The Social Security Trust Fund

by John Holbo on November 20, 2010

Yglesias has a post about the rhetoric of The Social Security Trust Fund, in response to a Planet Money podcast on the subject. The puzzle of the podcast is: how can there even be an argument about whether a giant Trust Fund exists or not? Shouldn’t that be sort of obvious? Yglesias is in the ‘it exists’ camp. And I think that’s right.

Here’s the way to think about the Trust Fund, to make it seem it doesn’t exist. The Social Security Trust Fund takes in money that it socks away, for an elderly day, in the form of government bonds. But, since it’s all just the government, that’s your right hand loaning your left hand money. If I am poor, I can’t get rich selling myself a lot of ‘Holbo bonds’. I can’t have my cake and eat it, too, earning money with the left hand, then loaning that money to the right hand, to spend on a piece of cake to be eaten now, while also writing on a piece of paper, ‘the right hand owes the left hand a piece of cake’. That seems like double-counting in the worst way.

Here’s the way to think about it, so it seems like the Trust Fund exists. The parents (government) agree that the child (Social Security) should have an allowance. The child wants to save the money. So the parents keep a running account. Every week, the parents write the child an IOU, which the child dutifully puts in a little box. Over time the box comes to contain a lot of IOU’s from the parents. Meanwhile, the parents are not separately putting funds that would correspond to those IOU’s into yet another box. They are just running the household. But the IOU’s exist, and are backed by the parents.

As Yglesias points out, the second way of looking at it is more accurate. But the criticism will then be: but the second situation boils down to the first! The parents and child are just all part of the same thing. This household is cooking its books! The left hand is giving the right hand money, and covering up for it by piling up worthless paper.

But then the criticism of this criticism should be: maybe, maybe not. It could be that the parents are indeed doing something very stupid. If they are saving for college just by putting IOU’s in a box, never actually preparing to pay for college. But if they are good for the money, eventually, everything is fine.

But now the retort will be: but we aren’t good for the money! These parents are (or will be) broke! The IOU’s will be worthless paper when the time comes to cash them in, so they are already worthless now! But even if the household is (or goes) broke, it seems a bit tail-wags-the-dog to focus on the structural feature of the kid’s box of IOU’s as the root of the problem. (If the family is kicked to the curb, foreclosed on, and everyone is glaring at the kid, clutching his IOU’s – ‘look what you’ve done now, kid!’ – well, that might be the height of comedy, but it hardly strikes me as economically insightful.)

To repeat: it can’t be the mere fact that parents indulge in semi-fictional accounting that’s the problem. I ‘owe’ my older daughter back allowance at this very moment, it so happens. Now in a sense it’s silly to suppose I am the debtor, she the creditor, given that she is completely dependent on me and her mother in every way. Nevertheless, I trust you can see the potential point of this semi-fiction of me owing my daughter a specific amount of money. And the point is similarly intelligible in the Social Security case. And when you see this, you see how off-target the complaints are.

If the US government completely and unrecoverably collapses, as a going economic concern, then the Social Security Trust Fund will be bust – and there will be no United States, too! (The latter is the more consequential concern, I should think.)

If the US government falls on seriously hard times, economically, there may need to be belt-tightening. Maybe the US government will have to break the deal it made, not making good on the IOU’s in the Social Security Trust Fund. Likewise, if our family falls on hard times, I may be driven to spend my daughter’s back allowance money on food for our table, in the sense that I may never pay her that money. (Hope not!) But if that happens I won’t describe the logic of the situation in terms of my daughter’s back allowance having turned out not to have been ‘real’, all along. If I don’t pay her, it won’t be because I don’t owe her – nor because that specific money ‘doesn’t exist’, whereas the money to put food on the table ‘does exist’. Talking that way just takes the minor accounting fiction that starts us out, and inflates it into a major fiction.

If the US government doesn’t fall on seriously hard times, but just finds financial life a bit tight – as it often is – the same point applies, only more so. In the Planet Money podcast the argument is made that breaking the deal isn’t really breaking the deal because the money has really been spent already on the very people who were supposed to get it, e.g. the Baby Boomers, who have benefited from all the stuff the government has bought them over the years. Well, I dunno. Suppose my daughter keeps not collecting her allowance, and not collecting her allowance, to the point where – when I finally pay out – it seems pretty significant. I have to go to the ATM, withdraw several hundred dollars and fork over. Usually paying the kid her allowance is an economically trivial act, from my point of view. Standing at the ATM, loath to suffer the hit to my wallet, I could argue that, in effect, I’ve already paid her the allowance, in the form of a roof over her head, food, medical care, education. It’s true that these are the very things the money I didn’t give her, as allowance, has tended to go for. But that doesn’t seem like an argument that she really never had any allowance to begin with. It seems more like a (distinctly weak) excuse for not paying her allowance. It’s ok for me to do you wrong in this case, kid, because I’ve done you right so many times before! That’s not even an excuse so much as a plea for forgiveness.

That’s pretty much it. The moral of the story is that it’s perfectly reasonable to worry about how the US is ever going to manage to pay for stuff it needs/wants. But accusing the Social Security Trust Fund of being a mere accounting fiction does not 1) do much to explain, analytically, why the budget is tight; 2) provide any justification for dealing with budget tightness by cutting Social Security, rather than some other thing, or by raising taxes. (It could well be that the optimum way of dealing with budget problems it to cut back Social Security in some way, but to talk yourself into this on the vaguely moralistic grounds that mere accounting trickery should be regarded as non-binding is quite confused.)

Is that right?

{ 160 comments }

1

Min 11.20.10 at 10:49 am

John Holbo: “Is that right?”

Well, it is, and it isn’t. :)

John Holbo: “To repeat: it can’t be the mere fact that parents indulge in semi-fictional accounting that’s the problem.”

That is absolutely right. :) The talk about how the Social Security Trust Fund (SSTF) is a fiction is propaganda, aimed at suggesting that Social Security is a fiction. That, as you say, it is full of worthless IOUs. OC, if the IOUs in the Trust Fund are worthless, then so are other U. S. gov’t IOUs, like the treasuries that so many people and gov’ts are buying (and the Fed is buying, too). It is amusing to think that the same people who are questioning the treasuries in the SSTF are up in arms about the Fed buying treasuries and taking them off the market. If they are worthless, who cares?

John Holbo: “If the US government falls on seriously hard times, economically, there may need to be belt-tightening. Maybe the US government will have to break the deal it made, not making good on the IOU’s in the Social Security Trust Fund. Likewise, if our family falls on hard times, I may be driven to spend my daughter’s back allowance money on food for our table, in the sense that I may never pay her that money.”

This is not quite right, and in an instructive way. As you indicate, if the US ceases to exist, its obligations will (probably) cease to exist. (Not necessarily. Its successor may honor them.) But that is not what is being claimed. What is not quite right is separating the US gov’t from the US. Technically, the US gov’t cannot fall on hard times. The US can, of course, but not the gov’t per se. The gov’t is the ultimate source of US dollars. It is inaccurate to think that it has money or that it does not have money. It creates money. (And destroys it, too. It burns dollars all the time.) Now, state and municipal gov’ts can fall on hard times, because they cannot create US dollars, only the US gov’t can do that. So it will never be a problem that the US gov’t cannot pay social security benefits because it is spending money on something else. (It may be that stingy bastards in Congress will reduce benefits or something, since they write the laws, but that is a different matter.)

Now, let us suppose that really hard times come. Say that the Yellowstone supervolcano erupts, not only killing millions of people but destroying agriculture more thoroughly than the Dust Bowl did, and leaving society in shambles. It may then be the case that the US (not the gov’t per se) will have trouble feeding its people. The gov’t can (and will!) pay its obligations under social security, but that may not prevent social security recipients from starving to death. It is real problems that we have to worry about, not whether the gov’t will renege on its obligations to its own people. The only people who are raising the question are those who want the gov’t to renege on its social security obligations.

John Holbo: “The moral of the story is that it’s perfectly reasonable to worry about how the US is ever going to manage to pay for stuff it needs/wants.”

That is true. But before you were talking as though it were perfectly reasonable to worry about how the US gov’t will be able to pay for things. That is an unnecessary worry. :)

John Holbo: “But accusing the Social Security Trust Fund of being a mere accounting fiction does not 1) do much to explain, analytically, why the budget is tight; 2) provide any justification for dealing with budget tightness by cutting Social Security, rather than some other thing, or by raising taxes.”

The US gov’t may run a deficit. (In fact, it does more than half the time.) But that is not the same thing as the budget being tight.

John Holbo: ” (It could well be that the optimum way of dealing with budget problems it to cut back Social Security in some way, but to talk yourself into this on the vaguely moralistic grounds that mere accounting trickery should be regarded as non-binding is quite confused.)”

Looking forward, the obvious challenge to the Federal budget is the cost of health care. OC, it is a concern for the Federal budget because it is a concern for the US as a whole. It makes no sense to address it as merely a question of balancing the budget. We cannot continue to spend more and more of our national income (GDP) on health care. Our health care costs have risen dramatically since 1980. But we did have a period of years when they did not rise as a percentage of GDP. They might have been too high, in a sense, but they were sustainable. (Those were the Clinton years.) Since then, GDP has not kept pace with health costs. We will not solve our problems with the cost of health care by draconian measures aimed at our seniors. The problems will still be with us, even if we eliminate Medicare entirely. Restoring economic growth would not solve the problems, either, but it would put us in better shape to deal with them. Likewise, the best way to meet the challenge of the budget is to restore economic growth. Right now, efforts to balance the budget are likely to hinder growth. The time to think about balancing the budget is when growth is robust. Like the Clinton years. Counter-cyclical policy is not rocket science, it is fiscal responsibility. :)

2

yclipse 11.20.10 at 11:26 am

The problem with Al Gore’s “lockbox” rhetoric in the 2000 election was that he tried to make it appear that the government would collect Social Security taxes and put them into a locked box, not to be touched for any reason, until needed. The governmental equivalent of Grandma stuffing dollar bills in her mattress. This is what passed for sound economic thinking in some quarters.

3

Adrian 11.20.10 at 12:01 pm

The trust fund isn’t real money, and it *is* a real promise. Sometimes it’s good to believe in it, sometimes it isn’t.

One good time to regard the trust fund as a fiction would be this. “Oh no, we can’t afford to pay for college, there aren’t enough IOUs in the college box!”. Well, you can or you can’t. The supply of IOUs isn’t a real constraint. And you might think sending your kid to college is worth spending your money on even if it takes more than you projected ex ante.

4

Tom M 11.20.10 at 1:17 pm

Two things:
1) FICA and Medicare tax receipts have exceeded expenditures since the fix in 1982; the excess has been borrowed in lieu of borrowing from the public so the way to consider the trust fund bonds is that they are no different from debt owed to China.
2) There are 3 projections used by the Trustees and the middle, the one most discussed, uses a GDP growth factor well below historical averages which could overstate the “shortfall”. The maximum obligations of the fund are about 6% of GDP and the FICA etc. taxes raise about 4% of GDP. The maximum shortfall would be 2% of GDP and that assumes a low growth scenario.
The podcast was pretty poor.

5

Henri Vieuxtemps 11.20.10 at 1:24 pm

The trust fund and the general budget fund are two separate financial entities, with different sources of revenue. It’s nothing like children and allowances; there’s nothing complicated here, and there’s only one way to think about it.

6

John Quiggin 11.20.10 at 1:55 pm

One interesting feature of all this is that the idea that “by the time I get to collect Social Security it will be gone” has now been around for 30-odd years – that is, it predates the retirement of virtually all current recipients. And to the extent that there’s any real possibility of a default driven/rationalised by a shortfall in the fund, it’s a couple of decades off at least, so the meme will have outlasted a full working lifetime before it corresponds to a real possibility.

7

Jim Bower 11.20.10 at 2:30 pm

1. Adrian – “The trust fund isn’t real money” – It was real money at the time we paid it in. How did it become imaginary?

2. The trust fund has always sounded like a “mistrust” fund. This is particularly true at the point where our family is poised to get some of our money back. Apparently we, as a people, cannot afford the security we contributed to during our entire working lives. It makes one wonder what other “essential” government functions are bankrupt in concept.

3. I hope China decides that it is in its best interest to maintain old folks in the USA. We have certainly been the teat which has nourished them into an economic superpower today.

8

Bloix 11.20.10 at 2:31 pm

Metaphors about money that compare the US government to households or firms are making an error similar to the one that results when you think of gravity as something that pulls things down. Why don’t people in Australia fall off? What keeps the earth up? If you think of the government as being like a household, the answers you get are as sensible as the belief that it’s turtles all the way down. If you think of the government as the source of money, just as the earth is the source of gravity, you get much better results.

Households and firms treat money as if it is an objectively real commodity. They have no power to produce it – they simply own it and trade it. It is as real as the car in their driveway, the milk in the fridge.

But the US government creates money. And it does so at no cost. So just as the earth cannot “fall,” the US government can never be broke and there can never be a debt that the government can’t pay.

The government can choose to default if it wants to, but that’s very different from saying it can’t pay its debts. It can always create as much money as it needs to pay any debt it has incurred.

But that’s printing money! You cry. Of course it is. All money is made by printing money.

This was true even in the era of the gold standard. The amount of money in circulation was always a multiple of the amount of gold the US held, and the multiplier was always set as a matter of public policy.

What about inflation? It’s true that if the US government puts more money in circulation and there’s no economic growth, inflation will result. And if the government prints money recklessly, there’s a risk of hyper-inflation.

But right now the economy is running well below capacity, so increasing the money supply does not create the risk of inflation, and would instead result in higher employment and growth. Those who raise fears of inflation are, as Brad DeLong says, crying “Fire, Fire!” in Noah’s flood.

As for Social Security, the risk that it will ever default is the function of one thing only: the risk that Congress will let it default. There is no risk at all that the Fund will “go broke.” It can’t go broke, because its assets are Treasury bonds, and the Treasury can always pay its debts by borrowing from the Fed. Unless, of course, Congress decides to default. But that’s not going broke – that’s refusing to pay a debt.

People who argue that there’s no trust fund and that the box is empty are liars who are trying to cheat you out of your money. The easiest way for me to get you to give me something is to convince you that it’s of no value.

9

John Holbo 11.20.10 at 2:44 pm

“But the US government creates money. And it does so at no cost. So just as the earth cannot “fall,” the US government can never be broke and there can never be a debt that the government can’t pay.”

I suppose I was just eliding over the (obvious, yes) possibility that the government could just print its way out of any debt hole, Zimbabwe hyper-inflation style. Standardly this is how the argument that there is no trust fund runs, after all: the only way we can pay this debt is to print our way out of it, Zimbabwe-style. Which is regarded, not implausibly, as a reductio ad absurdum on the idea that we can really pay this debt, in a substantive sense. So I was skipping over the ‘technically, we can always go the Zimbabwe way’ step as obvious but relatively uninteresting, since it is freely granted by both sides. But obviously I shouldn’t have skipped over it as it is a conceptually important possibility.

10

Henri Vieuxtemps 11.20.10 at 3:30 pm

The government can choose to default if it wants to…

The government won’t default, there’s a better trick: to keep cutting benefits so that the securities in the trust fund don’t need to be redeemed. They’ll stay there forever, in that ‘lockbox’, and more will be added.

11

Adrian 11.20.10 at 3:32 pm

Whether the trust fund is real money depends on how you count entities. You can’t owe yourself money, so whether the federal-government IOUs held in the trust fund are real depends on whether they’re owned by something that isn’t the federal government. For accounting purposes the fund is a separate thing: that’s why the most irrealist position calls the trust fund an “accounting fiction”. For legal purposes, as I understand it, the fund is also separate. That’s why the Treasury instruments concerned can be held without merger, and it also affects things like what happens by default if Congress does nothing.

But for economic purposes it’s all “the government”. So, in particular, the trust fund is irrelevant to whether “we” can afford to pay retirees a given level of benefits.

None of this affects Holbo’s point that the trust fund represents a commitment to pay which can’t be disregarded. In moral terms, I’d argue, the IOUs are held by future retirees collectively.

12

DonBoy 11.20.10 at 3:32 pm

The trust fund holds those bonds because they’re considered safe, but in theory at any moment they could sell those bonds for “real money”, at which point the entire “left hand/right hand” argument would fall apart. I once got someone on the other side of this to agree with what I thought was a strawman of their own argument: “The trust fund does not contain any assets, but it does contain things that on a moment’s notice can be redeemed for assets.” At which I was left to consider that somebody didn’t know what “assets” means.

I think behind the other side’s thinking there might be the idea that the USG could default on only THOSE bonds, and not on all of them, thus avoiding the “unthinkable” idea of general default. I presume that’s impossible, but I don’t presume it based on any knowledge of such a situation.

13

c.l. ball 11.20.10 at 3:57 pm

To keep with your family analogy, the problem is that when the dad owes the girl her accumulated allowance, his other expenses have increased and his savings are gone, such that his choices are: reneg on part of the allowance owed; work more hours (tax more); cut other expenses to compensate (non SS budget cuts); or borrow the money (issue new bonds to meet the SSTF obligations).

The worry is that the last option will be harder to do 30 years out. In high school a classmate had a semi-Swiftian solution: cut off all payments to those older than average life expectancy since they should be dead.

14

Adrian 11.20.10 at 3:58 pm

Donboy: if the trust fund sells its bonds, the federal government’s extra-governmental debt—i.e. the amount it owes to people that aren’t in some sense “the government”—increases. So the irrealist has no difficulty explaining the acquisition of new assets at that point: they’re newly borrowed.

15

OneEyedMan 11.20.10 at 4:01 pm

Social security obligations are indexed to greater than the level of inflation. It is not possible to inflate your way out of the social security obligations. If you want to cur their real impact you have to cut the benefits with legislation.

16

c.l. ball 11.20.10 at 4:04 pm

The real counter to SSTF deniers is to ask them how private sector pension funds work: do they have vaults full of gold & greenbacks, or do they have stocks and bonds, including USG bonds, or “pieces of paper”.

17

Matt McIrvin 11.20.10 at 4:05 pm

The problem with discounting printing money as the “Zimbabwe way” is that we seem to have gotten the idea that any expansion whatsoever of the money supply is hyperinflationary. This is buying into a right-wing, Glenn Beckian frame; right now, the great risk is deflation and some modest inflation would be good for us.

(Correct me if I’m wrong, but it’s not just the government that creates money, is it? It’s any bank that can make loans on a fractional reserve. But the government has some control over the rate at which this happens, through monetary policy. One problem right now is that the banks, having burned themselves, are not doing enough of this, and the government’s ability to prod private banks into creating more money is close to fundamental limits. Yet Very Serious People are still warning that they need to tighten up against inflation.)

18

Jared 11.20.10 at 4:27 pm

I could argue that, in effect, I’ve already paid her the allowance, in the form of a roof over her head, food, medical care, education. It’s true that these are the very things the money I didn’t give her, as allowance, has tended to go for. But that doesn’t seem like an argument that she really never had any allowance to begin with.

Hypothetically, let’s say your daughter throws a tantrum every time you walk past a toy store, so you spend a not-insignificant amount of money placating her with silly bandz and, I don’t know, Brats Dolls. Which she can’t buy with her own money because all she has is a bunch of IOUs. I think you’d have a pretty legitimate argument for deducting that amount from her eventual payout.

Is this analogous to a purported disproportionate benefit Baby Boomers have received from various government programs? I think it’s plausible.

19

mrearl 11.20.10 at 4:38 pm

As the thoughtful comments above reveal, what we have here is not rocket surgery. Pray tell, then, why it is that seemingly sophisticated persons of considerable experience in running the government–say, Erskine Bowles–when exposed to this and related subjects have a reaction just a few degrees from Abolish Social Security! Cancel The National Debt!

Perhaps that’s merely the logical extension of the oversimplified notion that we just owe those IOUs to ourselves. Which brings to mind Will Rogers’ observation: “It’s not what we don’t know that hurts. It’s what we know that ain’t so.”

20

JP Stormcrow 11.20.10 at 4:56 pm

A semi-on topic question that I am having a surprisingly hard time find the answer to is: What precisely was the state of Social Security at the time of the early ’80s fix? In my mind I think it was somewhat “worse” than now in that it was right at the point where outgo was greater than income and the projected “bankrputcy” was more imminnet . But my mind is going; I’m a boomer after all and have enfeebled myself through my repeated tantrums demanding generationally-targeted governmental largesse. But I am confident someone here has the actual facts.

The rhetoric of the Social Security “debate” is just so incredibly deflating–in some ways it is the Rosetta Stone of the last 30 years of political discourse. But that’s enough late empire fatalism for a Saturday morning.

21

Min 11.20.10 at 5:27 pm

John Holbo: “I suppose I was just eliding over the (obvious, yes) possibility that the government could just print its way out of any debt hole, Zimbabwe hyper-inflation style. Standardly this is how the argument that there is no trust fund runs, after all: the only way we can pay this debt is to print our way out of it, Zimbabwe-style. Which is regarded, not implausibly, as a reductio ad absurdum on the idea that we can really pay this debt, in a substantive sense.”

Well, of course, the problem is that phrase, “Zimbabwe-style”. How about “every day style”? The US has been increasing the Federal debt since 1837, most of that time with money backed by metal. We went completely off the gold standard under Nixon, on the advice of Milton Friedman. As did the rest of the world, perforce, since the US dollar was the world’s reserve currency (as it is today). There is no danger that Social Security will lead to hyperinflation.

As for the obviousness of the fact that the US gov’t cannot run out of money, the claim that it can is at the center of debt/deficit hawk rhetoric. “Social Security is broke!” “The US is going broke, like Greece!” “The gov’t has run out of money!” “What will we do if the bond market does not give us money?” Etc., etc. It is not obvious to our citizens or politicians, especially as the “starve the beast” crowd is spreading such lies.

22

Adrian 11.20.10 at 5:28 pm

“The trust fund is real” has, ISTM, become the liberal position now because the other side are using the irrealist view to deny the force of promises made in the past (including Greenspan’s 80s “fix”). But the whole idea of a trust fund is, arguably, non-liberal. It represents the idea that social security benefits should, over time, equal the proceeds on a dedicated tax imposed on wage earnings below a cap. But why should old-age pensions be funded in such a doubly regressive fashion, when TANF etc are funded out of general revenue? The answer I take it is that everyone’s pretending that workers are investing for their own pensions, so it’s not really soshalizm. But that’s silly.

The trust fund makes a certain sense as a way of promising to spend at least so much on old-age benefits in the future–and such promises, including those embodied in the 80s fix, shouldn’t be broken. But no one should be fooled into thinking the trust fund device makes funding more secure than mere legislation, since both benefits and tax rates are up for amendment by legislation, trust fund notwithstanding.

23

Min 11.20.10 at 5:39 pm

One Eyed Man: “Social security obligations are indexed to greater than the level of inflation. It is not possible to inflate your way out of the social security obligations. If you want to cur their real impact you have to cut the benefits with legislation.”

Isn’t the indexing that you are talking about indexing to wages, which increase more than inflation? We are an increasingly prosperous country. We are not just keeping up with inflation. What is the problem? :)

24

Bruce Baugh 11.20.10 at 5:56 pm

The real argument for “the trust fund isn’t real” is “needy people aren’t real, or at least only exist when it’s convenient for me to acknowledge them”, in the same way that it turns out mortgage note registration is only real when it’s convenient for people dealing with them in bulk, and in the same way that torture becomes real and bad when done by the wrong people. I used to think that the isn’t-real position would never survive the reality test of enraged financiers demanding the system keep working, but MERS demonstrated to any sane person’s satisfaction that they’ve given up on that kind of consistency as an operating requirement.

They’re like the Hayek of Earth-3: pervasive private caprice undermines the ability of public parties to honor their obligations consistently.

25

Bruce Baugh 11.20.10 at 6:04 pm

Adrian: But the whole idea of a trust fund is, arguably, non-liberal. It represents the idea that social security benefits should, over time, equal the proceeds on a dedicated tax imposed on wage earnings below a cap. No, it’s the idea that the government will honor its obligation to bond purchasers. The attack on the Social Security fund’s reality is at heart the argument that the government doesn’t have to pay its bond obligations, any more than mortgage sellers have to keep accurate timely records or have any records at all with which to mount foreclosures. It’s the same social scene at work, and the stuff you’re talking about isn’t relevant to it at all.

Nothing would prohibit the legislature from allocating funds to Social Security entirely apart from its earmarked tax revenues. It’s just that our beloved masters have decided they can do without bonds being taken seriously.

26

Tom M 11.20.10 at 6:31 pm

Social Security is the part of the “entitlement” package that’s the easiest to attack as long as you can make people forget that the bargain struck in the early 80s was 2 sided. The government obligated itself, through legislation, to make payments based on the demographics confronting it. Wage earners were obligated, under that legislation, to pay a tax in order to pre-fund the government’s obligation. Shortly thereafter, realizing just how much cash came from taxing the targeted 84% of total payroll, the cash went to the general fund by borrowing from that cash flow.
It’s not an “entitlement” program. That phrasing in probably the single most effective piece of language the conservative think tanks came up with. Of course, the whole bullshit “Ponzi” scheme phrasing was pretty good, too, but only for the real suckers.
The genuine problem is health costs but that’s a more than $2 trillion pie to carve up. If the argument isn’t over Social Security, somebody might ask what about the corporate looting of the populace through health care? That might be considered rude.

27

bjk 11.20.10 at 6:45 pm

I cracked the lockbox open, stole some of the Trust Fund notes, and now they can be yours for the low, low price of your intellectual honesty. Half-off for CT members.

28

jpe 11.20.10 at 7:18 pm

The first illustration is correct: it’s basically the right hand loaning the left hand. As w/ any arrangement where I loan money to myself wearing a different hat, it’s easy to cancel the debt. I won’t sue myself, after all.

29

Kevin Donoghue 11.20.10 at 8:06 pm

Adrian,

It seems to me that you need to resolve the tension between this:

“… everyone’s pretending that workers are investing for their own pensions, so it’s not really soshalizm. But that’s silly.”

And this:

“The trust fund makes a certain sense as a way of promising to spend at least so much on old-age benefits in the future—and such promises, including those embodied in the 80s fix, shouldn’t be broken.”

I’m not American so it’s not my problem really. But why on earth shouldn’t workers who have paid into a system believe that they have as good a right to get paid back as bondholders have to their interest payments? Defaulting on the former is every bit as shameful as defaulting on the latter.

30

Sebastian 11.20.10 at 8:20 pm

The trust fund is an accounting fiction, which doesn’t really matter either way. This can be pretty easily demonstrated:

Assume it really exists. For simplicity assume a government budget otherwise in balance. It doesn’t matter, you can set the point at anywhere other than zero, but zero makes it easy to understand.

So it comes time to draw down from the trust fund. The trust fund is in government bonds. So the government has the following options to pay for this: it can cut programs, raise taxes, print money, default, lower SS benefits, or some combination of the above. (Default isn’t really going to happen so long as the government can print money but I include it for completeness).

Those are the options. The government can sometimes disguise the options (normally be reissuing new bonds to put off the day of reckoning further) but those are the options.

Now let’s analyze it if the trust fund didn’t exist. In this case the government has the following options to pay for the Social Security benefits: it can cut programs, raise taxes, print money, default, lower Social Security benefits or some combination of the above.

Since the options are EXACTLY the same in both the “trust fund exists” and the “trust fund doesn’t exist” cases, it is purely an accounting fiction.

Now arguing over whether or not it is a useful propaganda device to employ or a useful propaganda device to attack is up to you.

31

bxg 11.20.10 at 8:31 pm

This whole question a effective, possibly deliberate, distraction: it DOES NOT MATTER THAT MUCH.
Let’s suppose the trust fund is real. Nevertheless: It’s not like someone’s 401(k), not like a company’s pension provisions (not even like a rather crooked company’s pension provisions): it is NOT an endowment meant to cover future SS obligations. It’s a tiny, tiny, fraction of what that would require … but that’s not it’s job.
It is more like a buffer account, a working person’s checking account rather than their savings account. The entire amount in it (assumed “real”) could play _current_ retirees for a few (4-5???) years at most; it certainly does not have assets accumulating (e.g. in the fashion of a 401(k) or any nominally funded pension fund) that pay currently working people’s retirement. It’s not supposed to.
The status of the trust fund is just not that important. Social Security benefits in year N are going to be paid – to between 95% and 105% accuracy – but employed workers in year N; the ontological status of a buffer fund to paper over any difference is mildly interesting and important. But in the scheme of things, no more than mildly so.

32

VV 11.20.10 at 8:34 pm

It is seriously shocking to see Holbo give credence to the view that the money contributed by wage earners to Social Security somehow aren’t real. SS isn’t funded by handouts from the general government proceeds. It’s funded directly by wage earners*. SS then lends the money to the government.

In what universe does the”left hand/right hand” analogy work? Except to imply that the government isn’t going to honor specifically the bonds that one particular lender among many, ie the SS trust fund, holds?

* Some time in the not-so-near future, this funding may prove inadequate. For the purposes of this discussion, we can agree to cross that bridge when it’s at least visible…

33

VV 11.20.10 at 8:37 pm

“In high school a classmate had a semi-Swiftian solution: cut off all payments to those older than average life expectancy since they should be dead.”

If they then proceeded to starve to death, that would lower the average age, bringing more people under the axe. A nice side-effect.

34

Henri Vieuxtemps 11.20.10 at 8:38 pm

Sebastian,
if the trust fund didn’t exist, then lowering Social Security benefits (or raising payroll taxes) would be a natural solution. But since it does exist, the government has no reason to do it. And that’s what this is all about.

35

Sebastian 11.20.10 at 9:04 pm

Henri, there was the 1983 act gradually increasing the eligibility age which is in effect lowering benefits. It has also variously increased and decreased the payroll tax (always in the favor of the baby boomers). The government already has done the thing you think the government has no reason to do. And it is talking about doing it some more.

The Social Security trust fund has no financial/economic significance to anything. It doesn’t change (either increasing or decreasing) the government’s ability to pay. It doesn’t change (either increasing or decreasing) any of the options for paying Social Security benefits. When people are talking about it as an investment or whatever, they are talking nonsense.

It may be useful for rhetorical purposes or as propaganda to people who know little about money, but that doesn’t make it a non-fiction. And the hysterical defenses about how T-Bills are backed by the full faith and credit of the United States of America which are sure to show up in such a discussion, don’t change anything.

36

Henri Vieuxtemps 11.20.10 at 9:13 pm

Sebastian, there was a reason to do it in 1983, because the program ran out of money.

Today it’s fully funded for the next few decades, so there is absolutely no reason to touch it. Unless, of course, you manage to convince people that it’s not.

37

Sebastian 11.20.10 at 9:31 pm

And the policy difference between having a “trust fund” and not is what again?

You have to raise taxes to cover it in 1983? Really? It is almost like the trust fund is some sort of accounting fiction or something.

“Today it’s fully funded for the next few decades”

Not particularly, see this year’s trust fund report:

“When cost exceeds income excluding interest (Chart C), use of trust fund assets occurs in stages. For HI, non-interest income fell short of expenditures in 2008 and again in 2009, when the HI fund used interest income ($15 billion) and assets ($17 billion) to meet expenditures. This year’s report anticipates a large deficit for 2010, due mainly to the recession’s negative effect on payroll tax revenues, followed by periods of declining deficits (2011-14) and small surpluses (2015-19) as tax revenues increase with the economic recovery from the recession and the ACA’s deficit-reduction provisions take effect. In 2020, demographic change causes projected annual deficits to re-emerge and increase until 2045, after which the cost rate exceeds the income rate by decreasing amounts through 2084. In 2020, under current law, interest income will again be required to meet projected HI expenditures and beginning in 2022, drawdown of assets will again be required each year until the trust fund is exhausted in 2029, after which tax income is estimated to be sufficient to pay 85 percent of HI costs, declining to 77 percent in 2050, and then increasing to 89 percent by 2084.”

Note that since the federal government has been spending 100% of the trust fund, all the time, the economic choices I outline above start hitting home the moment the cash flow goes out of surplus, which has already happened.

38

Sebastian 11.20.10 at 9:34 pm

I’m sorry, I quoted the paragraph above the one I meant to quote:

“For OASDI, annual cost will exceed tax income in 2010 by an estimated $41 billion, although the combined trust funds will continue to grow because projected interest earnings of $118 billion will substantially exceed $41 billion. This large cash-flow shortfall is mainly the result of revenue adjustments in 2010 of $25 billion for prior years for which estimated payroll tax allocations were too large. Annual cost is projected to exceed tax income by $7 billion in 2011, followed by three years of small surpluses before increasing annual shortfalls of tax income return permanently in 2015. The report indicates that annual OASDI income, including interest on trust fund assets, will exceed annual cost and trust fund assets will increase every year until 2025. At that time it will be necessary to begin drawing down trust fund assets to cover part of expenditures until assets are exhausted in 2037. After trust fund exhaustion, continuing tax income would be sufficient to pay 78 percent of scheduled benefits in 2037 and 75 percent in 2084. Although the projected exhaustion date for the DI Trust Fund is 2018, the value of the OASI Trust Fund would be sufficient at that point to make assets available to pay full DI benefits, but only with authorizing legislation.”

So the only reason the trust fund continues to gain ground even this year, is because of interest on the T-bills, which is to say deferred taxation.

39

OneEyedMan 11.20.10 at 9:40 pm

@ Min: I meant to write cut and not cur in my comment. I hope that eliminates any confusion. If not, here it goes:

” Isn’t the indexing that you are talking about indexing to wages, which increase more than inflation? We are an increasingly prosperous country. We are not just keeping up with inflation. What is the problem? :)”

I’m not saying it is or isn’t a problem to index to wages rather than prices. What I’m saying is that when social security obligations are designed to grow faster than inflation it is going to be awfully difficult if not impossible to eliminate those obligations by trying to print money or otherwise inflate the general level of prices.

I guess it might be possible with accelerating rates of inflation timed carefully to exploit the time difference between when inflation is calculated and when social security is paid but that’s playing a very dangerous game with hyperinflation and the politics stink to boot.

If we are not prepared to fund the obligations out of general revenue then we should reduce those obligations by statute, not monetary shenanigans.

40

Henri Vieuxtemps 11.20.10 at 9:43 pm

OK, so according to your quote the program is expected to be fully funded until 2037.

41

VV 11.20.10 at 9:50 pm

“is because of interest on the T-bills, which is to say deferred taxation.”

You would like Interest on T-bill *you* buy to be considered “deferred taxation”?
If a mutual fund buys them? Why is it any different for SS? The only difference is that the mutual fund manager happens to be a appointed by the government. Many pension funds are often run by government appointees in almost every part of the world. Treating pensioner savings in bonds as “accounting tricks” would certainly send said appointee to jail.

I really can’t believe the gall it takes to treat SS in any way other than a pension fund that invests very conservatively in bonds. Robbing pensioners seems to me to be the only way to look at any suggestion of not paying the US’s obligations to the fund.

42

Sebastian 11.20.10 at 10:41 pm

Henri, “OK, so according to your quote the program is expected to be fully funded until 2037.”

No. It is taking in less in taxes than it is spending NOW. That isn’t fully funded.

It expects to take in less in taxes than it is spending on a permanent basis starting in 2015. That is four years from now. Since the trust fund represents future taxes and since the US government has been spending the surplus in whole every year, the very moment that you have to touch the trust fund is when you have to start talking about either raising general taxes, going deeper into debt, or cut back on programs. That time is now. This very year. Not 2030anything.

VV, “You would like Interest on T-bill you buy to be considered “deferred taxation”?”

What I’d like is irrelevant. We are talking about what is and is not. You don’t get to have different facts just because they’d be more convenient. A government which issues interest bearing bonds is deferring taxation until the repayment of the bonds. If it ‘invests’ in its own bonds and puts it in a trust fund while spending the taxation that supports the trust fund, it is deferring taxation, no more, no less.

If I buy government bonds, I’m not deferring taxation. But the government still is. But those are two different parties. Me and the government. The government is still deferring taxation.

Again, look at my comment at #30. There is absolutely no difference whatsoever between the existence and non-existence of the trust fund. If there was a horrible error that destroyed all record of it, nothing would change. If it magically doubled in size, nothing would change. If it went up in puff of smoke nothing would change. It makes no economic difference whatsoever.

43

Sebastian 11.20.10 at 10:42 pm

Sheesh, five years from now. Bad fingers!

44

Sebastian 11.20.10 at 10:57 pm

And when I say ‘propaganda’, it may be too loaded of a word. If you want to simply things for people who aren’t paying attention or don’t care, the idea of a dedicated revenue stream [payroll tax] with a trust fund [surplus] isn’t atrocious. I’m not sure it is good, but simplifications often aren’t. But neither should we be fooled by our own simplifications into thinking that it represents an actual ‘savings’.

45

Bloix 11.20.10 at 10:59 pm

John, when you compare what I’m saying to “Zimbabwe-style,” you are falling under the sway of what tPaul Krugman calls “the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods,” and you are heading those who, as Brad DeLong says, are “crying Fire! Fire! In Noah’s Flood.”

I don’t expect that I will convince you (I am no more than a disembodied conglomeration of unpronounceable letters) but I urge you to begin reading Krugman and DeLong on a daily basis. You might also look at Eric Rauchway’s older posts (at Edge of the American West) on the Great Depression, and if you’re looking for a good book to sink your teeth into, you might try Lords of Finance by Liaquat Ahamed. Or you could read the work that made Ben Bernanke famous – his demonstration that the countries that stayed on the gold standard longest had the deepest and longest Great Depressions (in “Essays on the Great Depression”), or even Milton Friedman and Anna Schwartz, in A Monetary History of the United States.

What is bizarre about the current discourse, among even very educated people, is that we have forgotten almost everything that has been learned about money over the past 150 years, and instead seem to think that we can understand it through “common sense” metaphors, like comparing the entire economy to a family or a firm. You can’t do that, except as a very imprecise metaphor, and if you try to reason from metaphors you’ll make grievous errors.

The error you’re making when you talk about Zimbabwe arises from an unspoken assumption that money is something that has an objective reality external to the government that prints it. Therefore, you believe, when a government prints “extra money,” it is in effect counterfeiting, or printing phony money, and this phony money causes inflation.

This analysis is false. The reason it’s false is that there is no such thing as an objective reality to money. To you and me,the supply of money seems objectively fixed, because we don’t create it. But to the government, the supply of money is not fixed. The government creates money. It can create too little, which results in deflation (that’s where we are right now.) It can create just enough, which modern economists agree means moderate inflation (say, 2 percent). Or it can create much too much, which means hyper-inflation, like Zimbabwe or Weimer Germany.

The right amount of money in an economy is the amount that allows that economy to produce goods and services at near to full productive capacity – so that unemployment is under 5 percent. That’s not where we are and there’s no reason we shouldn’t be there, except for the false and savage gods that govern our national discourse, which demand that poor people and ordinary workers must suffer for the sins of bankers and brokers. Or less, melodramatically, from the false belief that there is some sort of “natural” amount of money that must exist, which is tampered with at our peril.

As for Social Security, it is simply impossible for it to “go broke” as long as it holds Treasury bonds. As long as there is a United States of America, the Treasury can pay treasury bonds. It can pay from tax revenues; it can borrow the money from investors; or it can “borrow” the money from the Fed, which is how the Government “prints money.” (The Fed lends money to the Treasury by buying Treasury bonds with money that doesn’t exist until the Fed makes the purchase. If you look at the dollar bill in your wallet, you will see that it is a “federal reserve note” – that is, it is an IOU from the Fed. Since money is nothing more than a promise from the Fed that it will give you a piece of paper with a picture on it in exchange for the piece of paper you already have, the Fed can create as many of these notes as it wants to.)

If the Government decides to pay future social security benefits by borrowing from the Fed, will that cause hyperinflation? Not if the economy continues to grow, it won’t. As long as the money that the Fed creates can be used to buy an increasing amount of real goods and services, there won’t be hyperinflation. Will the economy be growing sufficiently in 30 years to allow the absorption of that additional money? We’ll know in 30 years – but odds are that at least some and perhaps most of the Social Security benefits can be funded simply by increasing the money supply.

In any event, whatever happens, Social Security cannot “go broke.” It simply cannot, as a matter of fact. This is just as true as the fact that you cannot sail of the edge of the earth. Other bad things might happen to you – you might perish in a storm or starve in a flat calm – but you cannot sail off the edge. People who talk about Social Security “going broke” are making an error of the same order as people who think that the world is flat.

46

Henri Vieuxtemps 11.20.10 at 11:01 pm

Sebastian, it is fully funded until 2037, because it has enough money in the trust fund to last until 2037. Which means that there is absolutely no reason to tweak anything in the program until 2037.

It’s only because you refuse to accept that the trust fund exists the program appears (to you) to be in crisis already.

Which means that you were clearly incorrect in your comment 30, stating that the existence of the trust fund “doesn’t really matter either way”. As you can see, it certainly does.

47

Matthew Ernest 11.20.10 at 11:16 pm

“Since the options are EXACTLY the same in both the “trust fund exists” and the “trust fund doesn’t exist” cases, it is purely an accounting fiction.”

While the available options may be the same, the difference is in what are the legal options. If the SSTF is public debt, then it is unconstitutional to default on it (in fact, it is unconstitutional to question where or not the USA would default on it as well). The general budget problems occur when the SSTF starts trying to cash in that debt. If is not public debt, no one will ever again agree to net positive balance for SS over anything but the shortest term and the general budget problems occur immediately.

48

Sebastian 11.20.10 at 11:41 pm

“Sebastian, it is fully funded until 2037, because it has enough money in the trust fund to last until 2037. Which means that there is absolutely no reason to tweak anything in the program until 2037.”

No, it has enough T-bills in the trust fund that if redeemed by tax money collected elsewhere it can last until 2037. That is a rather enormous difference. Which means that exactly as I said at 30: “So it comes time to draw down from the trust fund. The trust fund is in government bonds. So the government has the following options to pay for this: it can cut programs, raise taxes, print money, default, lower SS benefits, or some combination of the above. (Default isn’t really going to happen so long as the government can print money but I include it for completeness).”

If you really believe that the trust fund’s existence changes those options, please identify which option you think is changed.

Does it need to cut fewer programs?

Does it need to raise less in taxes?

Does it need to print less money?

Which option is changed?

49

Sebastian 11.20.10 at 11:46 pm

“While the available options may be the same, the difference is in what are the legal options. If the SSTF is public debt, then it is unconstitutional to default on it (in fact, it is unconstitutional to question where or not the USA would default on it as well). “

Default is just a sideshow distraction. Whatever happens the US can always print more money to avoid default. The Supreme Court has already ruled that benefit levels are not mandatory and that they are not Constitutionally secured. Again the options are more taxes, cut other programs, less benefits, print money or some combination. Those are unchanged by the SSTF’s existence or non-existence.

50

Brett Bellmore 11.21.10 at 12:27 am

““But the US government creates money. And it does so at no cost. So just as the earth cannot “fall,” the US government can never be broke and there can never be a debt that the government can’t pay.”

I find this kind of talk incredibly exasperating. Ok, it’s true that, at the end of that “Zimbabwe-syle” hyperinflation, with the other employees of the Treasury having left to become subsistance farmers, the secretary of the treasury could still pick up a million “dollar” bill blowing down the street, scribble a few more zeros on it, and ‘create money’. So, yes, it’s true that the US can always create ‘money’, in this sense.

But “money”, in the sense most people mean, is a medium of exchange. If nobody wants to take that scribbled on bill in exchange for something, (Which IS the usual end result of a “Zimbabwe-style” hyperinflation.) then the US government most assuredly CAN lose the capacity to “create money”.

Now, this doesn’t imply that printing money doesn’t enable the government to “pay off” existing debts. But do enough of that, and the “paying off” becomes indistinguishable from repudiating the debt.

““While the available options may be the same, the difference is in what are the legal options. If the SSTF is public debt, then it is unconstitutional to default on it (in fact, it is unconstitutional to question where or not the USA would default on it as well). “

This one is pretty exasperating, too. The US government will never default on the debt owed to the SSA. Since the SSA IS “the other hand”, the US government will simply direct the SSA to not ask for the debt to be paid.

51

R. Fullinwider 11.21.10 at 1:42 am

Why is this so hard? The SS “trust fund” consists of US bonds. Of course the government will redeem them. Where will it get the money? From its general revenues. The government’s general revenues constitute a burden on you and me. Talking about SS being solvent until 2037 or thereabouts suggests that SS can maintain itself for another 25 or 30 years WITHOUT it being a burden on us. This is not the case. Once FICA revenues fall short of SS payouts (and that moment is upon us), the shortfall has to be made up through bond redemption, and bond redempti0n means a burden on us. Period.

52

Tom Maguire 11.21.10 at 1:49 am

“The US government will never default on the debt owed to the SSA. Since the SSA IS “the other hand”, the US government will simply direct the SSA to not ask for the debt to be paid.”

That seems to be a point that the Trust Fund apologists simply can’t grasp.

The Trust Fund is slightly more than a pure fiction – when it has a positive balance the Treasury can make payments without an appropriation from Congress.

When the balance goes negative, Social Security payments beyond their current cash receipts can only be made with a Congressional appropriation.

And as the Trust Fund approaches a negative balance, Congress can choose to extend its life by reducing benefits – a court has ruled that neither current or prospective retirees have a legal right to a specific level of benefits, so the fact that “trust fund assets are there” means nothing as to whether then-current claimants will actually get paid. Of course, a future Congress could let benefits continue at an unsustainable rate until the trust fund was exhausted, and then let benefits fall dramatically (since they would be funded by current receipts.)

The key point is that, although the analogy to a conventional trust fund has been a useful marketing ploy, this is like no other trust fund in the world. And the notion that as long as the assets are there the claimants are sure to collect is utterly fallacious; the accounting fiction may influence the political process as to who gets paid, but it *will* be a political process, not a matter of legal right.

53

Omega Centauri 11.21.10 at 1:56 am

I would prefer to consider the trust fund as a psycho-political entity. Thats the only sort of reality it has, it grounds people expectations of what fairness means in the context of retirement/insurance. Nothing more, nothing less.

Now, I think a more serious issue is coming up. Social Security is another indexed defined benefits package. That means that some roughly fixed absolute amount of future productive capacity is pledged for a specific purpose. It is relatively easy to keep these promises so long as real GDP increases at a respectable rate. But, what if we can’t keep up exponential growth? Gee duh, exponential growth can only occur for a finite period of time, eventually that trend line will be broken to the downside.
Aside from invoking a supervolcano, isn’t the world already starting to experience the effects of approaching physical limits to growth. Oil production has plateau-ed, and we must share this roughly constant volume with more and more consumers. Agricultural production may also have peaked, the effects of anthropo-induced climate chaos, exhaustion of ground water supplies, soil, and mineral inputs all threaten to undo the “green” revolution. So there is a very real possibility that economic growth in the developed world has peaked, will soon peak, or at a minimum growth may continue, but at too slow a pace. In any case, the pie that future society has to slice may not be big enough to enable past “promises” to be kept. Then we have to deal with the acrimony and loss of trust that reneging in whole or part will entail.

54

John Holbo 11.21.10 at 2:14 am

“John, when you compare what I’m saying to “Zimbabwe-style,” you are falling under the sway of what tPaul Krugman calls “the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods,” and you are heading those who, as Brad DeLong says, are “crying Fire! Fire! In Noah’s Flood.””

Sorry, you are conflating two different things, Bliox. By going all hypothetically Zimbabwe, I am not suggesting that we are actually on the verge of hyper-inflation. (Why would I be?) I am merely conceding the point that, in some sense, a government can inflate its way out of debt, as long as you don’t mind worthless currency. Brad DeLong and Kurgman are not denying that point, nor would they, I think. They is, rather, pointing out that we are not currently facing serious inflation. That’s something else entirely.

“The error you’re making when you talk about Zimbabwe arises from an unspoken assumption that money is something that has an objective reality external to the government that prints it. Therefore, you believe, when a government prints “extra money,” it is in effect counterfeiting, or printing phony money, and this phony money causes inflation.”

Sorry, Bliox, maybe the problem is that you yourself are actually a bit murky about what’s going on in Zimbabwe? Their currency is not counterfeited, or phony, neither in fact nor ‘in effect’. They aren’t suffering inflation because people are nervous about accepting Zimbabwean currency for fear that any given piece of paper isn’t ‘real’. So in using them as an example, I am of course not suggesting a case of counterfeiting or phony money, either in fact or ‘in effect’. It’s important to distinguish between authentic currency that isn’t worth much and counterfeit currency.

You yourself get it right just a bit further on. You recognize that the government of Zimbabwe is not counterfeiting but just increasing the money supply. Good! We are agreed!

Now, I actually did say something importantly wrong, as pointed out upthread, which is that the government could, in effect, inflate its way out of Social Security Fund obligations. That’s not true because they are pegged to inflation. Oops. Yes.

“In any event, whatever happens, Social Security cannot “go broke.” It simply cannot, as a matter of fact. This is just as true as the fact that you cannot sail of the edge of the earth. Other bad things might happen to you – you might perish in a storm or starve in a flat calm – but you cannot sail off the edge.”

I think the problem is that you are stuck on a point that most people don’t mention, not because they don’t get it, but because they are taking it for granted in their discussion. Well, ok, some of the critics of the Trust Fund are probably confused about it. But most of the critics of the Trust Fund at least understand this much: the government prints the money. It doesn’t appear under toadstools in the night or anything like that. Certainly not!

55

John Holbo 11.21.10 at 2:23 am

Sorry, I realize now that one phrase I used in the post may have set you off, Bliox. I wrote: “If the US government completely and unrecoverably collapses, as a going economic concern then the Social Security Trust Fund will be bust – and there will be no United States, too!” You may be reading that as me worried that Social Security will ‘go broke’. I meant it to be read as ‘The United States may become a failed state’. I’m not worried about it, but it’s a logical possibility. And if it happens, presumably pensioners either won’t get checks at all, or won’t get checks that are worth anything. But that’s the least of our problems, in that situation.

56

Tom M 11.21.10 at 2:31 am

although the analogy to a conventional trust fund has been a useful marketing ploy, this is like no other trust fund in the world.
That’s the most fallacious statement possible. The notes in the SS Trust fund are exactly like any other obligation of the US government. Since they are US government bonds the assets in the trust fund are better than the assets in any other private trust fund.
You erroneously conflate the legislatively determined level of benefits with the nature of the assets in the trust fund. Congress can attempt to change the amount a recipient will be paid but if you were able to obtain any of those bonds and went to a bank to redeem them, you would get arrested but in the theoretical universe where they were bearer bonds, you would get paid dollars. You may not want those dollars, but they would be there.

57

John Holbo 11.21.10 at 3:24 am

“That’s the most fallacious statement possible. The notes in the SS Trust fund are exactly like any other obligation of the US government. Since they are US government bonds the assets in the trust fund are better than the assets in any other private trust fund.”

Here’s an analogy. Suppose a (presumably religious person) suggested you can never trust anything anyone says unless they can swear by a higher power that it is true. Their word needs to be ‘backed’. But then it will follow that you can’t trust God’s word, because He, as the highest power, cannot swear by any higher power. Financially speaking, the US government is God.

58

P O'Neill 11.21.10 at 3:35 am

Picture to help the discussion — George Bush being shown, in horror, that the trust fund is just a filing cabinet in West Virginia. This was after he had spent it all on tax cuts, but before he wanted to invest it in the stock market.

59

Bloix 11.21.10 at 3:45 am

John- my point is that increasing the amount of money does not necessarily cause inflation. It does in Zimbabwe because the economy is shrinking. It does not when the economy is expanding. Thus increasing the amount of money is not the same as causing inflation, and it won’t cause inflation when the economy is running at less than full capacity.

Of course I understand that the currency in Zimbabwe is not counterfeit. I am saying that the problem of Zimbabwean hyperinflation has nothing at all to do with any problem that the US faces or ever likely to face and a comparison to Zimbabwe is not merely unhelpful – it arises from a confusion over the nature of money. Many people seem to believe that there is a “true” amount of money and that anything more than this is not “real” money. Often you hear this expressed in terms of “fiat money “from people who want to bring back the gold standard. But all money is “fiat money” – even under the gold standard money was printed in a multiple of the amount of gold that the government held.

And of the government can’t “inflate” its way out of the Social Security obligation. What it can do is to pay the obligation with funds that it obtains by selling bonds to the Fed. This transaction would be inflationary if the country were running at full capacity. But if the country is running at full capacity and the economy has been growing healthily, then the Treasury won’t need to sell bonds to the Fed, because it will not be hard for the Treasury to sell bonds into the marketplace or for the government to raise taxes. But if the economy is in a slump, then the Fed can buy Treasury bonds and the Treasury can use the money to pay the Social Security trust fund, and the transaction will not be inflationary.

I would like to think that people take this stuff for granted. But no one in Congress or the media appear to understand it, so it’s not necessarily the case that everyone who comments here does.

60

StevenAttewell 11.21.10 at 3:54 am

Holbo:

I think what Bloix is getting is that saying “government printing money to pay its bills” and “Zimbabwe-style printing money” have really different connotations on a rhetorical/emotive level, and that it tends to carry the implication that deliberately printing money to pay for something always leads to hyper-inflation. It’s like a German opponent of expansionary monetary policy making pointed references to Weimar – even if what we’re describing is practically identical, the political reception is entirely different.

61

StevenAttewell 11.21.10 at 3:54 am

*getting at.

62

bxg 11.21.10 at 4:13 am

> That’s the most fallacious statement possible. The notes in the SS Trust fund are exactly like any other obligation of the US government. Since they are US government bonds the assets in the trust fund are better than the assets in any other private trust fund.

Except that most other retirement private “trust funds” try, at least in name, to carry assets to provide for retirement to their members. The US SS fund does not. If you are more than 4 years away from retirement, the assets the US fund has – on the most generous possible interpretation of what is there are and what is not – remains zero ($0.0000) for you. By design. The US fund does not even begin to try to build savings to pay for future retirees. Anyone who thinks it is is under a rather large misunderstanding, and it would be understandable that such a person would be worked up questioning how the money is invested and even if it’s real. But such people are misguided as to the size of the trust fund (far far far smaller than you think relative to US pension obligations), its purpose (which is definitely not to fund future US pension obligations), and the importance of its real size (medium, at most, since the size of the trust fund is a third-order determinant at most of how much trouble future-US will have with its SS obligations.)

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Nathanm 11.21.10 at 6:08 am

The point I think Sebastian is making, and which no one has addressed directly, is that there is no practical (as opposed to legal or accounting) difference to the country between the US Government issuing bonds (to, say, finance shiny new fighter planes), and the SSA paying SS benefits from the trust fund. When the SSA redeems bonds from the trust fund what is happening is the same as when the government issues bonds. In both cases, the government is selling bonds to the public. The SSA redeeming bonds from the trust fund is the same as the government running a deficit.

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Bruce Baugh 11.21.10 at 7:43 am

Nathann: If the kind of argument Sebastian and people like him are making about the Social Security fun is valid, then it’s equally valid to say that there’s no meaningful difference between the Department of Defense buying bombers and the Department of the Interior buying bombers for rangers to use in controlling unruly crowds. It’s all the US government, after all, and the distinctions are just legal and accounting.

In other contexts, they’re happy to argue that legal and accounting distinctions matter a whole lot more than large quantities of human misery. They’re only doing the opposite now because they wish not to be bound to respect the kind of obligations they love to have when they flow the other way. It would never come up if, say, the Department of Defense had bought bonds to provide a distinct long-term revenue stream for ongoing obligations.

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Adrian 11.21.10 at 8:33 am

Bruce Baugh: ” No, it’s the idea that the government will honor its obligation to bond purchasers.”. The government can honour its obligations to bond purchasers consistent with any level of social security benefits. Cutting benefits 50% would mean the bonds in the trust fund last a very long time; it need involve no default.

The trust fund is no real protection, over and above the political promises it represents. It’s not a source of assets and it’s not a legal constraint on benefits. But buying into the trust fund means buying into the idea that social security can go “bankrupt” or “run out of money” while the US government is still solvent. Back when that was the evil conservative position, it did real harm.

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Paul Stanley 11.21.10 at 8:45 am

I might be wrong, but I think the trust fund is more than just an accounting gimmick. It puts government obligations “on the books”.

When domestic and foreign investors are thinking about buying US bonds, they know that the trust fund holds a large share of these bonds that were designed end up back on the market to pay for the Boomers’ retirement. The market then prices in the total amount of inter-governmental obligations through the interest demanded on government debt.

I think people have trouble with this because it shows what great footing the US is actually on financially. Even with the huge number of “unfunded” future liabilities, the Masters of the Universe on Wall St and around the world trust the US government enough to demand unbelievably low interest rates in exchange for the perceived security of US debt. The intellectual disconnect between market signals and right-wing ideology is what is most striking to me.

67

Brett Bellmore 11.21.10 at 8:45 am

I would note that, as distant as we are from a “Zimbabwe style hyperinflation”, the most efficient way to arrive at one is to proceed on the assumption that it’s impossible for it to happen. All this talk about how the government can ‘never go broke’ is laying out the route to get there.

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Adrian 11.21.10 at 8:47 am

Kevin Donohugh: I don’t see a tension. The private-investment model is a silly way to run state support for the retired. But while we’re doing it that way, you’re quite right that workers are entitled to what they were promised. (Not that they had a choice in what they contributed, it’s a tax really.)

But it’s not helpful to think of those promises as represented by the trust fund, rather than as promises. On top of everything else, as someone pointed out, the trust fund just represents the time-shift element. In a demographically stable system with current contributions equal to current payouts, the trust fund could always have a zero balance, but that wouldn’t affect the entitlements of retirees who’d “paid in” all their lives.

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Adrian 11.21.10 at 8:52 am

… But where a positive balance in the trust fund does represent a time-shift, as after the 80s “fix” we should honour both halves of the deal. That’s the sense in which it does make sense to think of the trust fund as representing promises. But it’s the promises that are important, not the trust fund. Sorry for two-parter: early here.

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Matthew Ernest 11.21.10 at 9:30 am

“When the SSA redeems bonds from the trust fund what is happening is the same as when the government issues bonds.”

The bonds in the SSTF are not the normal every day bonds that the public buys and sells. They are special bonds that cannot be traded with a third party and can only be sold back to the US Treasury. Normally issued bonds are clearly public debt; it is an open question whether the specials that the SSTF hold are public debt and I definitely can’t form an intelligent answer to that question.

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VV 11.21.10 at 9:50 am

“And the policy difference between having a “trust fund” and not is what again?

You have to raise taxes to cover it in 1983? Really? It is almost like the trust fund is some sort of accounting fiction or something.”

If an insurance company sees that the premiums it’s getting don’t allow it to cover the insurance payouts that the insured incur, it’ll raise premiums. How’s that an accounting fiction?? The tax raised was the insurance premium. What is so hard to understand about the government running a large pension insurance scheme?

You seem to take the fact that the government felt free to borrow from the premiums as somehow proof that the premiums didn’t exist, didn’t get paid and aren’t supposed to cover the insurance benefits.

To bxg: maybe you care to explain all those misunderstandings many of us have about SS. It seems the people writing the trust fund report themselves suffer from similar confusion though…

72

Henri Vieuxtemps 11.21.10 at 9:51 am

@51 Why is this so hard? The SS “trust fund” consists of US bonds. Of course the government will redeem them. Where will it get the money? From its general revenues. The government’s general revenues constitute a burden on you and me. (also something similar in 63).

No, it’s not a burden on “you and me”. All citizens are not the same, and all the government programs are not the same; even if some here want to pretend that they are, by framing it all as one single “government”.

When you cut SS benefits and/or raise payroll taxes you hurt one group of people (A) — and when you raise the general fund taxes (income, corporate, capital gains, estate) you’re hurting a mostly different (if slightly overlapping) group of people (B).

Since the program is solvent for the next 27 years, there is no reason to hurt A; the bonds would have to be paid by B. Naturally, the B people don’t want to pay, so they start this “there is no trust fund” campaign, trying to shift the burden ($2 trillion) to A. And, without a doubt, they will succeed. And that’s what this is all about.

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Brett Bellmore 11.21.10 at 9:53 am

It’s not a very important question in any case, since the whole “shall not be questioned” business would never be reached. As I point out, the SSA is not independent from the government that would have to redeem the bonds. If the government doesn’t want to redeem the bonds, it doesn’t have to default, it just directs the SSA to not ask it to redeem them. “Default” avoided, bonds reduced to irrelevancy. Or rather, recognized as the irrelevancy they’ve been all along.

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VV 11.21.10 at 10:28 am

“In a demographically stable system with current contributions equal to current payouts, the trust fund could always have a zero balance, but that wouldn’t affect the entitlements of retirees who’d “paid in” all their lives.”

It’s unclear how useful that theoretical construct is. Moreover, it is clearly problematic politically in the current environment. Because the retort is that in the current state, the taxes we pay aren’t enough to provide for the current level of benefits. (Sebastian already made that point.) So, if the SS hadn’t actually gathered more funds when the demographics were different, we would need to urgently discuss where the optimal balance is currently for a zero balance SS scheme (no pun intended).

The SS system finds itself in a political situation where people are questioning whether the we today can “afford” to hold the promises made to the previous generation, which at the same time is a political situation where significant numbers of people (still a minority, but a large one) think taxes are eeeviiil unless they fund police, prisons and wars. In such an environment, one is shooting oneself in the foot politically if one doesn’t point out that actually the promises made can still be repaid with the funds already contributed by previous generations (which is what you’re doing when you’re drawing down the trust fund).

That is actually a feature of the system, not a bug. If the “US Pension Fund” finds itself underfunded, it’s not (yet) because the premiums were not high enough, but because the management pilfered them.

The bonds actually exist. They exist the same way as the bonds that China bought exist. They were issued for the same reasons that the bonds China bought were issued (the general government needed money). The moment I see someone seriously stating that the US can’t afford to pay back other bondholders is the moment the claim that the the US can’t “afford” SS gains some credibility. If the question is “is it worth paying taxes to fund SS benefits” the answer should be “until 2037 or whenever the trust fund runs out, it is worth it at least as much as it is worth paying taxes to pay back bondholders of various stripes”

Obviously there can be a discussion about the optimal level of safety net coverage. The US already has among the loosest safety nets in the developed world, but since it is inhabited mostly by John Galt types, even that may be too much. But it colors the discussion significantly to say there is some current fiscal emergency. It also allows people wanting to gut SS to examine it in isolation from other budget items. Even so, it would be helpful to have some voices say “SS doesn’t have a funding problem, but even if it did, it should be funded to maintain current levels of benefits”.

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JP Stormcrow 11.21.10 at 1:50 pm

Brett@66:I would note that, as distant as we are from a “Zimbabwe style hyperinflation”, the most efficient way to arrive at one is to proceed on the assumption that it’s impossible for it to happen.

Actually I think the most efficient way is to let your economy go entirely into the tank. Maybe some kind of unimaginable scenario where one party is willing to stifle all government action in a desperate bid to win back power whilst being fronted by demagogues and funded by narrow-minded business oligarchs who expect to win on the margin.

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JP Stormcrow 11.21.10 at 2:25 pm

Which is also a pretty good prescription for screwing up Social Security, with an able assist from the online acolytes of oligarchy–both the confused and the disingenuous.

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VV 11.21.10 at 3:50 pm

What Henry said.

It is amazing to me to see people supposedly of good will attempt to persuade themselves and others that they can’t even begin to understand how, say, a public utility works! A 100% state owned government enterprise is still *not* the general government.
If
– the enterprise is the bus system
– the money from the monthly or yearly tickets of the last 10 years, stuffed in a mattress, are enough to fund operations of the buses for the next 30 years
– the government-appointed CEO diverts the funds elsewhere
– and then declares the bus company cannot run the routes even for the people that have already bought the yearly tickets

I think we can all agree that this is very problematic governance. Right? It’s not even an issue of whether this is legally fraudulent. It’s a matter of breaching the public trust in the worst way: taking money from a set of people and giving it to another set of people and then giving them the finger and yelling “Suckeeeers!”.

If a private insurance company had done what Sebastian and Brett and others are suggesting, we would all be screaming bloody murder. Why is it ok for the government to do it exactly?

Of course, in the context of trying to discredit the government, trying to disillusion people and persuade them that “government is the problem”, having the government renege on a generational promise would be awesome. So, in addition to shifting the financial burden, as Henry points out, we have the beautiful side benefit of turning people against government.

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Omega Centauri 11.21.10 at 3:52 pm

I’d like to clarify the whole inflation thing, by writing an equation. Let P be an average price level, M be the volume of money, V be the velocity of money, and G be the volume of goods production/consumption. Then we get an expression for the average price
P=M*V/G
I think it will become clearer if I take the logarithm of this equation, since that makes the
solution of the rate of change easier:
log(P) = log(M) +log(V) -log(G)
I’ll use the subscript l to denore logarithm of our equation becomes:
Pl = Ml +Vl -Gl
The rate of change of Pl, is the rate of inflation, and this is:
d(Ml)/dt +d(Vl)/dt -d(Gl)/dt
Which tells us that the inflation rate is
The percentage rate of increase of money, plus the percentage rate of increase of the velocity of money, minus the percentage rate of increase of goods production.
So what does this tell us about printing money versus inflation?
(1) Leaving other terms fixed the government covering a revenue shortfall by printing X percent od GDP per year adds X percent to the inflation rate. X is likely to be only a few percent of GDP, say 10% in an extreme case. The onlt way to get hyperinflation is if the velocity of money skyrockets -say people decide they had better spend it now while it is still worth something. Or the real economy collapses. Keep these things under control and hyperinflation cannot ocurr.

But people with certain agendas, and those who carry water for them will raise the spector of Zimbabwe, or Weimar because it creats the political/intellectual climate needed to gut the welfare state. Most of these people are just naive water carriers, they think emotionally, rather than analytically, and implanted fear of the extreme case dominates their thinking.

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Chris 11.21.10 at 3:59 pm

If the question is “is it worth paying taxes to fund SS benefits” the answer should be

… Here, let this historian show you how old people lived before SS existed. Horrifying enough? There’s more pictures in this filing cabinet…

The alternative to funding SS is not funding, and therefore not having, SS. We’ve been there. It sucked. We shouldn’t go back.

(Although, admittedly, that’s not an argument for any particular level of benefits above “subsistence and a roof over their heads”, let alone against means-testing or eliminating the cap on taxes paid into SS, etc.)

80

VV 11.21.10 at 4:16 pm

@Holbo: “Here’s an analogy.”

How’s that analogy useful for anything in this discussion? It is just as useful (or useless) to consider this analogy when it comes to bonds owned by you, TIAA-CREF, the Chinese, or anyone else. It is also as useful when considering “whether” the US has to pay civil service salaries next month. It’s essentially saying “the US government can do anything to its citizens” and beyond that “it can do anything to anyone (given that it has nucular weapons”.

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Bloix 11.21.10 at 4:18 pm

Brett at 66 – we have 10 percent unemployment and an economy that is operating well under full capacity. This is a real problem now. People who worry that failing to fix the deficit might conceivably, possibly, maybe, bring on hyperinflation are making the same mistake as the Fed made in 1929. In order to prevent a future problem that probably won’t happen, we can choose have a 10 or 20-year depression – which is, in fact, what we’re choosing to do. Or we can deal with the problems that we have and not worry right now about a fantasy problem that might or might not arise years in the future.

And the people who actually put their money where their mouths are – the bond traders – are not concerned about inflation – long-term interest rates are low and not budging – so people who claim that we should be placing inflation fears over unemployment concerns are saying that the market is stupid and they are smarter. These are supposedly free-marketers, but they believe that the market is efficient only when it confirms their pre-conceived ideas.

In any event, the deficit is not caused by Social Security. It’s caused by health care costs, which are ridiculously out of line with every other industrialized country in the world, by the Bush tax cuts for the very rich by two unfunded wars, and by the recession, which reduces tax receipts and increases transfer payments. Social Security doesn’t contribute to the rising deficit.

Anyone who talks about the deficit should be required to review these graphs:

http://motherjones.com/kevin-drum/2010/11/deficit-commission-serious

http://voices.washingtonpost.com/ezra-klein/2010/11/the_bush_tax_cuts_effect_on_th.html

http://www.businessinsider.com/chart-of-the-day-bush-policies-deficits-2010-6

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Bloix 11.21.10 at 4:27 pm

On the deficit, see Dean Baker, http://my.firedoglake.com/deanbaker/2010/11/20/compromise-on-social-security-and-medicare-why-my-center-left-friends-are-wrong/

“The third point is that there really is no deficit problem. The problem is health care. That is not just rhetoric; this is what the data show. In 1980, non-interest spending was 18.8 percent of GDP. President Obama’s budget projects non-interest spending at 18.6 percent of GDP in 2020. This means that in 40 years spending has actually fallen slightly as a share of GDP. The story of an out of control federal budget is a complete fabrication.”

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Brett Bellmore 11.21.10 at 5:53 pm

“The only way to get hyperinflation is if the velocity of money skyrockets -say people decide they had better spend it now while it is still worth something. “

And since that decision is generated by the inflation printing money causes, we can clearly see that inflation is a nonlinear function of printing money, right? Probably displays quite a bit of hysteresis, too, when you stop printing the money so fast.

Which would suggest we really don’t want to test how much money printing the government can get away with.

84

Sebastian 11.21.10 at 6:32 pm

“Brett at 66 – we have 10 percent unemployment and an economy that is operating well under full capacity.”

This is an atrocious argument in this context, unless you believe that the US economy will be there for the next 20-30 years. I fully agree with you that hyperinflation isn’t likely right this second. And if the topic on discussion were whether or not the government should borrow more money to “prime the pump” or take other action to push the economy toward expansion, your point would be well taken. But your whole comment at 78 (or so, who knows what number it will become but I’ll link here) seems to have transposed into an argument about the wisdom of Keynesian economic policy during a Depression/Deep Recession, which so far as I can tell has very little/nothing to do with the general wisdom of believing anything in particular about what the SSTF is good for and how wise it would be to consider printing money a major component of paying for bonds issued to it over a span of thirty years.

85

Omega Centauri 11.21.10 at 8:41 pm

Brett @80.
If some inflation caused the velocity of money to accellerate due to a panic, that has secondary effects, which should be selflimiting. First the people would have spent their wad within a short period of time. Secondarily it is stimulative, government revenues would go up, and public welfare spending down, so the need for the government to spend beyond its means would diminish. We have invstment vehicles such as TIPs which are indexed to inflation (and real assets are in effect indexed), so the erosion of wealth by inflation is illusory.

Following your logic means millions suffer, because of the angst of a few opinion makers.

Government spending is balanced by a combination of taxes, borrowing, and printing of money supply. The first and last of these forms are somewhat equivalent in that their extraction of resources from the economy is distributed.

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Kevin Donoghue 11.21.10 at 9:13 pm

@Adrian #67: I don’t think we disagree about any fundamental principle, but I do think you are seriously mistaken about how one should frame discussion of SS:

The private-investment model is a silly way to run state support for the retired. But while we’re doing it that way, you’re quite right that workers are entitled to what they were promised. (Not that they had a choice in what they contributed, it’s a tax really.)

Up to a point, Lord Copper. Enemies of SS like to make much of such platitudes as: it’s only a matter of book entries, accounting fictions etc. But actually all accounting has a fictional aspect: a “true and fair view” is just that, a view of how the enterprise is situated – a story. (The story may be largely fictional, as Anglo-Irish Bank and many another enterprise has shown.) The fact remains that a set of accounts is, amongst other things, a statement about who is legally entitled to what. When a government sets up a trust fund it says, in effect, that barring major catastrophes, it will repay you in retirement for the contributions you made during your working life. In a capitalist society the private-investment model isn’t by any means a silly way of expressing that commitment. Nobody denies that those who pay hard-earned cash for financial assets are entitled to receive cash in the future.

The fact that workers had no choice about their contributions is beside the point. I had no more choice about whether I participated in my employer’s pension scheme than I had about whether payroll taxes (a.k.a. PRSI in Ireland) were deducted to fund the state scheme. AFAIAC if (or more realistically, when) the state fails to pay me the expected pension that’s a breach of faith, in just the same way as if my boss pockets my pension entitlements, or the companies in which the funds are invested shaft the shareholders.

But it’s not helpful to think of those promises as represented by the trust fund, rather than as promises. On top of everything else, as someone pointed out, the trust fund just represents the time-shift element. In a demographically stable system with current contributions equal to current payouts, the trust fund could always have a zero balance, but that wouldn’t affect the entitlements of retirees who’d “paid in” all their lives.

At this point I’d like to go all Edmund Burke on your ass, but I don’t have his gift for prose. As some advocate once remarked in an English court: “When we think of trust funds, we think of widows and orphans and the wistful savings of a vanished hand.” The idea of a trust fund expresses the sense of obligation which one generation has to another. Students of economics know that in the overlapping-generations (OLG) model there is a Nash equilibrium in which the working generation allows the retired generation to starve. The Burkean purpose of a trust fund is to prevent the economy from settling into that equilibrium. The word ‘trust’ is playing an important role here. The aim of the enemies of SS is to persuade government to violate that trust, in order to prove once and for all that government cannot be trusted.

In case the above seems overly confrontational, I repeat that I think we’re in agreement about principles. But the framing matters too.

87

john c. halasz 11.21.10 at 9:57 pm

@83:

(I haven’t read all the comments on this thread, since the matter strikes me as clear-cut, without room for much reasonable dispute, let alone anxious contention, so sorry if the following obvious points have already been made).

“In a capitalist society the private-investment model isn’t by any means a silly way of expressing that commitment. Nobody denies that those who pay hard-earned cash for financial assets are entitled to receive cash in the future.”

Umm…financial assets bear risks and there is no guarantee that “hard-earned cash” will pay out “entitled” returns, as should be obvious to anyone paying attention to such markets recently. But Social Security is not a matter of investment for retirement income. It’s a *social insurance* program. I.e. it’s a universal annuitization scheme. The plain fact of the matter is that there is no private market for annuities that would remotely achieve universal coverage, let alone with anything like the efficiency, i.e. low transaction cost and relatively high return, let alone progressivity, that Social Security accomplishes.

The other basic point is that all retirement income/consumption is paid out or extracted from current production. There really is no such thing as hoarding current consumption for a generation to finance future retirements. Hence what really matters is the future state of the economy and its output. In that sense, any dispute about the “trust fund” is merely a matter of accounting fictions for reasons of political optics, not really a matter of economics. Or, otherwise put, if Social Security were to fail or become unsustainably onerous, that would be a general failure of the economy, and thus so would any other scheme of social provision for retirement likewise fail.

Likely opposition to Social Security and scare-mongering over it derives from sheer ideological animus. Since if government can provide for such a basic social provision with such efficiency in ways that “private” markets can not, what further evils of government provision, regulation, or economic management might ensue?

88

MMT Proselyte 11.21.10 at 9:59 pm

Brett & Sebastian

Hyperinflation is a canard. Printing money is a necessary condition for it, but it’s not sufficient – you also need (1) a huge supply-side shock (both Weimar and Zimbabwe saw a massive reduction in industrial production and/or agriculture in excess of 40% of GDP) and (2) govt obligations denominated in a foreign currency or gold.

The US can always deal with mild inflation by managing down aggregate demand when it’s got too close to aggregate supply (eg by increasing tax rates or reserve requirements). And unless there is a radical decline in productivity or the workforce / population ratio, there is no reason to believe that real resource constraints will jeopardise the SSTF obligations.

So this leaves the only valid concern over the SSTF being a distributional issue – whether there will be political support for spending money on SS. Since old people are good voters, I suspect that there will always be the political will to support SS.

89

Brett Bellmore 11.22.10 at 12:23 am

“And unless there is a radical decline in productivity or the workforce / population ratio, there is no reason to believe that real resource constraints will jeopardise the SSTF obligations.”

If I were inclined towards dark humor, I’d laugh my head off at THAT remark, given the projected age demographics.

90

mattski 11.22.10 at 12:55 am

Brett, I hate to dog you, but I think readers have a right to assess your credibility based upon your own words. Words like, “Folks, law IS violence.”

http://balkin.blogspot.com/2010/03/these-are-scary-times.html

91

Sebastian 11.22.10 at 2:57 am

Did you really write “unless there is a radical decline in productivity or the workforce population ratio without realizing that of course there is going to be a radical decline in the workforce/population ratio? I know that the so-called “modern monetary theory” disciples studiously ignore real resource constraints in favor of printing money no matter what the circumstances, but really….

92

john c. halasz 11.22.10 at 3:03 am

“without realizing that of course there is going to be a radical decline in the workforce/population ratio?”

Check out the current decline in that ratio rather than any imagined or projected future ratio, eh hombre?

93

Michael E Sullivan 11.22.10 at 3:34 am

“Since the trust fund represents future taxes and since the US government has been spending the surplus in whole every year”

And in what way does this make them different from any other holder of goverment bonds?

94

Sebastian 11.22.10 at 4:35 am

“And in what way does this make them different from any other holder of goverment bonds?”

Who said that it is? The point is that when bonds are redeemed they are a drain of money on the treasury that has to be paid for by tax hikes, or benefit cuts, or by printing the money. And that as SS goes into ‘deficit’ this means that there have to be tax hikes, or benefit cuts or that we have to print money to pay for it. And that the same options, in exactly the same magnitude have to be exercised whether or not there is a ‘trust fund’. I’m pretty sure I haven’t asserted that is different from any other holders of government bonds. It is an endemic problem with long term deep deficit spending.

I’m not the one pretending that US T-bills represent an investment for the US government.

95

MMT Proselyte 11.22.10 at 8:27 am

Sebastian
‘ “modern monetary theory” disciples studiously ignore real resource constraints in favor of printing money no matter what the circumstances’

Care to name one? MMTers dislike inflation as much as you do, but for policy prescriptions they focus on the size of the output gap, rather than spurious threshold levels of debt/GDP or bogeymen such as Zimbabwe.

Of course the dependency rate will rise, but as Halasz points out, current trends look rather less stark than that freshwater piece proclaimed. But if the dependency rate does fall more sharply, it’s just a political fight over the allocation of purchasing power (a la France, whose dependency ratio is >20% lower than the US). Nothing to do with bogus concepts of govt solvency.

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Chris 11.22.10 at 1:08 pm

Check out the current decline in that ratio rather than any imagined or projected future ratio, eh hombre?

Currently the ratio is still rising from more women entering the workforce, isn’t it? At least, if you count people who would work if they could find jobs as part of “the workforce”. To the extent that they’re not presently actually producing anything that can pay SS taxes/support retirees, that’s the REAL problem, not demographic shifts.

Full employment would be fuller now than in an age when roughly half the population was doing unpaid domestic labor, and that effect dominates over the increasing number of old people. (Although that may not be true forever. Eventually, all societies are headed for a decision about how much of the total output of society they really want to devote to keeping old people alive as long as humanly possible, vs. every other possible purpose for that societal productivity. The choice wasn’t so stark in the past precisely because so many people died unpreventably.)

97

VV 11.22.10 at 1:46 pm

A couple of my comments are stuck in moderation…and even though the discussion seems to have petered off, they seem to be of a piece with Kevin Donoghue’s post.

98

someguy 11.22.10 at 4:11 pm

The Trust Fund represents a very large and extremely real moral obligation.

But no money exists.

In your terms the issue is something like this ->

Mom has a stack of IOUs from her self of 100K.

She has promised her daughter 12K per year over the next 10 years.

She makes 100k per year.

She has set up an automatic deduction system that will pay her daughter 1k per year over the next 10 years.

So there is an acturial gap of only 10K. All Mom needs to do is increase the amount she pays into the automatic deduction system by a measly one percent of her income and the gap will be covered! So why is everyone talking about how the system is broke!

That of course is nuts.

But that is how a lot of progessives and liberals discuss the issue.

So acturial gap of x only need to increase taxes by y is a 2.4 trillion dollar lie.

Depressing but true.

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Sebastian 11.22.10 at 5:36 pm

Name one? I’ll name two. Bill Mitchell (the guru), and L. Randall Wray both dramatically underplay real world constraints, fluctuations of money utility based on scarcity of actual resources like time or raw materials, and the ability of governments to print their way out of trouble despite rather noticeable counterexamples. They essentially treat all currencies as if they were reserve currencies, and analyze from there as if they were gold standard economies that could print gold. Which isn’t to say that they have no useful insights. Just that they overplay all of them.

Again, solvency is a red herring, mostly raised in this thread to tar people, not actually by the people pointing out the situation with the trust fund. You can see that as early as my #30 where I say “So the government has the following options to pay for this: it can cut programs, raise taxes, print money, default, lower SS benefits, or some combination of the above. (Default isn’t really going to happen so long as the government can print money but I include it for completeness).”

So far as I can tell, no one has really disputed those options, not have they disputed that those options are unchanged by the existence or non-existence of the trust fund. You should note that the options I outline do not rely on default as a scare tactic or questions of the ‘solvency’ of the US government.

“But if the dependency rate does fall more sharply, it’s just a political fight over the allocation of purchasing power”

You hide a lot of unexamined assumptions behind that ‘just’.

100

geo 11.22.10 at 6:25 pm

Two questions so simple-minded that they probably don’t deserve a response:

1) Suppose the Social Security trustees had bought gold or blue-chip stocks instead of Treasury bonds. Would the SSTF still be an accounting fiction?

2) Isn’t there something morally repugnant in discussing whether to meet a putative Social Security deficit by a decrease in benefits rather than by a (modest) decrease in military spending and/or a (modest) wealth tax?

101

Henri Vieuxtemps 11.22.10 at 6:34 pm

@92 So far as I can tell, no one has really disputed those options

I disputed, but you wouldn’t acknowledge or respond to my objection.

The objection is this: since the program has accumulated $2 trillion in the trust fund, specifically for the purpose of financing the current level of SS benefits with the current level of the payroll tax, lowering SS benefits or raising the payroll tax are not justifiable options.

102

ajay 11.22.10 at 6:40 pm

93.1: no. In that case the political right, which has never supported Social Security, would have to try some other way of destroying it. Probably it would be condemning it as unwarranted and communistic intervention in the economy.
(By the way, the SSTF is over $2 trillion; this is enough to buy 20% stakes in all the companies listed on the New York Stock Exchange, or enough gold to fill 15 Fort Knoxes, or possibly Forts Knox.)

93.2: yes.

103

Salient 11.22.10 at 6:50 pm

solvency is a red herring

Since ‘inevitable and unavoidable insolvency’ is the only justification for downward modification of already meager Social Security benefits that is not morally repugnant, you may wish to revise or retract this claim. Granted, the various claims of insolvency that surface from time to time seem to be specious, at best. Your acknowledgment that a feasible modification of SS contribution rates (taxes) would suffice to ensure the indefinite-time-horizon viability of Social Security is appreciated. Why you bother to list a bunch of other “possible” outcomes, which range from morally repugnant to implausible, is unclear to me. Sure, all sorts of horrible things are possible alternatives to implementing more reasonable taxation. What, precisely, does this acknowledgment/concession of mine gain you?

104

Kevin Donoghue 11.22.10 at 7:08 pm

Suppose the Social Security trustees had bought gold or blue-chip stocks instead of Treasury bonds. Would the SSTF still be an accounting fiction?

If I understand Sebastian’s reasoning, any accounting entity which can be eliminated in the consolidated accounts of a larger entity is an accounting fiction in his eyes. Consider a subsidiary company for example, and adapt his argument using search-and-replace:

Assume the subsidiary really exists. For simplicity assume a parent company with cash flows otherwise in balance. It doesn’t matter, you can set the point at anywhere other than zero, but zero makes it easy to understand.

So it comes time to meet the subsidiary’s liability. The subsidiary holds parent company bonds. So the parent company has the following options to pay for this: it can cut costs, raise revenues, default, or some combination of the above.

Now let’s analyze it if the subsidiary didn’t exist. In this case the parent company has the following options to meet the subsidiary’s liability: it can cut costs, raise revenues, default, or some combination of the above.

Since the options are EXACTLY the same in both the “subsidiary exists” and the “subsidiary doesn’t exist” cases, it is purely an accounting fiction (as Sebastian understands that term).

105

Substance McGravitas 11.22.10 at 7:12 pm

It’s metaphors all the way down. I SOKAL THE THREAD!

106

MMT Proselyte 11.22.10 at 8:01 pm

Sebastian

Wray and Mosler always go on and on about real resource constraints – it’s central to their approach. You seem to be misrepresenting W&M horrendously. But as this is off-topic, can you link to any blog where you get into specifics on how they ‘underplay’ RRCs?

Salient makes the right point – looming insolvency is relevant to address, because it appears to a premise behind any concern over the the SSTF. When you use the euphemism “people pointing out the situation with the trust fund”, aren’t you insinuating insolvency too?

107

Min 11.22.10 at 9:22 pm

@ Henry Vieuxtemps #36:

The Trust Fund had not run out of money in 1983, although it paid out more than it took in, and had been doing so for a few years. At the end of the year it had $19.672 billion. :)

It has been increasing every year since then, including the past couple of years, and at the end of last year had $2.337 trillion. In those 26 years that is an average increase of 20% per year. Since 1983 was a low year, that level of increase is not representative. Last year was a bad year, of course: the fund only increased 6%. Since the end of 1999 until the end of 2009, the fund increased an average of 11.3% per year. ( http://www.ssa.gov/OACT/STATS/table4a1.html )

Sort of makes you wonder what people are screaming about, doesn’t it? Well, they are screaming about future projections, aren’t they? And how good are those projections? Not very good, to judge from recent economic projections, eh? GIGO.

108

Min 11.22.10 at 9:31 pm

Moi: ” Isn’t the indexing that you are talking about indexing to wages, which increase more than inflation? We are an increasingly prosperous country. We are not just keeping up with inflation. What is the problem? :)”

One Eyed Man: “I’m not saying it is or isn’t a problem to index to wages rather than prices. What I’m saying is that when social security obligations are designed to grow faster than inflation it is going to be awfully difficult if not impossible to eliminate those obligations by trying to print money or otherwise inflate the general level of prices”

I don’t think you mean “eliminate” the obligations, except in the sense of “meeting” those obligations. :) I do not think that anybody is seriously talking about meeting them by increasing inflation. As you do not deny, our economy grows faster than inflation over the long term. Given that, why would we need inflation to meet our social security obligations? As I said, what is the problem?

109

Min 11.22.10 at 9:42 pm

Sebastian #44: “And when I say ‘propaganda’, it may be too loaded of a word.”

“Propaganda” is right on. All of these scare tactics about social security are propaganda. The idea that the richest, most productive nation on earth cannot afford to fulfill its obligations to its seniors is absurd.

110

Min 11.22.10 at 9:55 pm

Brett Bellmore: “I would note that, as distant as we are from a “Zimbabwe style hyperinflation”, the most efficient way to arrive at one is to proceed on the assumption that it’s impossible for it to happen. All this talk about how the government can ‘never go broke’ is laying out the route to get there.”

Actually, the talk that I have seen here and elsewhere about how the gov’t can never go broke is simply correcting those who claim that it has gone broke or is in imminent danger of going broke. Such scare tactics have cowed and misled the public and politicians so that we are failing to do what we need to do to get us out of our economic mess.

111

Min 11.22.10 at 10:13 pm

Sebastian: “But your whole comment at 78 (or so, who knows what number it will become but I’ll link here) seems to have transposed into an argument about the wisdom of Keynesian economic policy during a Depression/Deep Recession, which so far as I can tell has very little/nothing to do with the general wisdom of believing anything in particular about what the SSTF is good for and how wise it would be to consider printing money a major component of paying for bonds issued to it over a span of thirty years.”

I am not sure who you are quoting. And you are right that the question of economic policy during a recession or depression is logically different from the question of social security. However, psychologically and politically, the two are related. The current hullabaloo about social security is a political product of the recession. People tend to have a pro-cyclical psychology, like steering away from a skid, instead of into one. The social security propaganda takes our eye off of the ball, as far as doing what needs to be done to get people back to work and getting the economy going again. In addition, by stirring up fears about economic security, it serves to paralyze the national will. Furthermore, the proposed solutions to the supposed social security problem would be likely to make our current economy problems worse.

112

Min 11.22.10 at 10:24 pm

Sebastian: “The point is that when bonds are redeemed they are a drain of money on the treasury that has to be paid for by tax hikes, or benefit cuts, or by printing the money. And that as SS goes into ‘deficit’ this means that there have to be tax hikes, or benefit cuts or that we have to print money to pay for it.”

I am confused by your remark. How does SS going into “deficit” mean anything, given the fictional nature of the SSTF?

And as for deficits, the gov’t normally runs a deficit. Furthermore, the debt continues to grow over time, without tax hikes or cuts to social benefits or “printing money”.

113

frank 11.22.10 at 11:45 pm

I often listen to podcasts from a financial site (financialsense.com) for discussions of markets and investing. The proprietor of this is a Tea Party enthusiast and he likes to compare Social Security to running a retirement program for his company. He says that if he collected funds for his employees’ retirement and then just spent them (as Congress has done!!) he’d be in jail.

Of course, he likes to claim that all the Social Security funds have just been spent and the money is gone. He does not want to acknowledge that there is a trust fund and that wealthy investors like himself might be called on to repay that debt.

A good response to this particular metaphor is what if he took his employees’ funds and invested them in US bonds? Would he expect the US Government to refuse to repay this debt because it’s just going to pay off some old people for their investments???

114

libertarian 11.23.10 at 1:55 am

When I save for my kids future, I get 5%-10% return.

My forced social security savings will return 1% (assuming I get my full benefits in 25 years time, which of course I will not).

My children are guaranteed -1% from their social security contributions.

This is all you need to know. Only morons consider this a good scheme.

115

Chris 11.23.10 at 2:23 am

@98: Wholly-owned subsidiaries ARE an accounting fiction. Their chief purpose is to firewall liability by going bankrupt separately.

However, if the subsidiary *does* go bankrupt, then it is taken over by a receiver or trustee, who is no longer answerable to the parent corporation and therefore can’t just be told not to call in the parent company’s debt, so in that respect it is different from the “two different parts of the US Govt.” example.

116

bxg 11.23.10 at 2:44 am

> My children are guaranteed -1% from their social security contributions
> This is all you need to know. Only morons consider this a good scheme.

Count me as a moron then. I think this suggests that SS still has some elements of being a social insurance scheme, not merely an government-run individual investment fund, and is all the more valuable for that.

(Though maybe I’m double a moron; I’m still confused as to why most commentors think the trust fund is significant either way as to whether future SS obligations can be paid … given that to a very large approximation it’s not the intent – or the possibility – to use the trust fund so.)

117

geo 11.23.10 at 3:44 am

libertarian @114: When I save for my kids future, I get 5%-10% return

How nice for you and your kids. But suppose someone else can’t or won’t save, or suppose they invest and lose. Does that mean their kids should go without education or health care? Some libertarians seem to think so, which is all we non-libertarians need to know about libertarianism.

118

Salient 11.23.10 at 3:56 am

He says that if he collected funds for his employees’ retirement and then just spent them (as Congress has done!!) he’d be in jail.

No, he’d just have some “unfunded pension liabilities” to “finesse.” Dude needs to subscribe to the Babelfish Neoliberalese translator. Srsly.

119

Salient 11.23.10 at 4:05 am

My children are guaranteed -1% from their social security contributions.

Wait, I thought they were guaranteed -100%, short of death or debilitation or whatever other early triggers are on the list. They’re paying money in that is getting paid out to the elderly, yes? Which means that some money that they earned^*^ is being redistributed to the elderly, under a system which (assuming we keep it going) will allow your kids to enjoy some of the fruits of younger folks’ labors when they’re old enough to retire.

^*^Actually I dispute the idea that one ever “earned” the money that goes toward FICA; it functions as if an employer is paying in a percentage of each employee’s income. The money isn’t earned and then taken away later; it’s basically a compensation-dependent fee on the employer for hiring that employee. I don’t think of the FICA payments on my check as money that was ever mine in the first place, and if Social Security were abolished it would be completely reasonable of my employer to “reduce” my salary/wage/compensation accordingly so that my take-home pay remains constant, and use the differential to buy stuff or hire someone else or whatever.

120

MMT Proselyte 11.23.10 at 8:28 am

Salient – right on; why not go further and say that income tax is not earned and then taken by the govt? The basis on which I get up in the morning to go into work is because of that nice net income I expect; the tax is a levy on my firm for employing me. I see no reason to believe, if taxes were halved tomorrow, that employers wouldn’t try wherever they could to cut gross incomes to converge on the same net income for their employees.

This mindset feels slightly less absurd in the UK where all income tax is taken at source; the US system encourages people to think they actually earn their net income, and that tax = theft.

121

Henri Vieuxtemps 11.23.10 at 8:34 am

I’m curious how you arrived at the 1% number. Social Security is a tax-exempt (up to $32K for two people) standard-of-living-indexed annuity, with additional provisions for disability and surviving dependents benefits. Is there a reliable (i.e. guaranteed not to go bankrupt) private entity you can buy this sort of contract from, and how much is it going to cost you?

Thanks.

122

MMT Proselyte 11.23.10 at 8:38 am

Libertarian – seriously, you expect 5-10% return over the next 20 years? Where on earth are you invested?

123

Zamfir 11.23.10 at 9:41 am

MMT, in Galt’s Gulch such ROIs are very normal, but you are not allowed to invest there, because of being a collectivist etc.

124

libertarian 11.23.10 at 10:34 am

> I think this suggests that SS still has some elements of being a social insurance scheme

Then make it so. Use it to put a floor under retirement income, not as a tax on the poorer young to pay for the leisurely retirement of the wealthier elderly.

125

libertarian 11.23.10 at 10:40 am

> Is there a reliable (i.e. guaranteed not to go bankrupt) private entity you can buy this sort of contract from

Have you read your SS statement lately Henri? Uncle Sam ain’t guaranteeing it. 1% is my expected return given current life expectancy for someone my age and my contribution rate, assuming I get what I am promised (which as I pointed out already, I won’t).

126

libertarian 11.23.10 at 10:47 am

-1% is the notional investment return, Salient.

> Actually I dispute the idea that one ever “earned” the money that goes toward FICA

On that argument whatever portion of your income the govt confiscates is not “earned”. Why not 99%?

127

libertarian 11.23.10 at 10:51 am

> you expect 5-10% return over the next 20 years? Where on earth are you invested?

Until a few weeks ago, commodities. Now back in high growth equities: technology, emerging markets. 5% – 10% is conservative. If the next 20 years are like the last 20 I will get 12%. But I don’t think the next 20 are going to be as good as the last 20.

128

James Kroeger 11.23.10 at 11:16 am

MMT Proselyte, 88:

Hyperinflation is a canard.

Indeed, it is. Any central bank that is serious about preventing the occurrence of hyperinflation could do so quite easily.

Intelligently designed credit controls would set absolute limits on the number of dollars that banks are allowed to lend within a specific time period. In addition, a competently-run central bank would make liberal use of ‘sterilization bonds’ to soak up excess liquidity. I don’t know if the Chinese pioneered the use of these bonds, but they sure have made effective use of them to avoid ‘excessive’ levels of inflation.

Of course, the central bank wouldn’t do anything with the money it receives from selling such bonds. Their main function would simply be to give the monetary authorities a method of removing excess pounds/dollars from the economy, but they would also provide the central bank with firm control of long-term interest rates, if that is what it desired.

The notion that hyperinflation is some kind of unstoppable monster that can overwhelm monetary authorities is nothing more than pure fiction. In countries where hyperinflation has occurred, it has always been because it was the intentional policy of those controlling the money supply. Any governing authority that wants to stop hyperinflation from happening can do so without throwing the economy into a recession.

So why is it that economists are not reminding the politicians of this fact?

129

MMT Proselyte 11.23.10 at 11:47 am

James Kroeger – good points, and I wish I knew why economists don’t refer to this.

If you subscribe to MMT, as I am minded to do (albeit that I think the approach seriously lacks decent critical engagement), you maintain that mainstream economists are stuck in a Bretton Woods mentality and that a form of cognitive dissonance keeps them treating the US and UK govts as currency users like a household, rather than sovereign issuers.

130

Henri Vieuxtemps 11.23.10 at 2:32 pm

1% is my expected return given current life expectancy for someone my age and my contribution rate, assuming I get what I am promised (which as I pointed out already, I won’t).

Well, it’s just that if you buy this sort of annuity from a private entity, I imagine your expected return will always have to be negative; otherwise the company would be losing money. 1% sounds like a great deal.

131

StevenAttewell 11.23.10 at 2:45 pm

Regarding Kroeger’s point, I think for some it’s reflexive mentality (a la Keynes’ comment about the tyranny of dead thinkers), but for others, it does ideological work. Many economists are ideologically opposed to the idea that the government should use its powers to enhance the welfare of the majority, so they use the specter of Weimar and Zimbabwe as a rhetorical club:
http://realignmentproject.wordpress.com/2009/10/14/job-insurance-part-9-what-is-nairu/

NAIRU is a fiction, always has been, because it persists in treating inflation as sui generis when in reality as Kroeger points out, it’s quite practical for the government to shape inflation rates at any level of employment. (see War, World, II)

132

michael e sullivan 11.23.10 at 4:57 pm

“The point is that when bonds are redeemed they are a drain of money on the treasury that has to be paid for by tax hikes, or benefit cuts, or by printing the money. And that as SS goes into ‘deficit’ this means that there have to be tax hikes, or benefit cuts or that we have to print money to pay for it. And that the same options, in exactly the same magnitude have to be exercised whether or not there is a ‘trust fund’. I’m pretty sure I haven’t asserted that is different from any other holders of government bonds. It is an endemic problem with long term deep deficit spending.”

You imply it when you say “the SS trust fund is an accounting fiction” and not “Treasury Bonds are an accounting fiction.”

If I run a private pension fund that holds 2 billion in T-Bills, well the government has spent that money as well. And when the day comes that I have a whole pile of people retiring and I have start redeeming those bonds in order to pay their pensions — the exact same problem exists.

But you leave out one important thing that the treasury can do in response to bonds being redeemed: issue more bonds to replace them. As long as there are willing buyers of US government obligations, the SS trust fund can redeem what it needs with no problems, same as any other pension fund.

Saying that the SS trust fund is an accounting fiction, implies that there is a difference between the bonds the SSA holds and the bonds that other people hold. There isn’t.

Here’s what’s an accounting fiction in my book: the published deficit, which, since the 80s, has treated SSA trust fund bonds as if they were not borrowing. In fact, our general revenue deficits have been much bigger than published, and IIRC, we never actually had a significant (if any) surplus in the late 90s, if you didn’t treat the trust fund this way.

So yes, a bunch of people in the government have treated this obligation as if it doesn’t exist (those publishing the headline deficit numbers), and it’s absolutely true that actions by the US government could make it “not exist” (i.e. congress decides to raise payroll taxes and/or cut benefits sufficiently to keep the trust fund from ever redeeming any of its bonds). But this is true of any set of government obligations. The government can pay them by treasury fiat, or can choose not to pay them at all.

It’s just that with SS, we have this meme developing that implies the money was never there in the first place. It is. It was paid in by workers who supported (and their elected officials supported) highly regressive payroll taxes, on the grounds that they were paying into a social insurance program and not supporting the general revenue fund. If that money isn’t paid out in accordance with the basic idea of a social retirement fund, then the money has essentially been embezzled off under false pretenses. the Government would be no different than Bernie Madoff if it does that.

Trust me, if there was any talk of treating the bonds held by powerful and rich folks as “not really there” all you right-wingers would be up in arms. But as long as it’s just working schmoes, it’s ok.

133

Min 11.23.10 at 5:59 pm

MMT Proselyte: “the tax is a levy on my firm for employing me. I see no reason to believe, if taxes were halved tomorrow, that employers wouldn’t try wherever they could to cut gross incomes to converge on the same net income for their employees.”

In the U. S., don’t we see this with companies that are allowed to “retain” sales taxes? (This is done sub rosa, OC.) They “collect” the “taxes”, but do not send them to the gov’t. How much of these monies do they pass on to their customers? To their employees?

134

Glen Tomkins 11.23.10 at 6:03 pm

Please don’t overthink this

Any sort of currency, as opposed to barter, is based on an artificial agreement about the enduring exchange value of the currency. We could still be using gold, the SocSec trust could all be in actual gold bullion, and its practiucal value to the recipients of its payments would still depend on all of us agreeing to honor a certain exchange value for gold, and for gold to continue to be granted legal tender status by all of us.

The bonds in which the fund are kept have no different status than if they were in bullion and we we were still on a gold standard. Maybe they would be more secure against truly catastrophic events if the fund was kept in bottled water, ammunition and canned food, but please, in any such eventualities, the last thing anyone would worry about would be SocSec payments. The other entailments of such scenarios would be much more dire and immediate.

135

libertarian 11.23.10 at 6:42 pm

Well, it’s just that if you buy this sort of annuity from a private entity, I imagine your expected return will always have to be negative; otherwise the company would be losing money. 1% sounds like a great deal.

More zero-sum “thinking” from the left. The private entity invests your money, Henri. Worst-case it should earn at least the global growth rate, but in general will do considerably better.

136

Henri Vieuxtemps 11.23.10 at 6:52 pm

So, is there a private entity that offers a similar contract?

137

Tom M 11.23.10 at 7:52 pm

Then make it so. Use it to put a floor under retirement income, not as a tax on the poorer young to pay for the leisurely retirement of the wealthier elderly.
More bullshit. Or, well, you know what it is. It’s what Social Security is and the program has had the effect of reducing poverty among the elderly,
Applying this estimate to the change in Social Security benefits between 1967 and 2000 suggests that the increase in benefits can explain all of the 17 percentage point decline in poverty that occurred during this period. The authors also find that higher benefits lead some elderly to live independently rather than with family members, and conclude that the effect of Social Security on poverty would have been even more dramatic in the absence of these changes in living arrangements.(Emphasis mine)

Auch: For 40.6 percent of senior beneficiaries, Social Security contributed more than 90 percent of their income in 2008, and for 26 percent of all senior beneficiaries, it was their only source of income. (Emphasis mine, too)

138

libertarian 11.23.10 at 7:57 pm

> So, is there a private entity that offers a similar contract?

An annuity with no guarantee you will be paid? Sure, I’ll sell you one today Henri. Give me an email address and I’ll let you know where to send the checks.

139

libertarian 11.23.10 at 8:03 pm

Tom M, people are living longer, simple as that. The current generation of boomer retirees did not pay for their retirement. But they voted themselves a nice comfy early retirement (retire at 50 in the public sector) with a guaranteed income paid by their children and grandchildren. They richly deserve their “most selfish generation ever” moniker. Well, fuck ‘em. I am not paying.

140

Henri Vieuxtemps 11.23.10 at 8:11 pm

Can you link to a private company offering a similar annuity, or not?

141

geo 11.23.10 at 8:18 pm

lib: people are living longer, simple as that

No, it’s not, as I’m sure others will soon jump in to point out. The average longevity increases apply only to the upper reaches of the income distribution, who need Social Security least. Those who need it most have had nearly stationary life expectancy. Krugman has blogged about this several times.

fuck ‘em

Ah, now we get to the heart of the libertarian philosophy.

142

libertarian 11.23.10 at 8:21 pm

Henri, put your SS money in tax-deferred T-bills. When you retire, buy an immediate annuity from any annuity provider. You’ll do better than social security (except maybe the bottom of the income scale).

143

libertarian 11.23.10 at 8:22 pm

> Krugman has blogged about this several times.

Heh. Krugman blogs about a lot of things. He is almost always wrong.

144

libertarian 11.23.10 at 8:24 pm

Besides, geo, you prove my point: if it really is only the wealthy that are living longer, Social Security is doubly a transfer from the poorer young to the wealthier elderly.

145

geo 11.23.10 at 8:36 pm

Social Security is … a transfer from the poorer … to the wealthier

So that’s what you object to. You really do have a heart of gold after all. Well, I’m sure we can fix matters and arrange for the transfer to flow the other way, if you’ll just get your fellow libertarian friends of the poor to pitch in.

146

Min 11.23.10 at 8:43 pm

libertarian: “Henri, put your SS money in tax-deferred T-bills. When you retire, buy an immediate annuity from any annuity provider. You’ll do better than social security (except maybe the bottom of the income scale).”

Sounds like an argument to pay more interest on the gov’t securities in the SSTF. :)

147

VV 11.23.10 at 8:48 pm

“Heh. Krugman blogs about a lot of things. He is almost always wrong.”

Right, and you are probably most often right… Appeal to authority may be a weak argument, but the opposite, appeal to un-authority, is certainly very Tea-Party like.

148

VV 11.23.10 at 8:49 pm

“Besides, geo, you prove my point: if it really is only the wealthy that are living longer, Social Security is doubly a transfer from the poorer young to the wealthier elderly.”

Troll alert.

149

Salient 11.23.10 at 8:56 pm

-1% is the notional investment return, Salient.

No, it’s -100%. Srsly it is, dood. The money you “pay into” Social Security is not yours. It is not an “investment.” You do not get anything back for it. If the country were to end its redistribution tomorrow, it would not “owe” you anything for your past contributions to FICA. I’m pretty sure you have coyly made a similar point yourself at various times in this thread, e.g. in response to Henri.

That FICA contribution is not even “yours” in the transient sense that you earned it only to have it taken away. It’s a tax on your income, which is determined by your employer. Your actual income is 6.2% less than your employer suggests it will be; that 6.2% is a quantity your employer pays to the FICA tax. You never see that money. It transfers from your employer’s hands to the government’s coffers. It’s never really “your” money to be spent or saved for tax obligations or invested or etc.

If you don’t want to contribute, well: tough luck, buck. Them’s the terms of gainful employment and productivity in the United States. You’re already being required to contribute less than is philosophically fair; you’re sponging off the productive work of the generations before you in order to make your profits today. You didn’t build that infrastructure all around you with your bare hands, and that infrastructure facilitates your gainful employment.

Some portion of the income earned from productive activity is redistributed away from the income-earners to the elderly. This is based on the basic notion that we^1^ feel the elderly are entitled to some comfort in their living, even if they’re not working. Ideally, we don’t expect anybody to work until their death, but we want people to enjoy some of the fruits of labor even after they quit working. Practically, Social Security payout often is too meager, and often begins arriving too late in life, to achieve that ideal.

Note that this is entirely independent of the problem of working-age poverty. I don’t think a business owner who did fairly well in working life should have to work until death, any more than anyone else. The elderly should be given enough of a share in the fruits of production to ensure they can get by reasonably comfortably. This has been a basic notion in civil society for much much longer than the existence of annuities or even banking.

Thank you for agreeing that the SS payout age is much too high to suit the purpose of the fund, by the way, and therefore disproportionately favors more privileged individuals who tend to live longer! That’s why it’s important to reduce, not raise, the SS payout age.

Also, the fact that FICA caps out at income of ~ $109,000 is absurd and philosophically unjustifiable. Even if SS was indefinitely solvent as-is and was running a surplus, there’s zero reason that cap makes any sense at all. It’s an arbitrary sop to richer folks.

^1^Here and throughout, “we” is intended to mean “most civil and reasonable people, but not you” — after all, in your own words, you’d sooner fuck ‘em than fund ‘em.

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piglet 11.23.10 at 9:21 pm

There are basically two ways of providing for the elderly: the clan system, and the social security system. There is no other way, no such a thing as a capitalistic retirement system based on individual investment in market instruments. Such a system will always leave a large fraction, probably the majority, of retirees uncovered and they will still need either public assistance or their own children to provide for them. The latter is the worst case because in such a society, people are pushed into having more children, and that is not good for anybody contrary to those .

Libertarian lives in a fantasy world in which money can be made to double every 10 years or so (5-10% annual increase) all by itself. The recent series of financial crises, starting with the Enron crash that robbed thousands of employees of their retirement savings, should have convinced any numerate person that middle class savers cannot rely on private savings to last for a lifetime. The phony debate about SS solvency is another depressing proof of how uninformed and innumerate the American public is. It is very difficult to counter the right-wing nonsense that people like libertarian believe because it is rooted in the voodoo economics that Americans have been brainwashed with for the past 30 years or so. I predict it will go away after another couple years of economic stagnation.

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piglet 11.23.10 at 9:22 pm

There are basically two ways of providing for the elderly: the clan system, and the social security system. There is no other way, no such a thing as a capitalistic retirement system based on individual investment in market instruments. Such a system will always leave a large fraction, probably the majority, of retirees uncovered and they will still need either public assistance or their own children to provide for them. The latter is the worst case because in such a society, people are pushed into having more children, and that is not good for anybody contrary to those wingnuts stuck in the 18th century conviction that more bodies are better.

Libertarian lives in a fantasy world in which money can be made to double every 10 years or so (5-10% annual increase) all by itself. The recent series of financial crises, starting with the Enron crash that robbed thousands of employees of their retirement savings, should have convinced any numerate person that middle class savers cannot rely on private savings to last for a lifetime. The phony debate about SS solvency is another depressing proof of how uninformed and innumerate the American public is. It is very difficult to counter the right-wing nonsense that people like libertarian believe because it is rooted in the voodoo economics that Americans have been brainwashed with for the past 30 years or so. I predict it will go away after another couple years of economic stagnation.

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Peter Whiteford 11.23.10 at 11:27 pm

Libertarian said” When I save for my kids future, I get 5%-10% return.
My forced social security savings will return 1% (assuming I get my full benefits in 25 years time, which of course I will not). My children are guaranteed -1% from their social security contributions.”

This is not a valid comparison. In addition to building up one’s own entitlements, social security has a redistributive benefit formula. And of course, most of the money going into social security is used to pay current retirees.

It is often argued that workers could get a better rate of return than social security by investing in the market. But this would leave the redistributive components of social security to be paid for, and if social security was turned into a purely private savings and investment scheme, it would also mean that current taxpayers would need to come up with extra taxes to pay pensions for current retirees and those close to retirement, until the personal savings scheme was fully mature about 40 years from now. i.e. you have a very large transition cost in moving from a social insurance system to a personal accounts system.

Now Libertarian may not want to do redistribution, and he may not want to pay current entitlements, but when you compare returns in the current social security system with personal savings accounts, you have to include all the things that the current system does.

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Salient 11.24.10 at 12:43 am

It is often argued that workers could get a better rate of return than social security by investing in the market.

That argument is insane, because it proposes workers will be able to bilk an ever-increasing portion of the fruits of labor. (Doubling one’s money is irrelevant if prices have all doubled, so we have to consider inflation-adjusted rates of return.) If true, this would choke off the portion of the fruits of labor that go to workers, leaving less and less for non-retirees.

[Yes, this is flirting with "labor theory of value" nonsense, but sensible nonsense is a perfectly good response to insensible nonsense, thank you.]

If we say “approximately 6% of each year’s production will be distributed to the retired/elderly, with a little extra held back for anticyclical increases in disbursements to cover leaner years” then we’re holding fixed the proportion of goods to be redistributed. If we propose that individuals ought to be able to do increasingly better than that [even post-inflation-adjustment], then we’re suggesting they should be able to acquire an increasing chunk of the pie per year.

So fine. Set the % to be redistributed higher, if you prefer; increase the FICA tax rate accordingly. Whether it’s through that or through any other investment mechanism whatsoever, the net effect is to draw more resources away from workers and distribute them to retirees/elderly. OK with me, but… not really the thing I think CT’s resident libertarian troll wants to see happen.

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piglet 11.24.10 at 1:06 am

“It is often argued that workers could get a better rate of return than social security by investing in the market.”

Indeed it is “often argued” but never proven. Wherever it was tried, it failed (e. g. Chile). Show me an example of a market based pension system that has worked successfully for as long as Social Security has. There’s none.

Switzerland has an interesting arrangement in which most employees have a private pension fund in addition to being covered by a public retirement system (both are actually constitutionally mandated). The pension fund contributions are mandatory but the actual investment is left to private fund managers (with some regulations as to the level of risk they can assume). The pension funds have to guarantee a minimum yield which years ago was, I believe, 4%. Meantime it was reduced to below 3% because nobody can guarantee 4% any more. Corrected for inflation, these funds are hardly better than treasury notes. On the other hand, the huge amount of saved capital looking for investment, much of which has to go into real estate, drives rents up. In other words, instead of paying higher SS (the Swiss acronym is AHV) taxes to fund a more generous public retirement system, Swiss workers are paying for private pension payouts with higher rents, not mentioning all the fund fees and so on they are also charged. There is little evidence that Swiss middle income people benefit from that arrangement. But hey, taxes are low! The rich like it! Case closed!

There is no free lunch period. Money doesn’t spontaneously multiply. Capital yields have to come from somewhere. Libertarian above mentioned commodities. Consider for a moment – could a private pension system be built on yields from investing in commodities? Let’s assume that commodity prices keep rising. That means what? Inflation. So yes if everybody invested in commodities, prices would rise, yields would be good, but they would be immediately eaten up by inflation. What about economic growth? The last decade has been the worst in history in terms of economic growth in the US and much of the world and this is likely to stay that way. There are limits to growth. The laws of physics apply to the economy even though Americans sincerely believe that scientific facts are just opinions that can be changed at will. But whether or not economic growth comes back, the market will not be able to beat Social Security. With high growth, market yields increase but so do SS tax revenues. With low growth, both SS taxes and investment yields decline. In both cases, it is the work of the currently economically active generation that provides for the retirees. The big difference is that Social Security is better insulated from economic fluctuations.

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libertarian 11.24.10 at 1:09 am

n ddtn t bldng p n’s wn nttlmnts, scl scrty hs rdstrbtv bnft frml. nd f crs, mst f th mny gng nt scl scrty s sd t py crrnt rtrs.

Thr r tw knds f rdstrbtn gng n t prsnt wth SS: ntr-gnrtn nd ntr-gnrtn. Th lttr s ctlly rltvly mnr: ys hghr-ncm wrkrs nd p sbsdzng th rtrmnt f th lwr-ncm mmbrs f thr wn gnrtn, bt nt whl lt. Hwvr bcs f th gng ppltn, ntr-gnrtnl rdstrbtn s lrg nd grwng rpdly. Th crrnt crp f rtrs r th frst t hv pd t lttl (n ggrgt) fr thr gnrtn’s rtrmnt.

Th ntr-gnrtnl rdstrbtn s lrgly frm yngr wrkrs wth fw ssts t ldr rtrs rgrdlss f thr sst stts (SS s nt mns tstd ftr ll). Hnc SS s nw mssvly rgrssv systm whrby th ldrly r scrwng thr wn chldrn nd grndchldrn.

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Peter Whiteford 11.24.10 at 2:11 am

libertarian – when you say that the current crop of retirees is the first to have paid in too little, do you have any studies that support this? For example, I thought that the early retirees in the system benefited most, since benefits were first paid in 1940 when recipients would have contributed very little to the scheme. Also when you say the scheme is massively regressive, could you direct us to studies that show this?

However, these points do not change the fact that comparing rates of return to a savings scheme and a social insurance scheme is not comparing like with like.

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VV 11.24.10 at 3:35 pm

“older people have a lot more money than young people”

No they don’t. They are, after all, out of work. And there are a lot of hard working people living hand to mouth. Grow up.

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JanieM 11.24.10 at 4:18 pm

“Did SS pay full benefits to existing or new retirees when it started? I don’t think so.”

“I don’t think so” is not evidence. Outside the world in your head, there is actually another whole big world, where research may be done.

From Wikipedia:

“The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92.” (Footnoted to a Social Security Administration site.)

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piglet 11.24.10 at 4:56 pm

“older people have a lot more money than young people”

Sure and those Wal-Mart greeters are doing it for the fun.

“The inter-generational redistribution is largely from younger workers with few assets to older retirees regardless of their asset status (SS is not means tested after all).”

What is unfair is capital income taxed at lower rates than labor income. Those retirees rich in assets – a minority – do in fact benefit from a redistribution from poor to rich but not because of SS.

“The current crop of retirees are the first to have paid too little (in aggregate) for their generation’s retirement.”

That is typical libertarianesque nonsense. Those currently 60-65 years old have paid into the system all their lives. To accuse them of free-riding is quite outlandish. But also notice how that claim contradicts libertarian’s other “argument”, that SS pays back too little. So which is it?

the elderly are screwing their own children and grandchildren.

Boy, this guy must hate his parents. Whatever they have done to upset you, they have provided for their children AND their parents while they were economically active. Now they are retired and in need to be provided for, they ask the currently active generation to fulfill its part of the inter-generational contract.

In a different sense however, you do have a point. Today’s retirees are the Tea Party base. While relying on Social Security and Medicare for themselves, they vote Republican to make sure that the next generation won’t get the same benefits. It’s called dialectics I guess.

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Tom M 11.24.10 at 9:46 pm

Of course the scheme is massively regressive. You pay when you have little a job. Fixed that part for you; given the stated unemployment, not to mention the actual rate of 14-20%, I don’t think you’ll get a lot of bitching and moaning about FICA from the freshly employed.
If you were interested, you could read about the current state of the system. It collects from about 81-82% of total US payroll vs. the Greenspan target of 84%. According to the Trustees’ Report, a 1-2% increase in covered payroll would ensure solvency of the fund for the 75 year horizon.
That 75 year horizon is important since the usual scare tactics, and why you believe you won’t get your money, use an infinite horizon and then claim the liabilities are unfunded. This statement from piglet It is very difficult to counter the right-wing nonsense that people like libertarian believe because it is rooted in the voodoo economics that Americans have been brainwashed with for the past 30 years or so. simply cannot be emphasized enough.
You will get your Social Security but you should consider why you have been led to believe the contrary. The whole Cato, AEI Peterson cabal is very, very good and there is virtually no one in the media, other than Krugman, who tries to dispel the fog of words.
(I’m not in any way disparaging the works of those bloggers and academics who counter the propaganda but it’s not the same amplitude or reach.)

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