What's the Argument That SS Affects Deficit

[Happy_Fun_Ball]

And, Shodan, a related question: Do you think the US debt would be lower if the trust fund had invested the surplus somewhere else?

[Little_Nemo]

@MilTan

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.

Okay so if I’m understanding you correctly, I have a certain amount of income. I also have some expenses, like medical bills. And I have things I want to use money for in the future like my children’s college fund. Ideally, my income is high enough that I can pay my current expenses (like medical bills) and have some money left over that I can put aside for my future expenses (like college tuition).

Now in the situation you describe, my income is not sufficient to meet my current expenses (the medical bill). So I borrow money from Bob. I now have two future expenses - college tuition and repaying the loan from Bob.

But up to this point, you haven’t mentioned an important issue: am I putting money aside for my future expenses or not?

@MilTan

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. 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).

I’m not seeing the equivalence between NemoBonds and BobBonds here. When I borrow money from Bob, I am essentially selling him a NemoBond - he’s giving me money now in exchange for my promise to give him money in the future. This creates a future debt for me.

If I buy a BobBond, the money flows the opposite way. I am giving Bob money now in exchange for his promise to give me money in the future. This creates a future asset for me.

So if I sell NemoBonds to Bob (borrow money from him) I am not investing in BobBonds (loaning money to him). If I spend the money I make for selling the NemoBonds, I’ve just creating additional future debt - I’m now going to have to pay Bob back and pay tuition bills. If I hold the money I make for selling the NemoBonds, I’m just breaking even (assuming there’s no interest) - in twenty years I give Bob back the money he gave me and I still owe just as much for college tuition as I would have if I had done nothing.

To answer your question about how the “trust fund” sees this, it makes a big difference whether it’s full of NemoBonds or BobBonds. Look at the possible alternatives:

1. I have $100 left over every week. I loan it to Bob. Twenty years later, I need $100,000 for my kid’s college tuition. Bob owes me $100,000. I go to Bob, he pays me the $100,000 he owes me, I use it to pay the tuition.

2. I have $100 left over every week. I stick it in a drawer. Twenty years later, I need $100,000 for my kid’s college tuition. I have $100,000 in my drawer. I use it to pay the tuition.

3. I have $100 left over every week. I “loan” it to myself. I put an IOU for $100 in a drawer and I spend the $100. Twenty years later, I need $100,000 for my kid’s college tuition. I owe myself $100,000 in IOU’s. The money I owe to myself and the money I am owed from myself cancel each other out. But I don’t have $100,000 to pay college tuition.

4. I have $100 left over every week. I spend the $100. Twenty years later, I need $100,000 for my kid’s college tuition. I don’t have $100,000 to pay college tuition.

5. I don’t have any money left over every week. I borrow $100 from Bob and put it in a drawer. Twenty years later, have $100,000 in my drawer. I owe Bob $100,000 and I need $100,000 for my kid’s college tuition. I don’t have the money to pay both of them.

6. I don’t have any money left over every week. I borrow $100 from Bob and spend it. Twenty years later, I owe Bob $100,000 and I need $100,000 for my kid’s college tuition. I don’t have any money to pay either of them.

7. I don’t have any money left over every week. I borrow $100 from Bob. I then loan that $100 to myself and put an IOU in my drawer. I then spend the $100 I loaned to myself. Twenty years later, I have a drawer full of IOU’s that say I owe myself $100,000. I also owe Bob $100,000 and I need $100,000 for my kid’s college tuition. The money I owe to myself and the money I am owed from myself cancel each other out. But I don’t have any money to pay Bob or the tuition.

Now the difference between #1 and #5 (or #6) is the difference between my trust fund being full of BobBonds and my trust fund being full of NemoBonds.

You’ll notice that #3 and #4 are actually the same. But in terms of Social Security, what we’re doing is #3 while pretending we’re doing #1, #2, or #5. In terms of the overall economy, we’re doing #6 or #7.

[Little_Nemo]

To answer Voyager’s question, I don’t think the government will default on its treasury bonds. It will collect taxes and pay them off (or it will borrow moer money and pay them off).

My question in turn is this: Assume Social Security taxes in 2011 are equal to the amount of Social Security payments in 2011 and there is no excess. Will that create any change in SS taxes in the year 2031? Will SS taxes in 2031 be higher, lower, or the same if no excess is collected in 2011?

[MilTan]

@Little_Nemo

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.

You’re not putting the IOUs in a drawer. You’re selling a bond. A bond you were going to sell anyway. Why does it matter to whom you’re selling the bond?

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.

And this, right here, is the argument I’ve been waiting for you guys to try and make. The only way this argument makes sense is if having the SSTF caused the US to run larger deficits than it otherwise would have. That might happen in your example, but I haven’t seen any evidence that that is the case in reality.

[MilTan]

@Little_Nemo

Okay so if I’m understanding you correctly, I have a certain amount of income. I also have some expenses, like medical bills. And I have things I want to use money for in the future like my children’s college fund. Ideally, my income is high enough that I can pay my current expenses (like medical bills) and have some money left over that I can put aside for my future expenses (like college tuition).

No. Your kids’ trust fund already exists. Say you have a rich Uncle with no kids of his own that puts money into that trust every year. The funding for the trust does not come from your own income (in case it’s unclear, “you” in this analogy is a stand-in for just the general fund of the US government). College tuition is not a future expense you have to worry about. Rich Uncle Pennybag’s money is taking care of that.

Now in the situation you describe, my income is not sufficient to meet my current expenses (the medical bill). So I borrow money from Bob. I now have two future expenses - college tuition and repaying the loan from Bob.

Nope – you have one future expense: repaying the loan from Bob.

But up to this point, you haven’t mentioned an important issue: am I putting money aside for my future expenses or not?

I fail to see why this is relevant.

Originally Posted by MilTan
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. 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).

I’m not seeing the equivalence between NemoBonds and BobBonds here. When I borrow money from Bob, I am essentially selling him a NemoBond - he’s giving me money now in exchange for my promise to give him money in the future. This creates a future debt for me.

Let’s keep our terminology clear. This creates a current debt for you, which is an obligation to repay Bob in the future.

If I buy a BobBond, the money flows the opposite way. I am giving Bob money now in exchange for his promise to give me money in the future. This creates a future asset for me.

A current asset for you, not a future one. As long as other people are convinced that Bob is solvent and won’t default, you can sell them your BobBond and get money/goods and services now.

So if I sell NemoBonds to Bob (borrow money from him) I am not investing in BobBonds (loaning money to him). If I spend the money I make for selling the NemoBonds, I’ve just creating additional future debt - I’m now going to have to pay Bob back and pay tuition bills. If I hold the money I make for selling the NemoBonds, I’m just breaking even (assuming there’s no interest) - in twenty years I give Bob back the money he gave me and I still owe just as much for college tuition as I would have if I had done nothing.

If you sell NemoBonds to Bob, you are giving Bob an asset (the bond) in exchange for a liability (the obligation to repay the debt) and cash. Spending that cash does not create any additional debt. Any additional debt would necessarily show up as a liability on your balance sheet. But all that remains on your balance sheet is the original liability. Once you have the cash, you can do whatever you want with it (spend it on hookers and blow, bury it in the ground, etc.) and it does not create any additional debt beyond the liability incurred by selling the bond. The only way to create additional debt is to issue more NemoBonds.

And again, you don’t owe anyone any money for college tuition. When you’ve sold your NemoBond to Bob, that’s to cover your own operating expenses. In that scenario, Rich Uncle Pennybag’s trust fund is left untouched, and will cover your children’s college tuition.

To answer your question about how the “trust fund” sees this, it makes a big difference whether it’s full of NemoBonds or BobBonds. Look at the possible alternatives:

I found it difficult to parse these scenarios, because I never know whether you’re talking about yourself, the trust fund, or the amalgamation of yourself and the trustfund when you’re talking about who is buying bonds, who is selling bonds, who owes college tuition, etc. Here are the parameters I’m operating under:

1. There is a trust fund, “TF,” with it’s own dedicated funding stream (Rich Uncle Pennybags). This is the entity that has the obligation to pay for your children’s college tuition. That is the only spending obligation the trust fund has. This trust fund is accumulating money right now, and will be drawn down while your kids are in college, at which point it will be exhausted. Notably, any expenses of your kids’ you need to cover after they graduate college are not the responsibility of this trust fund (analogously, any outlays required by SS after the trust fund’s exhaustion are independent of any discussion of the (un)reality of the trust fund). The trust fund needs to find some place to invest its money.

2. There is you, “Nemo,” with your own funding stream (your job) and your own expenses (your day to day expenses, including your present medical bills). Some times you have more money than you need to cover your expenses, some times you have less. In particular, right now, your expenses exceed your income. You have the ability to issue (extremely safe) NemoBonds that the whole world agrees are safe, because they are confident that you will ultimately be able to repay them (either rolling them over by selling more NemoBonds, or because you’ll be making enough money in the future to just pay back the principal).

3. There is Bob, “Bob,” who is willing to both issue debt (in the form of BobBonds) that Nemo or TF can buy, and buy debt (in the form of NemoBonds).

I know it might be a pain for you, but I would have a much easier time responding to your scenarios if you rephrased them in terms of TF, Nemo and Bob. In particular, it is important to my understanding of the scenarios that it is clear whether TF or Nemo has the surplus, whether TF or Nemo is buying Bob/NemoBonds, etc.

For what it’s worth, here’s my construction of the current situation vis a vis Social Security, in terms of this analogy:

Nemo has a deficit, and needs to sell NemoBonds to trade current cash flow for future cash flows. TF has a surplus (it is not being drawn down yet), and needs to invest it somewhere; it is willing to buy NemoBonds or BobBonds. Bob (China, Canada, etc.) is willing to sell BobBonds, and buy NemoBonds. What actually happens is that Nemo sells NemoBonds to both TF and Bob, in an amount exactly equal to Nemo’s current deficit, and TF only buys NemoBonds. The alternate scenario that you’re proposing is that Nemo sells NemoBonds only to Bob, in an amount exactly equal to Nemo’s current deficit, and TF only buys BobBonds.

Given that both Bob and Nemo are able to make good on their debts, explain to me how these scenarios differ a) in the amount of money the TF will ultimately have to pay for college tuition, and b) in the amount of money Nemo will have to pay to cover all outstanding NemoBonds.

[Little_Nemo]

@MilTan

You’re not putting the IOUs in a drawer. You’re selling a bond. A bond you were going to sell anyway. Why does it matter to whom you’re selling the bond?

And this, right here, is the argument I’ve been waiting for you guys to try and make. The only way this argument makes sense is if having the SSTF caused the US to run larger deficits than it otherwise would have. That might happen in your example, but I haven’t seen any evidence that that is the case in reality.

Well, Social Security doesn’t cause the deficit in particular. But it is part of what causes the deficit in general. Social Security causes the deficit. The Pentagon causes the deficit. NASA causes the deficit. The FBI causes the deficit. The National Park Service causes the deficit. The federal court system causes the deficit.

The United States government spends more than it collects and that causes a deficit. Social Security is a government expense so it is part of the deficit.

Ask yourself this, if the government abolished the entire Social Security program tomorrow, wouldn’t that reduce the total expenses of the United States government? And wouldn’t that in turn lower the deficit?

[MilTan]

@Little_Nemo

Well, Social Security doesn’t cause the deficit in particular. But it is part of what causes the deficit in general. Social Security causes the deficit. The Pentagon causes the deficit. NASA causes the deficit. The FBI causes the deficit. The National Park Service causes the deficit. The federal court system causes the deficit.

The United States government spends more than it collects and that causes a deficit. Social Security is a government expense so it is part of the deficit.

Look, I agree on all of this with you. But that’s because we’re no longer talking about a world where there’s an “on-budget” balance of payments and an “off-budget” balance of payments. But that’s neither here nor there when it comes to things like the Social Security trust fund.

Here’s a way to look at the SSTF that may make you happy: it’s a promise to make good on Social Security’s obligations for the next 20-odd years by raising income taxes, not payroll taxes. The promise is discharged exactly when the ledger shows the SSTF to have been exhausted.

Now sure, we can renege on that promise[sup]1[/sup], but we should be clear that that is what we’re doing, rather than trying to pretend that the promise was never made in the first place.

---

[sup]1[/sup] The only way to truly renege on this promise is to raise payroll taxes and use the added income to pay off maturing SSTF securities, or, equivalently, lower benefits and use the surplus payroll taxes to pay off the securities. Contra innumerate doomsayers, simply saying “we won’t pay off the trust fund” won’t make a difference to the deficit, when you talk about the deficit as the total federal deficit.

[Lobohan]

@Little_Nemo

Well, Social Security doesn’t cause the deficit in particular. But it is part of what causes the deficit in general. Social Security causes the deficit. The Pentagon causes the deficit. NASA causes the deficit. The FBI causes the deficit. The National Park Service causes the deficit. The federal court system causes the deficit.

The United States government spends more than it collects and that causes a deficit. Social Security is a government expense so it is part of the deficit.

Ask yourself this, if the government abolished the entire Social Security program tomorrow, wouldn’t that reduce the total expenses of the United States government? And wouldn’t that in turn lower the deficit?

Are you assuming that we’d keep collecting the Social Security funding? Isn’t that a little silly?

[MilTan]

@Lobohan

Are you assuming that we’d keep collecting the Social Security funding? Isn’t that a little silly?

No, I think he’s taking advantage of the fact that SS is technically in the red this year (receipts lag outlays). It’s actually in the black when you factor in interest payments on the SSTF, but that counts on both sides of the ledger when you’re talking about government as a whole, so it cancels out.

But eliminating SS will reduce the deficit by ~$45 billion. Which is a miniscule fraction of our budget deficit. My position has always been that we should either talk about SS as distinct from the general fund, in which case it makes sense to talk about the “Social Security problem,” but in which case the trust fund has a real effect; or we should talk about SS as part of the federal government, in which case the “Social Security problem” is actually the “Federal government problem,” to which SS contributes a nominal amount and shouldn’t be anywhere near the top of our priority list.

[Voyager]

@Little_Nemo

To answer Voyager’s question, I don’t think the government will default on its treasury bonds. It will collect taxes and pay them off (or it will borrow moer money and pay them off).

My question in turn is this: Assume Social Security taxes in 2011 are equal to the amount of Social Security payments in 2011 and there is no excess. Will that create any change in SS taxes in the year 2031? Will SS taxes in 2031 be higher, lower, or the same if no excess is collected in 2011?

Any surplus or deficit today is not automatically going to change taxes in the future - ore even now. If however the demographics say that the trust fund will be exhausted in 2031 (or before) and the revenue in 2031 will be less than payments to recipients, then either the taxes would have to rise, the benefits fall, or money be paid for benefits from general revenue. None of this has anything to do with the quality of the bonds or the ability of the government to pay them off - the bonds have all been sold. If this is the case - and it looks like it is - then we should do something now, since, just like retirement planning, the sooner you start saving the more you will have.
The problem with this “the bonds are worthless” or “the deficit will eat us all” stuff is that it prevents a discussion of how to deal with the real problem - the problem that pretty much everyone agrees on. Contrast this with Reagan, who seemed to believe that SS was a good thing and needed to be fixed. I don’t know if the current conservative hatred for SS comes from hatred of a government program which works, which goes against their true writ, or just lack of empathy for anyone who will need SS to survive in retirement. Kind of “let them eat their 401K” argument. Reagan did not grow up rich, and new what the Depression was all about, and I bet he knew old people whose lives improved when SS started.

[Voyager]

@MilTan

Look, I agree on all of this with you. But that’s because we’re no longer talking about a world where there’s an “on-budget” balance of payments and an “off-budget” balance of payments. But that’s neither here nor there when it comes to things like the Social Security trust fund.

How can SS be said to “cause” the deficit when it is cash flow positive? The other stuff, definitely.

Now sure, we can renege on that promise[sup]1[/sup], but we should be clear that that is what we’re doing, rather than trying to pretend that the promise was never made in the first place.

---

[sup]1[/sup] The only way to truly renege on this promise is to raise payroll taxes and use the added income to pay off maturing SSTF securities, or, equivalently, lower benefits and use the surplus payroll taxes to pay off the securities. Contra innumerate doomsayers, simply saying “we won’t pay off the trust fund” won’t make a difference to the deficit, when you talk about the deficit as the total federal deficit.

If we reneged on the promise by defaulting on the treasury bonds exclusively owned by the trust fund, won’t that be reducing the deficit by removing a liability? It would be a disaster, of course, but it would reduce the deficit.

[MilTan]

@Voyager

How can SS be said to “cause” the deficit when it is cash flow positive? The other stuff, definitely.

Technically, SS is projected to be in deficit this year (though not next year). and in any case, it will be cash flow negative in at most ten years. In such a scenario, it doesn’t cause the deficit, but it contributes.

If we reneged on the promise by defaulting on the treasury bonds exclusively owned by the trust fund, won’t that be reducing the deficit by removing a liability? It would be a disaster, of course, but it would reduce the deficit.

It would reduce the debt (exactly as defaulting on any other debt would), but it would have no effect on the deficit (except at the margins due to reduced interest payments).

[MilTan]

@MilTan

It would reduce the debt (exactly as defaulting on any other debt would), but it would have no effect on the deficit (except at the margins due to reduced interest payments).

Though it’s worth pointing out that defaulting on SSTF bonds would almost certainly cause interest rates to spike, so any benefit gained from avoiding interest payments on SS bonds would be ephemeral.

[Voyager]

@MilTan

It would reduce the debt (exactly as defaulting on any other debt would), but it would have no effect on the deficit (except at the margins due to reduced interest payments).

Debt versus deficit. I was being sloppy. I certainly agree with your interest rate point - and it would also be a lot more difficult to sell bonds, and we might see a run on them.

However, given that I read of some Republicans thinking it would be a good idea to not pay interest in order to avoid raising the debt ceiling, maybe this disaster would be considered a good thing by some of our less bright politicians.

[fumster]

@Little_Nemo

Well, Social Security doesn’t cause the deficit in particular. But it is part of what causes the deficit in general. Social Security causes the deficit. The Pentagon causes the deficit. NASA causes the deficit. The FBI causes the deficit. The National Park Service causes the deficit. The federal court system causes the deficit.

Holy shit!! I just remembered I forgot to pay my NASA and FBI taxes! You know, the ones that are specifically designated for those programs.

[Damuri_Ajashi]

@amarone

Why can’t both positions be right?

1. Money you lend to yourself is not an investment.
2. Money you lend to yourself reduces the amount you have to borrow from elsewhere.

Both look correct to me.

Well the second one is the first one isn’t

If company X pension fund bought Company X bonds, are those bonds not an investment?

[Damuri_Ajashi]

@jtgain

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.

I think its dishonest to imply that the full faith and credit of the United States is anything less than the best credit risk in the world.

[Damuri_Ajashi]

@jtgain

I’m just not seeing how this isn’t a three card monty accounting trick.

Its starting to look like this may be because you don’t want to.

I could do it in my personal budget.

No you couldn’t. This is not fancy accounting, your IOUs are not backed by the taxing power of the United States government.

What is the difference between my hypo and what the feds are doing with social security?

It ignores the fact that the boat is giving you the money for the boat fund in exchange for the promise to buy the boat.

You can complain about the fiscal irresponsibility of the government but you can’t blame that fiscal irresponsibility on social security can you?

[Damuri_Ajashi]

@furt

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.

If you have a few million dollars, then yes, perhaps your investment advisor will tell you to mix up your asset classes a bit. But REALLY wealthy people don’t buy S&P funds, they buy laddered treasuries.

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.

I don’t know how you reduce the risk in a portfolio below risk free (which is what treasuries represent).

Diversification is a method of reducing volatility and hopefully skimming higher risk premiums than the risk free rate but its not as risk free as treasuries.

Whenever this has been suggested, though, it’s been demagogued as “too risky.”

Do you know how a well diversified portfolio would have performed over the last ten years? Compare that to how a portfolio of treasuries would have performed.

Here’s the problem. The social security trust fund is 2.4 TRILLION dollars. Try investing that much money.

[Damuri_Ajashi]

@Stratocaster

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.

Uh, no. If the government didn’t have social security to dip into, they would raise moer money elsewhere.