year-to-year federal budget deficit, at least for the next few years. And that the SS Trust Fund has no effect on the overall level of US debt.
The concern, and why people are hammering on about this, is that many many times people with ulterior motives have attempted to “write off” the SS Trust Fund as “not real money” in an attempt to make the program as a whole look extremely weak and unstable. Their motives have always been to either significantly curtail the program, make it optional, convert it to private accounts, or any number of schemes to ultimately undermine its role as a social safety net.
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This assumes a plan to repay principle and interest in time for my kids to attend college. The government has no plan to repay principle at all, so in this hypo, the college fund would still be empty with me borrowing more money to make the tuition payment each semester. There is no college fund. There is simply a promise that I will pay for my child’s tuition, which is no different than never having a college fund in the first place.
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SS has an independent source of revenue just because that’s the accounting trick that is used. I could say that my boat money comes from my wife’s $200k/yr job and our home/food/utilities/car payment money comes from my $10k/yr job. Then I could point to my well-funded and responsibly cared for boat fund while lamenting the severe deficit in my home/food/utilities/car payment fund.
Just reshuffle the names on the various taxes that the federal government takes and redirect the funds to different departments. Then magically some of those other departments have “independent” sources of revenue. It’s still X% that comes out of a person’s paycheck. Just because you call it a Flobgomber tax and direct the funds there doesn’t mean that the Flobgomber Department is running independently, efficiently, and is well off financially.
Wrong on both counts, but thanks just the same. The Federal budget, in the aggregate, is what it is. Funds are fungible. Anyone who suggests otherwise is playing accounting games. Even if you believe that, right now, at this point, SS revenues are less than the current obligations.
Second, the Trust Fund doesn’t purchase bonds. It issues its own non-marketable IOUs. When those IOUs become due, they do not magically transform into greenbacks. The government can pay them off from a phantom surplus that exists at that point, by raising taxes, or by issuing new debt. The notion that Treasury issues are unrelated to the government’s need for funds (for example, to fund SS IOUs) is, well, ridiculous. The volume of bonds issued varies directly with the government’s need for funds. Worded differently, if there is no SS indebtedness, there will be fewer Treasury instruments issued. That is, less debt.
Huh? Canada buying our bonds increases our debt. If we issue debt, amazingly our debt increases. If Canada issues debt, our debt level is unchanged.
And in any of these characteristics, they differ from bonds how, exactly? Bonds don’t “magically transform into greenbacks” either. The principal is repaid either because the government has cash (because taxes are sufficiently high) or because the government has issued new debt.
While the Treasury does issue special bonds to sell to the trust fund, you’re buying into some sort of weird fallacy about what triggers those issues. The notes the Treasury sells to SSTF exactly offset any actual Treasury bonds the Treasury would issue. That is why the total federal deficit is the general fund deficit less any “IOUs” (to use your term) purchased by the SSTF. By giving IOUs to the SSTF, the Treasury needs to issue less debt to the public at large to cover its operations, as it is able to redirect payroll taxes to cover some of them. Issuing IOUs doesn’t increase the Treasury’s debt obligations, it keeps them exactly the same; instead of those obligations being solely met through Treasury bond issues, they are partially met through borrowing money from the SSTF.
I don’t know how else to say this: if the Treasury wasn’t borrowing money from the SSTF, it wouldn’t magically have to borrow less. It would just be borrowing more in the form of T-bills.
Edit to add: suppose the government were running a surplus (on budget), and the SSTF had a surplus to invest as well. The government wouldn’t just decide to go into debt in order to borrow money from SS. It would either a) lower taxes so that the net federal deficit was 0 (this is what the Greenspan commission enabled Reagan to do, although the deficit was decidedly not 0) or b) replace maturing T-bills with SSTF bonds, rather than conducting more Treasury auctions. And before you object: Treasury auctions will continue apace even if the government is running a surplus, since that’s the only way to pay back the principal associated with maturing debt.
Ack – you’re interchanging cause and effect here, or, at least, being very sloppy with the language. Our debt is our debt, and we can cover it either by printing money or by issuing bonds. We don’t issue bonds in order to increase our debt.
I think this sloppiness caused you to miss Voyager’s point: it’s not as if Canada would walk up to Geithner and say: “We want Treasuries,” to which Geithner would respond: “Sure, let me go into debt so I can sell you some.” The US is already in debt. It already has a deficit. Geithner is selling the Treasuries whether Canada wants them or not. Canada buying them instead of China, or Grandma down the street, or your bank’s money market fund, does not change the amount by which the US is in debt. More to the point, Canada buying them instead of the SSTF offsetting them doesn’t increase our indebtedness, either.
It occurs to me that I was a little sloppy with language in the previous post. I meant to say: “Our deficit is our deficit, and we can cover it either by printing money or by issuing bonds.”
They don’t differ. I was just describing the process. The Trust Fund essentially delays the sale of marketable bonds. So what?
I’m not sure whose point you think you’re making here. Yes, the government gets to spend money that it would otherwise have had to finance with bonds. Assessing the debt in the SSTF as something substantially different than debt is a creative exercise indeed. But in any event, the money is gone, a debt is incurred, and at some point in the future, bonds will likely be issued. It is as certain as the tides.
Yes! Yes, that’s correct! So now we get to call the very real obligation in the SSTF what? A “kind of debt”? Does that let us sleep better? It’s a debt. You’re falling into the obvious trap of actually believing the accounting magic that says the SSTF does not increase our debt, through the magic of creative and arbitrary accounting.
No, it’s not the only way, particularly not in a budget surplus. Why is this such a popular fiction? Treasury issues do not “continue apace” at some immutable level regardless of the government’s need for funds.
You are repeating my point, and not the first person in this thread to do so, apparently thinking you’re contradicting me. If the U.S. issues bonds, its debt increases. Period. It doesn’t matter which non-Treasury party buys them. We don’t issue bonds to increase our debt. We issue bonds and in doing so increase our debt. Any decision we make that leads to the issuance of Treasury instrument increases our debt. That’s all.
We are in complete agreement as to what you’ve just written. Well, almost. Everything up to your penultimate sentence. It is absolutely possible to issue additional Treasury debt instruments without increasing our debt. This happens all the time when additional Treasuries are issued to cover the principal of maturing bonds. It happened in 2000, when the government ran an on-budget surplus and the federal debt decreased. Treasury auctions still happened, new Treasuries were issued, and, importantly, the SSTF continued to buy debt instruments.
It does not follow from any of this (either the parts we agree on, or the parts we disagree on) that the SSTF is in any way “fake” or full of “IOUs” that differ in any meaningful way from other Treasury bonds. Specifically, the SSTF buying their particular non-negotiable instruments does not lead to the issuance of new Treasury debt that would not have been issued anyway. It does not increase our indebtedness relative to a baseline where SSTF bought, say, commercial paper, instead.
Edited to add: One could imagine a world where the US had no debt and ran a surplus, where the SSTF would have no way to buy US government debt. But we are far from that world, and, in fact, that’s probably not a world we want to get to. The Treasury will almost certainly always maintain a market for Treasuries, at the very least so the Fed can conduct open market operations.
MilTan, what you’re saying is true. You understand that Social Security is a government expense that has to be paid for. But if you read through this thread you’ll see a lot of people aren’t grasping that. They think that the future growth of Social Security has already been paid for and the money will be there waiting for us - and that’s not true.
Here’s the reality - we’re collecting SS taxes in 2011 for 2011 expenses and 2031 expenses. But we’re spending all of it in 2011. When 2031 arrives, there’ll be no money from 2011 available and we’ll have to collect all the money we need for 2031 again.
So Social Security affects the deficit the same way a plan to build an American state station on Mars would affect the deficit - it’s be a big expense that we’re going to have to pay for at some point in the future.
Actually, investing 101 includes “diversification,” and it’s not merely for yield, it’s also for safety. With T-bills, the chance of default is miniscule, but the yield is so low that it’s possible for it to be eaten up completely by interest. Especially since the reason t-bills are safe is because the government can print its way out of debt, a hedge against inflation makes the overall fund safer.
The government will borrow most of that money, raise some of it in taxes and perhaps not spend more on defense than almost the rest of the world. Oh and medicare reform. What people keep missing in these SS debates is that SS is peanuts compared to medicare/medicaid.
It shows that social security is paying for itself. Its not a primary driver of the deficit.