What's the Argument That SS Affects Deficit

Great Debates
121

I don’t think anyone misunderstands that. I don’t believe there is anyone in this thread that has said that SS does not have a funding problem; merely that it’s not the biggest problem the government faces.

Not quite, because, as has been pointed out (accurately) in this thread, SS has a dedicated funding source. Even after the trust fund is exhausted, SS will collect enough money to pay out ~75% of scheduled benefits, in perpetuity (at least to the end of the 75 year actuarial window). The remaining 25% represents roughly (going from memory here) 1.5% of expected GDP. We currently have a budget deficit of roughly 10% of GDP; SS projected impact on the deficit in 2030 (which may well be wrong) is small potatoes. That is one of the points most people are making.

The other point people are making is that drawing down the trust fund is a perfectly reasonable approach for SS to take, as that is why the trust fund was established. I don’t know if you’ve made this particular point, but plenty of people in this thread have tried to argue that the trust fund is merely an accounting fiction, and hence we should worry about SS’s effect on our finances right now. I, personally, think that argument is a bit of flim flam mostly intended to screw over the middle class to the benefit of the wealthy.

Social Security affects the total federal deficit (for the past 30 years, mostly by reducing it), but not the on-budget deficit. A plan to build an American space station on Mars would affect the latter.

As to why this particular accounting practice matters, it’s because the implicit deal cut by the Greenspan commission in the 80s was for SS to finance the on-budget deficit for 30 years, in return for having its deficit financed by the general fund for the next 20. In particular, this means that any tax increases intended to cover SS’s withdrawals from its “imaginary” trust fund should come from income taxes, not payroll taxes. The SSTF represents more than a loan from Social Security to the federal government. It represents a loan from the working- and middle-classes to the upper classes. And that loan is coming due.

For what it’s worth, the SSTF is not currently being drawn down; SS receipts don’t cover SS outlays (though most of this discrepancy is due to the 2% payroll tax cut passed for this year), but SS receipts + interest do. The trust fund is still growing.

122

And to repeat for the umpteenth time in two threads: the SS Trust Fund is not invested in T-bills. T-bills are short term government bonds that pay low interest rates. Nowadays, the Social Security Trust Fund buys special securities available only to the trust fund. These securities pay interest rates comparable to Treasury bonds (longer term than T-bills, and paying higher interest). In the past, the SSTF could buy regular Treasurys - it bought bonds, not T-bills.

123

The instruments Social Security purchases are inflation-protected.

124

It will come from taxes not specifically designated for Social Security just the same way the money to pay off every other bond does.

125

As I stated earlier, the correct answers were given in previous thread(s) and are being made by some in this thread. If it wouldn’t sound snarky, I’d suggest that it would be illuminating to compare the math and econ credentials of those on the two sides.

But briefly: The Federal deficit is a real problem. The looming S.S. deficit (“Baby Boom Bust”) is a real problem. But what’s with the fantasy that substituting Canadian bonds for U.S. bonds in the SSTF portfolio would have any good effect? (Some scenarios have been proposed, e.g. if in future U.S. defaults on its debt but Canada doesn’t, the Canadian purchase will look wise. Is that what you’re arguing? :confused: )

You misrepresent my statement as “accounting fraud”, but now admit your misrepresentation was itself a silliness… OK. But, I may be keeping score! :cool:

It sounds like you missed the umpteen posts where it was patiently explained that the bonds held by SSTF are included as public debt, and count against the debt ceiling and where it was explained that any surplus in SS funding is not subtracted from “the Federal deficit” used in budgeting. (Admittedly, some politicians might find it expedient to invent a “total federal deficit” that reverses this sense, but we need not be at their mercy.)

126

Perhaps my understanding of government debt is faulty, but as I understand it the current US debt is managed something like this:

  1. Every day/week/month, a % of US-issued debt obligation matures (the bonds are 30 years old) and must be paid off.

  2. To pay just this maturing debt, the treasury issues new bonds for the original amount, and takes this money plus interest (provided by the general fund) to close the old bonds. The assumption is there is always a market for these bonds no matter the amount (which has been true now for decades, in large part because US bonds are perceived to have miniscule risk).

  3. For (2) “provided by the general fund” would be true if there was a surplus (or at least no federal deficit). With a budget deficit the government actually issues additional bonds to cover the interest as well.

If this scenario is correct, there is normally never a need for the government to pay off the principle. This seems strange if you compare the government to a household budget, but it works because a government (unlike private individuals) is expected to live a very, very long time. So long as the market has confidence that the threat of US default is near 0–i.e. that the US government will be doing (1) and (2) in perpetuity–the absolute size of the debt principle is irrelevant.

Of course, if the debt grows to an obscene level of GDP, the size in and of itself will make investors jittery. But if GDP grows, I don’t understand why the debt can’t just grow with it (i.e. fixed % of GDP). Also, if lenders lose confidence in the finances of the US, won’t they first react by just demanding higher interest on those bonds issued in (2)–essentially increasing the future costs of the general fund/borrowed interest payments in (3)? Yes, at some obscene level they may threaten to stop buying US bonds altogether–in which case Congress would have to raise taxes to avoid defaulting on the bond payments in (1), since default would only make the problem infinitely worse.

If this is really how it works, I don’t see how the SSA cashing bonds in the future should be considered a major liability:

a. On the minus side: When the SSA does cash in its notes, the total amount of bonds the government would have to issue for (2) on that future date (to cover the money SSA collected in (1)) would be higher than normal. This increased request for capital will of course cause the interest rate on these new bonds to be higher than they would otherwise have been. The higher debt level may also decrease bond investor confidence, but unless someone provides data showing these future cash-in’s will be a significant fraction of GDP, this just doesn’t seem liike a likely outcome.

b. On the plus side: Using the trust fund now to reduce the deficit means less borrowing now, and therefore lower interest rates on bonds issued now, saving us money in the future when those SSA-held notes come due.

IANAE, but it’s plausible to me (a) and (b) may be a wash, or at least not so different that it’s worth going all Chicken Little on the problem.

127

Septimus, switching your fonts around isn’t as impressive as you think.

The difference between the American government investing in Canadian bonds and the American government “investing” in American bonds is very real. A bond is nothing but a promise that the government will collect taxes at some point in the future. As Americans, it makes a big difference to us if Americans or Canadians are paying those taxes.

Here’s a simple comparison. Suppose every week I loan my neighbour Bill a hundred dollars and he gives me IOU’s. Bill then goes out and spends the money buying beer. Now suppose that a year from now, I have an unexpected medical bill and I need five thousand dollars. I go over to Bill’s house with those IOU’s and he has to find the five thousand dollars he owes me.

Now, suppose every week I loan myself a hundred dollars and give myself an IOU. I then go out and spend the money on beer. And a year from now, I have an unexpected medical bill and I need five thousand dollars. But it’s okay - because just like above I have a drawer full of IOU’s worth five thousand dollars. Problem solved. I’ll just cash those IOU’s in and use that money to pay off that bill.

This illustrates the fundamental difference between loaning money to somebody else and loaning money to yourself. Mainly, you can’t loan money to yourself.

128

The posts in this thread prove otherwise.

129

Okay, then I’d word it, “No Treasury instrument is issued that does not increase the debt from where it would otherwise have been without that issuance.” That cares for maturing debt that would have evaporated (say, if a surplus existed).

I don’t disagree. My point is the level of debt. If only the SSTF were a “fake” debt. It’s real, and my points would remain if it were composed of Treasury bonds.

130

How can you can call something wrong, when you then turn around and make plain that you don’t even understand it?

I’ll try again in a larger font. Use Google Translate if English isn’t your native tongue:

If S.S. hadn’t bought its bonds, U.S. Treasury would have sold them to someone else.

Stated differently, GWB didn’t start the expensive Iraq War just to put SSTF funds to use. :smiley:

131

Your analogy assumes that if you don’t give yourself the IOU, you wouldn’t have bought beer. But that’s not true in this case: the Treasury was buying beer anyway. The only question was, who was going to loan them money.

You keep looking at this problem from the perspective of the SSTF (the entity doing the lending). I think it’s more productive to look at it from the perspective of the US Treasury (the entity doing the borrowing). The obligations that matter are not our future spending obligations, but our future debt obligations (or, to be more precise, our future spending obligations are somewhat irrelevant in this particular case).

Let’s try this analogy:

You have an account you’re keeping in trust for your children (a conveniently named “trust fund”). You also have medical expenses right now. To pay these expenses, you can either borrow money from Bob down the street, giving him an IOU, or borrow money from the trust fund, replacing some of the money in there with an IOU (let’s call it a Class A NemoBond). Now, twenty years later, that IOU comes due. Does it matter whether the NemoBond is in your kids’ trust fund or at Bob’s house? No. You still have to pay it, and you have to pay the same amount regardless of the holder[sup]1[/sup]. Do you agree that the holder of the NemoBond does not change your indebtedness? All a bond is is an IOU signifying a promise to pay some amount, plus interest, over a fixed time frame.

Now let’s look at things from the trust fund’s perspective. A trust fund is not just a pile of cash sitting in a warehouse somewhere. That money is always invested somewhere[sup]2[/sup]. Because you care about your kids’ future, you want to park the money in a safe investment. Bob runs a large bank that issues BobBonds, which are quite safe, so you’ve invested in them. Turning to the scenario from the previous paragraph. If you sold your NemoBond to Bob, then the money in the trust fund is still invested exclusively in BobBonds. If you sold your NemoBond to the trust fund, then some of the money in the trust fund is being used to purchase NemoBonds and not BobBonds. From the trust fund’s perspective, does it matter whether it holds NemoBonds or BobBonds? It’s invested money either way (and, like all investments, it’s lent money, either way). The only difference is that one of them might be riskier than the other. But you’re in luck! NemoBonds are actually the safest investment in the world.

So when the time comes for the trust fund to be used by your children, they’re going to redeem whatever BobBonds or NemoBonds happen to be in it. Should they care? Remember, any NemoBonds they redeem were going to exist anyway (they just would have been sold to Bob, and been redeemed by him, instead of the trust fund).

[sup]1[/sup]New expenses arising in the future, by the way, do not affect whether or not you need to pay back that IOU, which is why I said future spending obligations don’t really play a role in our little play.

[sup]2[/sup] Technically, even leaving the money in cash is “investing” it. A dollar bill is actually a 0-interest bearer bond. Like all 0-interest investments, it is vulnerable to inflation, and like all bearer bonds, it is freely transferable (at face value, if the counterparty is willing to accept the credit-worthiness of the issuer, which almost all Americans are).

132

Thank you, MilTan. Yours is the post I’d have been proud to make, were I more patient. (I hope it doesn’t jinx the message for septimus to say this.)

Now I wait for the reaction. If it’s “Thank you, MilTan, now we finally understand”, I’ll slink away and order a copy of How to influence people.

On the other hand, if we just see the same tired gibberish repeated, I’ll conclude my sarcastic large-font explanations were as good as anything.

133

Whatever are you talking about. When the amount in the trust fund goes down as it is used to pay for benefits when the SS revenue is below its yearly payouts, that is exactly repaying principle. Where else is the money coming from? Most corporations repay principle on bonds, either directly or by rolling them over. Haven’t you even had a bond come due?
As for the rest, you do realize that your bank account is only a promise to repay you the money you put in, right? The promise is now guaranteed by the same government you don’t trust to to repay SS, but people in 1932 found out how feeble that promise could be.

For this example the source of funding for SS is the yearly surplus. I used book royalties as an example since they are an independent source of income (like SS is versus taxes going to the general fund) which is targeted for a specific purpose. In the old days women who worked would sometimes consider the husband’s income the houses and their income theirs, since they felt they shouldn’t have to work. If that income got targeted for a boat fund or vacation fund, and got borrowed against, it would be the same thing. But SS payments are very different from general tax payments. My father fought for a decade to get the UN to consider SS a tax at all (for complicated reasons which are irrelevant here.)

Might I remind you that SS income is legally committed to SS payments and the trust fund? No other tax (not counting Medicare) is tied to a future obligation. When I pay income and capital gains taxes I don’t expect the government to give me anything specific in return, now or later. So, sure, if you ignore all the ways that SS is different from other taxes it looks like other taxes.

134

First of all, my Canada example had both the US and Canada buying equal amounts of the others bonds for their SS systems, instead of buying their own bonds. Now, does this increase debt or not?
Second you fundamentally misunderstand how bonds work. The budget is set, the deficit defined, and bonds are issued to cover the deficit. A bond sale is not done first, before the budget is set. (I’m ignoring short term bonds issued for purposes of cash flow.)

This year, the trust fund will decrease, and SS will not be purchasing bonds on a net basis. Please show me cuts to the budget made specifically in response to this fact. If an SS surplus directly leads to a bigger non-SS deficit, then an SS deficit should directly reduce the deficit.
You are also clearly confusing the level of external debt to the level of total debt. The difference is important to understand when talking about the deficit, but makes no real difference in policy.

135

You have done this a couple of times, and it doesn’t make any sense. The USA and Canada have different governments, and US citizens do not, by and large, pay taxes to the Canadian governments. Nor vice versa.

However, it is the case that the US taxpayer must pay to replace the funds that have been spent out of the Social Security fund. This is true no matter whether the US government spends it directly, or borrows it from itself and then spends it anyway.

The total amount of debt, in other words, that the US taxpayer has to make good on is the same no matter how you look at it.

“The point of view of the Social Security trust fund” is meaningless - it is just an accounting convention. And the notion that the SS trust fund has some reserves on which they can draw is misleading to the point of dishonesty - there are no such reserves. There is just the taxpayer’s pocket. That is all there ever was, and all there ever will be.

Regards,
Shodan

136

In what material way are you distinguishing between the securities the SSTF holds and the Treasuries China holds?

Put another way: do you agree that rather than buying non-negotiable instruments, the SSTF could have bought regular old Treasuries? (As it has in the past) And if they held regular Treasuries they could have “redeemed” them by selling them to third parties to raise cash (e.g., China)? Would the Treasuries magically change in character when they were transferred from the SSTF to China?

The answers to these questions, by the way, should be: Yes, yes and no.

So, now, what is the difference between SS selling Treasuries to China versus SS redeeming its special bonds with the US Government and the US Government covering that by selling Treasuries to China?

137

I’m going to work on this one piece at a time.

The problem with putting your own IOU’s in your drawer is that it gives you the illusion that you’re saving money. You tell yourself that you can spend money on beer each week and still put a hundred dollars aside for future expenses. But you’re not really doing that.

Once you acknowlege that your IOU’s are not going to have any real value in the future, you’ll have to start thinking realistically about your future needs and how you’ll meet them. Maybe you’ll start drinking less beer and putting some real money into your drawer. Maybe you’ll go out and get a second job so you can drink beer and put money in your drawer. Or maybe you’ll exercize more in a effort to avoid unexpected medical bills that you now know you won’t be able to pay.

138

The example is not that complicated. American SS has a surplus at the end of the year; instead of buying the US Bonds they buy now, they buy Canadian bonds. The Canadian SS system has an equal surplus at the end of the year; instead of buying Canadian bonds, they buy US bonds.

The US debt is clearly unchanged in this scenario - in the broader sense of debt. The US external debt does go up, but it also has an equal value in assets. The Canadian situation is symmetric. Now, the question is, is the total debt any different in this scenario than in the current scenario?

Very good. Now, if the US had issued external T-bills for the debt that SS bought, they would also have to use taxpayer funds (or new bills) to pay them off. Exactly the same case.

Accounting conventions are very real, and represent actual distributions of money. But the trust fund is very real. When I was a kid I had a stack of savings bonds (small stack.) Were they not an asset? If one of my money market funds has some of its money in T-bills, should its statements mark that asset as worthless? If the market thought that the government wouldn’t pay off, what do you think the value of those bonds would be, and what interest rate do you think they’d get.
I’ll ask you - is your problem that you are convinced that the government will default on these bonds? If yes, why does the market disagree with you? If no, why do you consider the trust fund dishonest?

139

Please show evidence that the deficit (non-SS part) and federal expenditures have been affected in any way by the Social Security surplus.

Now I’ll ask you - do you think the IOUs represented by treasury bonds will have no value in the future? And you can answer the questions I just asked Shodan also.

140

I agree with this, but this is NOT a problem with social security. This is a problem with governement spending. This is a problem with government spending money that it does not have and issuing bonds. It is not the fault of the trust fund that the safest place in the world to invest money is US Government bonds. It is not the fault of social security that the reason that US Government bonds are so safe is that they are just conduits into the US Taxpayers wallet. The trust has been running a surplus due to the large number of baby boomers working that will soon retire. The trust need to invest this huge pile of cash somewhere to protect it from inflation and the safest investment in the world is US Government debt.

Why do you think it would have been better if this money had been invested in corporate bonds? Do you think the investment would have been safer? What should the trust have done with the money?