Tom Saving on the Social Security Trust Fund

Disclaimer: It is late and I’ve had a few drinks. So maybe I’m being silly here, but David I’m not seeing how this works.

Let’s say the government is supposed to send out $10 billion in Social Security checks, but all the incoming tax receipts are already spoken for. If I understand what Tom Saving is saying, the SSA could give the Treasury $10 billion in bonds from the trust fund, saying, “Gives us $10 billion in cash.”

Then the Treasury floats $10 billion in new loans to the private sector, cancels out the $10 billion owed to the trust fund, and gives the cash to the SSA. So the debt ceiling hasn’t been breached, and the retired people get their checks.

But now the government still owes the SSA another $10 billion. I.e. the Treasury didn’t actually meet its obligations, it still failed to deliver the $10 billion it owed the SSA, and instead on the side it redeemed $10 billion in assets that the SSA handed over.

Is that legal? I mean, I know that’s the kind of stuff Geithner has been doing with the government employees pension fund since mid-May when they officially hit the ceiling. Can they legally do that with money owed to SSA?

Are we talking about consolidation of government debts and the legal definition of government debt for the specific purpose of the debt ceiling?
It seems that Saving’s point is similar to Paul’s idea about the Fed. If you consolidate all government debts –meaning that Treasury bonds accounted as assets in the Fed and SSFund are cancelled by an equal amount of Treasury liabilities– the final balance sheet will show the same amount of government liability but a different composition. To the extent that the new liabilities (bank reserves in the case of the Fed and benefits in the case of SSFund) are not included in the legal definition of government debt for the purpose of the debt ceiling, one can claim that there is room to increase the debt relevant to the ceiling. Then, the only issue would be how to do it and apparently in the case of the SSFund cannot be done in just one accounting operation (although I’m sure there is a lawyer that will argue that they can do it).

So, the debt limit “crisis” isn’t a crisis after all. They can use the trust fund to pay social security recipients, and incoming revenue to pay for everything else… without borrowing more. That is, what the trust fund represents is time… time enough to make the necessary adjustments to bring spending in line with revenue.

Another thought on the side; What the Republican House should pass (immediately) is legislation for a month by month increase to the debt limit. And every month the amount of the increase should be 10-20 billion dollars less than requested. That’s what a bank does when I ask for a loan. They make me come up with a down payment.

The first David Henderson looks correct to me. It increases the public debt to replace the trust fund bond by a normal bond.

What Saving is pointing out is that the Trust Fund allows bypassing the debt-ceiling rules. That’s news to me, though you would think the president would know.

To make it a less confusing example, suppose the left hand owed the right hand an IOU. In this state, the right hand has an asset, the left has a liability, and the entire body has a net value of zero.

Now the left hand finances its liability by taking a loan from a friend, and it pays off the right hand. The left hand still has a liability, but now it’s to the public. The right hand still has an asset, but now it’s real money. The net value of the body didn’t change, but now it holds real money and a public debt.

Simply by a transfer within government, the Social Security Administration can come up with funds to pay benefits for a long time–without adding any new debt to the gross debt.

No, they can’t. That’s just wrong.

I’m not sure what the niceties of the bookkeeping are, but SS is expecting to receive payroll tax revenues each month to pay scheduled benefits (its liabilities). (Ignore that the amounts don’t exactly balance out).

If, SS doesn’t receive those tax revenues, because Treasury doesn’t deliver them on time, then they’d have to receive bonds instead. Bonds which increase the liabilities of the Treasury.

So, SS takes some older bonds out of the filing cabinets and presents them to the Treasury for redemption so they can now pay SS benefits due? That gets everyone nowhere. Where would the Treasury get the money to redeem those older bonds if not from the tax revenues that should have been given to SS in the first place?

Unless the Treasury starts selling assets like the gold collecting dust at Ft Knox. But that doesn’t need to involve the SS Trust Fund.

You guys are making this way too complicated.

The U.S. government has a bunch of T-bills sitting in a filing cabinet somewhere. That filing cabinet is called the SS Trust fund. Those T-bills count against the debt ceiling, since the debt ceiling is on gross debt.

The U.S. government sells those bonds on the open market and gets money. Money can be exchanged for goods and services.

The U.S. gov’t has $2.4 trillion it owes itself that counts against the ceiling. Whether than money can be used for general expenditure is an open legal question, but it can certainly be used for SS benefits.

The U.S. government sells those bonds on the open market and gets money.

No, they are specifically not marketable, by law. The SS bonds in the filing cabinet are owned by the SS Trust Fund and can only be presented to the Treasury for redemption.

Speaking of fictional debt instruments…

Isn’t it also a fiction to borrow against future tax revenue while the proposed population to be taxed is making it clear that it will refuse to pay the higher taxes?

So, the question is not whether or not to default, but who to default on. So why not use the method of spending down the trust fund to essentially default on future beneficiaries of Social Security? It spreads the pain broadly, gives people time to adjust, and doesn’t cause a credit shock.

Current SS benefits are paid out of current revenue that is received from payroll taxes. If SS benefits are $100 and payroll revenues are $150 then $100 is used for SS benefits, the additional $50 is spent on other current expenditures, and the treasury writes an IOU to SS administration for the $50 it took from the payroll revenue and spent.

When payroll revenues exceed expenditures this excess money is spent on general expenditures and the SS admin receives an IOU from the treasury. However, since 2010, SS expenditures have exceeded revenues. For example, SS benefits were $100, but payroll revenues were only $75. So to make up the shortfall, the SS admin says to the treasury, “I have collected all of these IOUs over the years when revenues had exceeded benefits and now I will now need to redeem some of the IOUs to make up the $25 shortfall in order to pay all of the obligations”. So, now the $25 comes from other current tax revenues to pay the current SS benefits.

What I see happening if all of this is correct is that by retiring the $25 IOU the government owes to itself it is reducing the national debt by $25. This is because the money that the government owes to itself is considered part of the national debt and part of the debt limit. If at that moment the government was exactly at that limit and it retired $25 of the national debt through current revenue paid for the SS admin IOUs, it could then issue $25 of additional debt to bring itself back to the limit and use those additional funds for current spending.

But what I see as the restrictions with Thomas Saving’s argument is that the Treasury could only redeem those bonds 1)where IOUs were used to cover a shortfall in payroll revenues to pay SS benefits and 2)where there was sufficient general revenues to meet the shortfall in payroll revenues. So, it seems SS would have a claim on general revenues as long as they existed. An added benefit of paying SS revenues would be that any redeemed SS IOU would free up debt room to sell Treasury bonds to the public to increase income to pay current expenditures.

All this doesn’t seem to contradict what Obama says, however. If general revenue is used on other programs such as military pay, then there simply isn’t any revenue to purchase SS IOUs. The law may say the treasury must redeem the SS IOUs if presented but if there is no money left then there is simply no way to redeem them. This argument seems to suggest by paying SS benefits you get more bang for your buck, because as SS IOU are paid off they can be replaced by Treasury bonds for increased revenue. If, however, SS expenditures only exceeded payroll revenues for the first time last year, the shortfall probably isn’t that much and, therefore, the debt freed up by retiring SS IOUs will not be that great either.

The explanations above about trading obligation for obligation are correct. The $2.5T SS surplus is included in the commonly quoted $14.5T national debt, which we see on the debt clock. Redeeming, say, $1B of SS bonds reduces the debt by that $1B. But since we don’t have $1B lying around, a $1B bond is sold on the open market to pay for the SS bond redemption. Trade obligation for obligation. No increase of debt.

We regular folks should be making the point that the SS surplus is real. It’s accounted for in most govt. accounting. It was paid for by real money, by real people, us.

The primary reason that they don’t want to redeem SS trust fund obligations is because it’s getting more and more difficult to replace them by selling open market bonds.

There’s an implication of all these pundits saying that the SS trust fund is a fiction or is broke. Some do it from muddled “flow of funds” thinking that accounting lines can be breached (they surely don’t shift capital to expense in their own businesses). The more they say it, the more it becomes possible, because the government representatives can rewrite laws under the cover of enough punditry like this. Others do it because they want to, or see the need to, essentially default on those obligations (~17% of the national debt), which is essentially taking the money from regular working people to pay off a nice chunk of the national debt.

If you have the “flow of funds” belief, go back in time and ask yourself where you would prescribe that SS should invest its surplus. Gold? The stock market? Oil reserves? Those would instantly become distorted markets.

SS is run similarly to an insurance company that sells an annuity.
– both pay claims from current receipts.
– both invest surpluses.
– both dip into surpluses when needed.
– both adjust rates when needed.
The latter point is where we were at in 1983, when the Greenspan Commission tweaked SS so it would be solvent forever. But within a year or two, it became clear that it wouldn’t last (later studies showed that over 60% of the blame was because of the unanticipated shift of wealth from the middle class to the rich). That is also the point where we should be now. Tweaking is needed. But beware of any dismantling of SS that results in essentially another class shift of wealth.

I also contend that dismantling SS is socialistic, for those who are concerned about individual self-sufficiency. With SS we’re forced to pay for our own retirements (do the calculations from your SS statement, the payout is just about the same as what you’d have gotten from an insurance company annuity, individualized for your particular payments). Without SS, there will be an increase of seniors living in poverty (e.g., the complete Ryan plan was estimated to result in 40% of seniors living below the poverty line in the 2030s). The U.S. always seems to come to the rescue of people in poverty with welfare and subsistence programs and payments.

But hey, SS is an easy, understandable target, when most all of our fiscal drains are health care costs.

Tom:
You have an excellent understanding of the trust fund mechanics.
Joe:
The SS trust fund is not like an insurance company.
It does not invest its surplus in assets that can be liquidated without raising new monies.
An insurer’s reserve is liquidated without raising new monies.
Dipping into the trust fund (principal and interest) requires new monies, as if the trust fund did not exist.
From a paper entitled “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2009:”
Page 183 “Why are Social Security and Medicare not shown as Government liabilities in Table 13-1?
There is no bright line dividing Social Security and Medicare from other programs that promise benefits to people, and all the Government programs that do so should be accounted foor simlarly.
Furthermore, treating taxes for Social Security or Medicare differently from other taxes would be highly questionable.”
Page 195 “The trust fund surpluses could have added to national saving if overall government borrowing from the public had actually been reduced because of the trust fund accumulations.
At the time Social Security or Medicare redeems the debt instrumenrts in the trust funds to pay benefits not covered by income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits, JUST AS IF THE TRUST FUNDS HAD NEVER EXISTED.”
http://www.gpoaccess.gov/USbudget/fy09/pdf/spec.pdf.
Don Levit

Shell games are awfully difficult to follow.