Social Security and the Debt Limit: the Basics Again
Well the word out of DC this morning is that the GOP will cave on holding Obamacare hostage at least to the debt ceiling in exchange for negotiations on long-term debt with Social Security explicitly on the table. So it is time to review some basics here.
First we have Public Debt and Debt Subject to the Limit. For practical purposes they are one and the same at $16.7 trillion dollars. You can examine the numbers and see the technical distinctions here: http://www.treasurydirect.gov/NP/debt/current
That same link will show that ‘Public Debt’ is the sum of ‘Debt Held by the Public’ (currently $11.9 trillion) and ‘Intragovernmental Holdings’ ($4.8 trillion). And what are ‘Intragovernmental Holdings’?
http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner
Intragovernmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.
And the largest of these trust funds are the combined OASDI or Social Security Trust Funds at around $2.7 trillion.
Which gets us to a simple point. Intragovernmental Holdings including assets in the Social Security Trust Fund are included as a portion of Public Debt and so Debt Subject to the Limit. Which means any action that in the short term either accelerates receipts into the Trust Funds or decreases drawdown (depending on which way the arrow currently is running) has the arithmetic effect of increasing Trust Fund balances over the baseline which in turn INCREASES DEBT SUBJECT TO THE LIMIT. Now in the long term those receipt increases or outflow decreases have the effect of reducing what is called ‘Unfunded Liability’ and so arguably increase the health of Social Security over that same long run. Well fine, we can have that discussion. But what is clear is that extorting cuts in Social Security in the context of a short term debt ceiling increase makes no numeric sense at all. Because the effect of those cuts whether large or small has the first order effect of increasing that component of Debt Subject to the Limit that is comprised of Intragovernmental Holdings.
To repeat something I have said over and over: ‘Unfunded Liability’ is not ‘Debt’. Not as the latter is operationally defined in current federal budgeting. And pretending that it is as an excuse to drag Social Security into the current debate over shutdowns and debt limits is just dishonest bait and switch.
Bruce Webb is smarter than I am. Let me try to explain this in words that the rest of us can understand. For the record, I agree with Bruce.
Social Security HAS NOTHING TO DO WITH THE NATIONAL DEBT WHATSOEVER.
Except: that “the government OWES MONEY TO SOCIAL SOCIAL SECURITY. money that it (the government) borrowed from a legal entity, called the Social Security Trust Fund, set up for the explicit purpose of keeping Social Security money separate from “government money.”
There seem to be lots of people who can’t understand the difference between money that you borrow, and money that you lend. Some of these people are “experts.” Expert liars.
Social Security, a legal entity, takes in money from “workers” for the explicit, sole, and legal purpose of using it to pay benefits to workers for retirement, death or disability. That money is NOT available to “the government” for “government” purposes EXCEPT if it (the government) BORROWS THE MONEY. In which case it has a legal obligation to PAY IT BACK.
Those “experts” would have you believe that if the government has to pay back Social Security that would “increase the debt” or horrors, the government would have to find the money somewhere else, such as taxes, or borrowing it from someone else.
Try, try, try to understand that Social Security is NOT borrowing anything. It is LENDING to the government money that the government would otherwise have to get from taxes, or from other borrowing.
The “actuarial deficit” the Trustees Report for Social Security is NOT A DEBT. It is a statement by actuaries that if things keep going as they have been going, Social Security will not collect enough taxes over the next seventy five years to pay benefits at the current schedule. The answer to that is to raise the tax rate. It turns out to be a tiny amount.
But the Liars don’t want that easy, fair, cheap, and sensible answer. The only answer they will accept is cutting Social Security, one way or another. There purpose is ultimately to destroy Social Security, apparently in the belief that they can make workers work longer and so make more money for “the 1%” who keep just about half of every dollar workers “make.”
Using the debt as an excuse to cut Social Security is doubletalk, lies, fraud. The incredible thing is that ALL of our elected leaders have been fooled… or on the take. And ALL journalists have been fooled or are on the take.
The point Bruce is trying to make is that if you “cut” Social Security, and don’t cut the payroll tax, the payroll tax will continue to bring more money into SS than is needed. What happens to this money is that it is LENT TO THE GOVERNMENT, INCREASING THE NATIONAL DEBT.
In fact that won’t happen. The government is going to borrow the money anyway. From China if not from Social Security. But yes, he is right that cutting SS INCREASES THE DEBT.
I find that point a bit arcane for most people to understand. But they ought to be able to understand that SS is paid for by the workers who will get the benefits, and has NOTHING to do with the “debt,” except in the twisted minds of those who want to fool you into cutting it.
NOTE for “LIberals”: this will no longer be true if you succeed with your half witted plan to “scrap the cap” and “make the rich” pay for SS.
It might remain “technically true” and give the savants something to talk about. But “the rich” will know when they are paying for something they are not getting. And they won’t put up with it for long.
Now some of you out there may be thinking to yourselves, “The explanations given by Bruce and Coberly sound simple enough. Then why is anyone in the government saying that SS benefits must be reduced in order to help to reduce government debt?” That’s a good question and one can only wonder what explanation those geniuses might come up with if asked in that manner. I would guess that the focus of an answer would be to try to suggest that the Trust Fund is a myth. Or that the Special Treasuries held by the Trust Fund “are just so many I.O.U.s” I think it was George W. that came up with that asinine description at some past debate.
Read the Social Security legislation if you don’t or can’t believe Bruce’s description of how the Trust Fund functions. The SS Trust Fund is an entity created by the Congressional legislation that created the Social Security program. The Trust Fund is the recipient of all of the FICA payroll collections that are deducted from workers’ pay and the employer contributions as well. Real money taken from your pay and supplemented by your employer’s equal contributions. The Trust Fund serves the purpose of holding those funds separate from other government tax revenues in order to comply with the Social Security law. No commingling permitted. FICA doesn’t pay the military. FICA doesn’t pay for bridges and highways. FICA is for workers retirement.
So why is the Trust Fund denominated in Special Treasury notes? What would you do with large sums of money that is being put aside for future use and needs to be kept in the safest possible place? That’s right. Good old US Treasury notes. Just like the banks do. Just like you might be doing with some of your excess cash. Just like Japan, China and most of Europe and even Russia does with its excess cash. The Social Security Trust Fund lends its excess revenue to the US government so that it will earn a little interest and be as safe as can be.
That those Trust Fund assets are a part of the US debt is not in dispute. What must be recognized is that the debt to the Trust Fund is no less legitimate than the Treasury notes held by any other entity. What is in dispute is the stupidity of the current intention to some how describe Social Security benefits as a burden to the US government more so than any other part of the US government debt. The only way to reduce government debt is for the government to stop borrowing new funds. The only way to do that given the realities of running a properly functioning country is to increase revenue. Argue all you like about how the government spends the revenue it takes in, but recognize that a portion of that revenue, FICA payroll deductions, are exclusive to the payment of Social Security benefits.
Well I certainly agree with both Jack and Coberly but I don’t want to lose the focus here.
Short term cuts to Social Security to save money only means an increased Trust Fund balance compared to the baseline. Which means more debt on net and not less.
Now it is true that cutting Social Security benefits does reduce deficits on the most commonly reported metric used for such. But any proposal to phase in that change or exempt whole categories of beneficiaries, which is a feature of ALL Republican plans published to date means that any effects on the actual deficit number are diminished or delayed. In fact standard Republican promises to exempt anyone “in or approaching retirement” by which they mean people 55 and older means that you would get ZERO savings until the youngest of those started collecting benefits, which date is OUTSIDE the 10 year Budget scoring window used to score legislation.
That is bring Social Security into either a debt or deficit discussion makes no sense if your proposal serves to increase the former and not have any effect on the latter for a couple of decades.
If Republicans want to address ‘Public Debt’ and ‘deficits’ then they need to do that via measures that actually serve to address them. Not by ringing in an 80 year old policy preference using a phony equation of ‘unfunded liability’ and ‘debt’.
It only sounds like it is somehow on point. Because to most people the lines between ‘deficit’ ‘debt’ and ‘liabiity’ are understandably blurred. But they are not blurry at all in federal budget laws and language and scoring. In fact the three don’t even necessarily move in the same directions, still less in the same magnitudes.
Bruce,
1) “Unfunded liability” is no part of the debt discussion.
2) You are mistaken that Social Security does not affect the debt limit. If you cut Social Security payments, effective immediately, this would stop the trust fund from growing, reducing debt.
Similarly, if you raised the SS tax rate, this would reduce the debt/deficit.
You, coberly, and Jack are some bad shills.
well, i guess it depends on what the focus is.
social security does not contribute to the debt in any manner.
using the debt as a “reason” to cut social security is simply a lie.
while you could “technically” claim you are reducing “the deficit” (not “the debt”) by not paying back the money you owe TO Social Security (because you borrowed it FROM Social Security), and you could do this because for some purposes government accounts account money paid in (borrowed from Social Security) as “revenue” and only counts actual cash (not “unpaid” interest on bonds which are debt owed TO Social Security) paid out as “expenses,” don’t try this with your friendly neighborhood lender, whether it’s Eddy “the Shark,” or Bank of America.
or you can confuse yourself to death with “academic” definitions that turn out not to mean anything because “accounting” is not “law” and under the law “debt” means exactly what you think it means…
Social Security does not contribute to the debt. Social Security is not “going broke.” Social Security will not be a huge burden… or any burden at all… on “the young.” If you… and a hundred million other people… don’t understand this, you are going to be bamboozled and very, very, poor when you get old and wish you could retire.
Sammy,
You seem to have trouble understanding inflow and outflow. SS tax money flows into the Trust Fund. If you reduce SS payments without reducing SS taxes, more money will flow into the Trust Fund thus INCREASING the debt, not reducing the debt.
Sammy
and you are an idiot. If you cut Social Security payments… the Trust Fund would grow. The TF is what is left over from the taxes you collect after you make the benefit payments. Take in the same, pay less out, leaves you MORE in the Trust Fund. This is what Bruce was trying to tell you.
On the other hand if you raise the taxes, but do not increase benefits paid out, The Trust Fund would grow. Since the Trust Fund is lent TO the government, this would, by itself, INCREASE debt. This is what Bruce was trying to tell you.
“The Deficit” is a term of art, which is used by the government in a non intuitive way, so that you can lead yourself seriously astray if someone tells you that “cutting benefits will reduce the deficit.” They might as well have their damned fingers crossed, because they are using the word “deficit” in a way no one else uses the word. In fact they are using it to mean the opposite of what everyone thinks it means.
They fool you. But that is easy.
So lets go back to the simple easy to understand facts: Social Security is paid for by the workers who will get the benefits. It cannot borrow. Social Security does not add to “the Debt.” The government (Congress) adds to the debt when it Borrows money. It can borrow money from Pete Peterson, you, China, or Social Security. But Pete Peterson, you, China, and Social Security, do not ADD to the debt. You merely lend the government money so that it does not have to raise taxes. If it has to raise taxes later to pay back the money it borrows, that is called “paying your debts.” And it … paying it back… REDUCES your debt.
If you can’t understand this, God help you. God help America.
One more try for the Sammy’s:
Sammy if you borrow money, and if you have a job, and if you keep a budget to help you keep track of your money every month you might have a column for “wages” and a column for “purchases”.
If you don’t have a column for “money borrowed” and just include that with “wages” you are fooling yourself. And if you don’t have a column for “debt payments” perhaps because the debt has not yet come due and you haven’t had to keep track of payments … yet… you are fooling yourself.
Congress has been fooling itself. It counts its “wages” to include “taxes” (remember, it collects taxes, not pays them) as well as “money borrowed”, and it does not keep track… in its budget… of “money owed” or even “paper interest paid”…. (but it does keep track of it in other bookkeeping, so it does not quite fool itself, or break its own law).
Given this way of accounting, as long as you can cut payments from Social Security to beneficiaries so that Social Security never comes to you and says the time as come when you must start paying “cash” to repay the money it (those beneficiaries) lent you, you can continue to fool yourself that the money is not “really” owed.
But when you DO start making real cash payments and you count those payments as “expenses,” then you can claim that “social security increases the deficit” because the way your made your budget you call “deficit” the difference between money in and money out, without regard for the fact that some of that money was borrowed and was always part of your debt, but you are then a doubletalking liar. Or a cheat and a welsher,
At this point no one is going to be surprised to see the Congress… your Congress, by the way, full of people elected by you, because they told you the lies you love to hear… no one will be surprised when they cheat the workers who paid into Social Security, claiming “we can’t afford it.” And no one will even notice that while cheating them of the money in the Trust Fund is pretty small stuff, cheating them out of the Social Security system itself, is a major crime. Something your Ayn Randians would understand as murder, if they weren’t the ones doing the murdering.
[Ayn Randians have worked themselves up to believe that since money is time, and time is life, taxes is theft and theft is murder. The point I am trying to make about Social Security is that it was created to give ordinary workers a chance to retire… have time to live without having to go to work every day… by saving their own money under government protection. Cutting Social Security… destroying the system, or just reducing benefits to the point where they won’t “enough” for even a minimal retirement… is taking away those last few years from the workers who paid for the time. Some of those workers will die before they can retire. Some will die before they otherwise would have. Either from the work, or from malnutrition and exposure when they can’t find work and just die in the streets.
But, hey, we can save ourselves eighty cents a week each year by not raising the tax to close the “actuarial deficit” (the difference between projected expenses from living longer, and projected income from the payroll tax being less because of wages being squeezed. since we are never going to get old, it won’t matter to us.
http://cnsnews.com/news/article/social-security-faces-96t-unfunded-liabilities-83894-household
“(CNSNews.com) – The Social Security program faces $9.6 trillion in unfunded liabilities over the next 75 years, which is up $1 trillion from last year’s projection of $8.6 trillion, according to the latest report from Social Security’s board of trustees.”
The unfunded liability is the amount that has been promised in benefits to people now alive that will not be funded by the tax revenue the system is expected to take in to pay for those benefits. (The Social Security trustees calculate the unfunded liability for a period of 75 years into the future, from 2012 to 2087).”
http://www.garynorth.com/public/11404.cfm
“You probably remember the figure that has been cited by Prof. Lawrence Kotlikoff of Boston University. He has estimated that the present value of the unfunded liabilities of the federal government as of 2012 totaled $222 trillion. This was not the unfunded liability in terms of future income. This is the present value of the unfunded liabilities. Obviously, there will be a default.
The public is unaware of any of this. I suspect very few people you know have ever heard of this problem or this estimation of what the unfunded liability is. Congress really does not know. Most members of Congress have not heard about it. So, to help remedy this situation, several members of Congress and the Senate have decided to co-sponsor a piece of legislation which would force the Congressional Budget Office to produce what is basically inter-generational accounting. It would force the CBO to provide the statistics on what the total unfunded liability is.”
Sammy anyone who doesn’t think that unfunded liability is part of the talking points that have insisted Social Security be put on the table in the current debt limit discussion just hasn’t been paying attention to right wing messaging. They always talk about the burdens Social Security will put on future generations without acknowledging that under current law there is no such burden. Zero. Zip. Nada. Because current law would have benefits reset to then curren income at Trust Fund Depletion and so equally reset that so-called ‘liability’ to zero. The belief that there is such a thing as unfunded liability assumes that left unchecked we have no ability to address it ever. Which is why believers assert that we have the ability to address it now.
It is a funny kind of ‘liability’ that can be literally wiped away with the stroke of a pen. That is because it is entirely a theoretical construct. Which doesn’t stop a bunch of people on your side of the aisle from fixating on it and insisting that it is a reason to bring Social Security into current debt and deficit discussions.
But why am I bothering. The evidence is there for anyone to see who follows the discussion. And your plain assertion to the contrary carries no weight at all.
“If you cut Social Security payments, effective immediately, this would stop the trust fund from growing, reducing debt.”
Sammy let me scale this down to a point that you might understand.
Let’s say you had a frugal Uncle Ham who had invested excess wagel in a bond fund and then reinvested all earnings on that fund back into that fund because he didn’t need that income right away. But expected to. Let’s say his balance in that account over the course of his lifetime was $2.7 million and he was planning to withdraw 5% of it annually for as long as its balance allowed. Now if his return on that $2.7 million was less than 5% per year, that 5% withdrawal would over time reduce his principal. Even more so if he kept the nominal amount of that withdrawal the same. On the other hand if his return on that account was more than 5% then his withdrawal of 5%, even if it increased in nominal terms, would still leave his account balance higher than before.
Okay maybe that is too hard to grasp. So let me give this case:
Uncle Ham has $2.7 million in the bank in interest earning securities and decides not to draw ANYTHING out of it. Which is to say that he just decided not to pay any more ‘benefits’ at all. What then would happen to his account. Well it would grow by whatever interest rate those securities carried – compounded. And if those securities were issued by his brother Uncle Lam then the TOTAL amount that Uncle Lam would owe Uncle Ham would continue to grow until or unless Uncle Ham decided to pay himself monies in excess of his earnings.
With that elementary lesson in mind let’s restate your argument:
“”If (Uncle Ham) cut (bond account earnings) payments to (Uncle Ham), effective immediately, this would stop (Uncle Ham’s) fund from growing, reducing debt (owed to Uncle Ham by Uncle Lam).”
Well put like that the argument is numeric gibberish. And all you have to do is substitute ‘Uncle Sam’ for BOTH ‘Uncle Ham’ and ‘Uncle Lam’ and then substitute ‘trillion’ for ‘million’ to see why your statement is equally gibberish. If excusable because of the failure to see that Uncle Sam here is wearing both Uncle Ham and Uncle Lam’s hats.
Here’s another way to understand deficit as it applies to Social Security finances. All deficits are the negative balance when income is less than expenses. What to do? Borrow some money to cover the budget deficit. Now we are in debt. Social Security had been for a long while in the opposite situation. It was planned to be so by legislative action when the FICA rates were raised back in the ’80s. Social Security income was greater than needed to cover expenses. Social Security expenses are the benefits paid to the retired. That surplus income was stored/saved in the Trust Fund and converted immediately into Treasury notes for safe keeping and earned interest income. That provides a source of program income and savings to cover eventual deficiencies. It also creates government debt because the Treasury notes represent that portion of FICA payroll collections that are borrowed by the government (or lent to the government) as a legislated aspect of the Social Security financing mechanism.
Result? If benefits are reduced then the Trust Fund amount will grow even if no additional FICA is added as a surplus (as a result of reducing FICA collections, for example) the Fund will earn interest. The less Trust Fund savings that are not used the greater will be the government debt to the workers who have spent a lifetime having FICA taken out of their pay. Reduce any Social Security deficiency caused by benefits greater than FICA collections and you increase the government debt. Increase benefits and pay that increase out of FICA savings in addition to current FICA income and you reduce government debt.
Aha!!! I’ve suddenly discovered the best way to reduce government debt. Increase the benefits to an extent that draws heavily on the Trust Fund assets and the debt to the Trust Fund will have to be paid. Uh oh. There’s a snag to that solution. The government will then have to borrow from China, Japan, Goldman Sachs, etc. in order to pay down the debt it owes to the Trust Fund. No matter how I try I can only resolve the “debt crises” by recognizing that current tax revenues have to rise in order to do so. On the other hand the current operating expenses of the government such as wars, farm subsidies, uncollected corporate taxes, etc. could be reduced. That’s how you deal with a deficit in the general budget and when that deficit is reduced there is less need to borrow more to cover such a deficit and thereby create more debt. It’s a pretty simple formula that most people and businesses understand. Too bad the people we send to the Congress haven’t a clue. Or maybe they’re just a bunch of deceitful dirt bags.
“which in turn INCREASES DEBT SUBJECT TO THE LIMIT. ”
No, you were right when you said it has nothing to do with the debt. If the general fund increases its debt owed to SS, it will decrease its debt owed to others. Net zero.
Well, I can’t honestly say I really understand all the other explanations offered to Sammy, so I would not be surprised if no one understands mine. But I think any honest person reading those explanations would at least begin to suspect “something” was wrong with the claim that SS increases the national debt. And from there they could figure it out for themselves, which is really the only way anyone ever understands anything.
The facts are still that Social Security does not borrow any money from anyone. Social Security benefits are paid for with money collected from the workers who will get the benefits by the so-called “payroll tax,” which is kept separate from “government” money by law.
The Liars try to confuse you into thinking that the money the government has borrowed from Social Security is money that you will have to pay TO Social Security because of Social Security’s expenses… knowing you will forget that money was lent to you by Social Security in the first place. You didn’t notice it was lent to you, because “you” never saw it, but it was used to reduce your income and other taxes below what they otherwise would have been to pay for what the government bought… including the normal paying back of money it borrowed from other people.
Meanwhile that “9.6 Trillion…. 83894 household” that Bruce talks about is another lie. It becomes a lie by the very careful way they conceal what it really means. I think that “83894 household” means that they divided the 9.6 Trillion by the population (300 billion plus) and then multiplied that by the “average number of people per household.
Well households don’t pay payroll taxes. Workers do. And the 9.6 Trillion is the amount of money (in present value) that would have to be paid over 75 years if the latest guess …9.6 Trillion… turn out to be right. So the first thing you might want to do to get an honest feel for how much we are really talking about is divide the 9.6 Trillion by the 75 years to get 128 Billion, still a lot of money. But over those 75 years the number of workers paying into SS will average about 150 million (or more), so divide the 128 Billion by 150 million to get 853 dollars per year. Still seem like a lot?,,, to pay for your retirement that may last 20 years or more? Then try to keep in mind that over the 75 years incomes are expected to double… at the very low rate of increase now projected by the Trustees, so you would be paying that 853 out of an income that (also an average over that time) is about half again as much as you make today. Say you make 50k today, then that 853 would come out of an income of about 75k… leaving you with only 74,147 dollars a year to live on.
There are other was to do this “back of the envelope” calculation, but if you don’t consider all of the variables… how many people are paying the 9.6 Trillion, how much money they have to pay it out of, and how badly they will need it when they must retire… you will just be playing with numbers to your own confusion and nonsense.
Do remember that that 9.6 Trillion is only the latest guess, based on, apparently, the new idea that more workers will be unemployed in the future and so not paying the payroll tax.
Could be, but remember the whole “actuarial deficit” in the first place came out of the “prediction” that there would be fewer new workers coming into the system… because of a lower birth rate… that would be retiring from the work force… because of the baby boom… and not dying off as fast… because of longer life expectancy..
but wait… go back and look at that… there are going to be fewer workers, but unemployment is now expected to go UP?
nah, the real reason the projected shortfall has increased is because the last guess wasn’t scary enough for you.
And especially you have to remember that whatever happens you are going to need those social security benefits if you don’t want to work for the boss until you die. Unless, of course, you win the lottery. I don’t think it would be too wise to count on your 401k.
If it comes down to paying an extra thousand dollars a year for forty years in order to have an extra about eighty thousand when you retire (SS earns an effective interest that about doubles your contribution over forty years), that eighty thousand would pay for an extra four years at a quite low rate of spending in retirement. You are going to need it.
What is the mechanism that allows the government to borrow from the Trust Fund? Is it a part of the original SS legislation? Is it something that just happens every year? Are there years when the government does not borrow from the Trust Fund?
Little John
Bruce could tell you if it was part of the original legislation. It is certainly part of the current law and has been for some time. SS “naturally” accumulates more in taxes than it spends in benefits, and this extra money doesn’t just sit on the shelf. It is “invested” just like any other money that is “saved” or, especially, saved in a trust fund…. which simply means money dedicated to a specific purpose, and subject to the laws that guarantee that is what it will in fact be used for.
There was a question at one time (and still is, but not very actively) whether the “extra” money would be invested in private instruments, or “other” public instruments… which would offer a higher return at the cost of less safety. The decision was to invest it in “special bonds” which differ from regular bonds in that they cannot be sold to “the public” and therefore their price (and effective interest) does not change over time. This is the ultimate “security.” And it does not matter very much. The interest on the bonds, and the bonds themselves when they are repaid, form only a very small part of the income to Social Security, and small changes in interest, or even total default would not materially affect the cost of Social Security to the worker who is paying for his future benefits via the payroll tax, through the genius of Pay as You Go financing.
SS has been lending money to the government this way at least since 1983 when the tax rate was raised following a serious problem with the old tax rate not keeping up with inflation and unemployment at the same time. The new tax rate was enough, and was understood to be enough, to “fund” Social Security for the (then) next 75 years… and that would include the baby boom retirement.
Recently the recessions, and high unemployment have cut payroll tax income to the point where SS has had to collect some of the interest owed to it in actual cash… as opposed to simple bookkeeping notations that added the interest to the principle with no actual money changing hands. This will move up the time when the very large Trust Fund created in 1983 to, as noted, fund the baby boom retirement. will be exhausted.
That is not a serious problem. The boomer will have paid for their retirement, and the further tax increase that you hear will be needed will actually be going to pay for the longer life expectancy of the post boomers… together with the reduced tax collections from lower than (previously) expected increases in wages.
This is not what everyone “wants” but it isn’t a very high price to pay for continued “security” for retirement. It’s as if the price of bread increased over time to be a slightly higher fraction of your income. You’d still pay the higher price, and be glad to have the bread.
NO ONE in the Social Security “debate” offers a realistic plan for keeping Social Security without raising the payroll tax the small amount that would be needed. What you hear is schemes for investing the money in private accounts…. with no way to guarantee that the money will be there when you need to retire… especially if you never earn enough to invest enough to get those magic returns. Because Social Security is insurance, even if you never earn enough… etc. you will get an insurance boost on your retirement benefit that should make it possible for you to “get by”. This boost is paid for by a payout schedule in benefits that pays out a little less (as a percent, more in actual dollars) to those who earned “more than enough” over a lifetime to “get by.” Lots of people want to count this as a “transfer payment,” which it is, in the same way collecting on your fire insurance is a transfer payment from those who do not have a fire. No one wants the fire even if that means the return on their investment is zero. No one wants to end up poor, even if that means the return on their investment in old age poverty insurance is less (as a percent) that that of those who do end up poor.
This is more than you asked for.
but here’s a little more
if the Norhwest Plan were adopted, and the Social Security tax was adjusted (up or down) in response to ten year projections, Social Security would never face a shortfall, and there is no reason to expect the total tax increase would be more than 2% (each) for the next hundred years.
During this time it would be “normal” for SS to collect some of the interest owed to it in cash. This cash would add a small amount to the tax collected to pay for benefits. The rest of the interest owed to SS would be added (no cash) to the Trust Fund to maintain a balance equal to one year’s (reserve) benefit costs. And of course that balance… still lent to the government… would earn enough interest over the following year to generate a cash payment to SS, and a paper increase in the Trust Fund. etc, forever as far as the eye can see.
The money paid by the government in interest to SS, would be no different from the money paid by the government in interest to any other buyer of government bonds.
If the government ever wanted to pay off its debt entirely (bad bad policy, but you hear people call for it) SS could park its extra money in private, or other government, bonds. It might collect more interest that way, or it might lose a bundle in a bad market. It wouldn’t make a hell of a difference. SS could keep on ticking with “pay as you go”.
We might all end up a little poorer during hard times, but that is the way the economy has always worked since before money was invented. The difference with Social Security is that the hard times are never distributed so that the old people starve… and barring nuclear winter or climate melt down… the young will… even after paying their social security… which is how they pay in advance for their own retirement… even if you can’t understand how that works with pay as you go… the young will still have enough to live on from day to day… putting a little by (through SS) for their own retirement.
Sorry that I have to keep saying this.
Little John–The deposit in the TF of employment taxes first in the Treasury then in the TF is described in 42 USC 401(1)a et seq. It’s also described in the SS Act itself. In section 201 (I think.)
“What is the mechanism that allows the government to borrow from the Trust Fund?”
It was set up that way from the beginning.
In 2001 Greenspan expressed the concern that with government surpluses, the general fund would not want to borrow from SS. If the dot-com growth had been sustainable and Bush had not reduced taxes, the existing mechansim might have needed to be changed.
As long as federal debt exceeds the TF, SS is just one creditor among many.
““special bonds” which differ from regular bonds in that they cannot be sold to “the public” and therefore their price (and effective interest) does not change over time”
The rate does change, it is just not set by direct sales. It is set from a formula based on treasury sales. Thus it is true that they are yielding less than they were a decade ago. Of course, it is also true that they yielded less in the 40s and 50s. As coberly did say, it does not a serious concern.
Arne
the bonds only change their “rate” when new ones are issued. the old ones keep their “effective rate” because their price does not change in the market place as bond traders make new bets on future prices.
if (and correct me if i am wrong) a bond is issued for a hundred dollars at an interest rate of 3% the interest rate will not change during the life of the bond. but if that bond were traded on the market, and the market thought that future bonds would pay 5%, then the 3% bond would no longer be “worth” a hundred dollars, but only 60 dollars. The guy who paid sixty dollars for it would get “5%” effective interest on his 60 dollars.
I know you know this. But you may not have known that is what I meant by special bonds’ effective interest does not change over time because of changes in the price of the bond on the market.
Ah, you are right. Price is not the same as rate. My bad.
Krugman mentions prioritization in his column today. He unfortunately does Social Security a disservice by giving an example of the unlikely ability of the Treasury to be able to prioritize debt payments, especially as they may relate to the payment of Social Security benefits. However, his comment, see below, gives one the impression that the Treasury is paying benefits out of the general fund rather than simply paying back the Trust Fund debt. Worse yet he neglects noting that nearly all of the benefit payments coming from the Treasury originate from FICA payroll deductions which are legally bound to be used exclusively for Social Security benefits payments. That would be the final indignity, paying off other government debt by reducing SS benefits and using FICA revenues to do so.
The offending comment:
“First, the U.S. government would still be going into default, failing to meet its legal obligations to pay. You may say that things like Social Security checks aren’t the same as interest due on bonds because Congress can’t repudiate debt, but it can, if it chooses, pass a law reducing benefits. But Congress hasn’t passed such a law, and until or unless it does, Social Security benefits have the same inviolable legal status as payments to investors.” http://www.nytimes.com/2013/10/11/opinion/krugman-dealing-with-default.html?hp
Geez, if even Krugman can’t get this right how the devil can we expect Obama or anyone else in DC to get it right and stop screwing with the legislatively and historically sanctified character of the entire Social Security program.
Thanks all for the explanation.
I have been self-employed for the last twenty years and have been lucky enough to pay the maximum into the system for ten of those twenty years…the full 12.4 up to the cap on wages. I tell you this just to let you know I am pretty well invested in the system and I want that money back. I just have this weird belief in the back of my mind that our debtors…the U.S. government, is not very creditworthy. “The full faith and credit of the United States…”? Excuse me but I am not buying it. That phrase may apply to the People’s Republic of China, Japan or PIMCO, but for average citizens I am skeptical if the government really means it. Call me cynical but cynicism is just idealism that’s been crushed.
I also have doubts about the actuarial assumptions in IC. I understand “pay as you go” but i am wondering if you’ve ever put in HC assumptions into the NW Plan? What would the 2% turn into? 8%? I am curious about that.
Again thanks for Dale, Nancy and Arne’s answer to my earlier question.
The answer to the history question is to be found in the First Report of the Trustees of Social Security issued on Jan 1, 1941 and discussed in an AB post by me with close to that same title.
The Social Security Act of 1935 did not set up separate fund to hold receipts and pay out benefits. In large part because monthly benefits under Title 2 (what we know as SS today) were not scheduled to start until 1941. Still those receipts in excess of outlays were from the beginning held in special interest earning Treasury instruments. Whether this constituted ‘borrowing’ rather than internal accounting that recognized the time value of money collected now to be spent later is I think not of much interest.
The Social Security Amendments of 1939 established the OAS Trust Fund and made other important changes, most importantly by adding a survivor’s benefit ‘S’ to a previously old age program ‘OA’ but also my moving up benefit payments to 1940 and formalizing the acounting in a way that made it make sense to talk about Treasury ‘borrowing’ from the brand new Social Security Trust Fund, and the TF ‘lending’ to Treasury. But it is worth noting that then as now the ManagingTrustee of Social Security also wore the hat of Secretary of the Treasury and that the Board of Trustees has always been made up of Presidential appointees subject to Senate approval whether to their cabinet positions which ex officio made them Trustees or to the Commissioner position or the much newer Public Trustee positions. That is the Social Security Trustees have never had the nominal independence of say the Federal Reserve Board. Still the Social Security Trust Funds do have an identity and protections established in current law and the Trustees, although they may wear other hats, do have legal obligations to act as Trustees. By and large the structure has worked well.
But the important point is whether you examine the internal to Treasury structure established by the 1935 Act or the formal Trust Fund established by the 1939 Amendments all excess revenues to be credited to Social Security have been invested/parked in Treasury issued interest earning securities. And so in a perfectly reasonable formulation have been ‘borrowed’ by Treasury and ‘lent’ by Social Security.
“What is the mechanism that allows the government to borrow from the Trust Fund? Is it a part of the original SS legislation? Is it something that just happens every year? Are there years when the government does not borrow from the Trust Fund? ”
A better way to look at it is to say that the Trustees of Social Security are by law restricted to investing extra cash in instruments “fully guaranteed as to principal and interest by the U.S.” Which for decades after 1939 meant Treasuries. Now nothing I know of in the law would have prevented the Trustees from buying those Treasuries in the open market and Nancy Altman (author of the Battle for Social Security and current co-director of Social Security Works and previously executive assistant to Greenspan on the 1983 Commission) informs us that the Trust Fund at times has held marketable Treasuries in its portfolios. But mostly nobody would want the Trustees to be active players in the bond markets and the practice for decades is to take new issue Special Treasuries in exchange for excess cash and for earnings on the existing portfolios and for the yields on Specials to be set by a formula ultimately derived by market transactions in the recent past. So while the Trustees are not market participants as such and Special Issues not marketable, neither are their yields just set by fiat.
Little John: “I also have doubts about the actuarial assumptions in IC. I understand “pay as you go” but i am wondering if you’ve ever put in HC assumptions into the NW Plan? What would the 2% turn into? 8%? I am curious about that.
Again thanks for Dale, Nancy and Arne’s answer to my earlier question.”
Well I too am skeptical about IC assumptions, though I tend to think they are on the whole too pessimistic. As to the NW Plan, it was designed to be somewhat impervious to the assumptions.
Of the three main contributers Coberly was initially most committed to Intermediate Cost, at least implicitly, his solution just ran with its numbers and was somewhat steady state. On the other hand I was initially much more an advocate of Low Cost economic numbers and sugggested that the original Coberly plan might well be overkill. Arne, originally a skeptic, did some analysis on my take on the economic numbers and conceded there was a ‘there’ there. On the other hand he was (and is?) a little more inclined to think that IC has understated mortality improvements, and since to some degree good news for old people is bad news for solvency has been inclined towards HC demographic numbers.
Northwest was hammered out as a compromise that didn’t require explicit acceptance of any one of IC or LC or HC as a whole, not least because those models are not designed to be predictions as such. Instead Northwest just establishes a method for running with IC and changing as it changes each year. But with a method we call ‘Triggers’ that adjusts future changes in FICA rates 20 or so years down the road.
For example it is a rare year that would see actuarial imbalances under IC change even as much as 0.03%. And any such changes can readily be handled by adding or subtracting a 0.2% FICA change at the END of the sequence. So under NW we enact a series of fixes which might have 0.2% FICA increases in each of the next five years and then a hiatus followed by another series of 0.2% increases in years 10 to 25 which combined fully backfill CURRENT YEAR IC. Once that fix is established and so priced into expectations we can legitimately say tht
Social Security is actuarially solvent over the 75 year horizon. Now should the Trustees come out with a new Report showing an additional 0.03% imbalance under new IC then NW only has to allocate that over the 75 year window. Because the heavy lifting was done with the putting of NW in place in year one. And because of that there is no sudden need to accommodate 8% instead of 2%. If things start trending towards HC then the needed changes in year 15 or so start looking fairly ominous, which then gives us years to adapt the benefits formula or income formula.
But NW has more backstops than that. Because if things really come in as bleak as HC would have them then there would be economy wide consequences way beyond that of Social Security solvency. So it is not likely that policy makers would ever let things get that far. In fact the whole logic of “sooner is better than later” advanced by crisis-mongers will in fact kick in at some point. But there is little case for advancing ‘solutions’ to SS based on worst case scenarios without considering what that scenario would do for your proposed fix or for the economy in general.
For example if we take HC Real GDP and productivity numbers seriously then it is numerically impossible to save the day via personal accounts, you can’t get the returns necessary. On the other hand if we shoot for LC Real GDP and productivity numbers then Social Security never goes to crisis at all and there is nothing for personal accounts to fix. The dirty secret of all privatization plans is that the returns they need to provide their fix silently assume much better economic numbers than the IC model they use to present ‘crisis’. And it is only worse when you ring HC numbers in.
So feel free to make the full or partial case for HC. You might well be right, certainly my projections from 2004 were in retrospect way too optimistic. On the other hand an HC outcome doesn’t present an argument for any of the solutions the ‘Crisis’ people are pushing. Because their numbers on ROI just wouldn’t run.
As for this from Arne, well I have never bought it. Even though economists way above either my or Arne’s paygrade have told me I am dead wrong. Okay. Stubbornly wrong.
“No, you were right when you said it has nothing to do with the debt. If the general fund increases its debt owed to SS, it will decrease its debt owed to others. Net zero. ”
The problem here (it seems to me) is that it builds in the assumption that federal borrowing needs are somehow fixed and the only question is the allocation. But this does not to me seem to be the way DC operates at all. Instead they use combined figures to argue that there is room for policy changes on one side of the equation that actually show no room at all.
For example when Social Security started running strong cash surpluses around 1996 and then ended up taking ‘unified budget’ numbers into surplus, the Newt Gingrich House argued that there was room for tax cuts on the General Fund side even though it was still in deficit. The effect of taking this approach would have been to increase borrowing due to the combination of steady state GF spending while decreasing GF revenue. And by baking the tax cuts into law to continue that extra borrowing forever even if and when (and it was always a ‘when’) Social Security would stop running the surpluses that ostensibly opened up that extra borrowing room. But there was no mechanism in place that would have automatically cut down needed borrowing on the GF side as net lending from the SS side decreased, instead the result could have been projected as it ultimately turned out to be an explosion in net borrowing and so Public Debt.
Cutting Social Security outlays would increase Trust Fund balances and so debt. But is there anyone out there who believes that every dollar of those cuts would then simply replace existing borrowing on public markets? Or would Congress simply continue to borrow at the current rate as long as the public markets would allow it? Arne’s formulation would seem to assume a constant appetite for borrowing unconnected with the appetite for spending on preferred categories that doesn’t seem to exist.
Despite assertions to the contrary, cuts in Social Security outlays do reduce the most common metric of budget ‘deficit’. And there is good reason to believe that Congress to the degree it is restrained by anything is so restrained by the deficit number and not the debt number. There is no reason at all to suggest that they would keep the overall Public Debt number steady because of what seems to me to be in origin an accounting identity.
Then again an economist with credentials longer than all our combined arms with whom I had direct off the record discussions on this exact point advised me kindly but firmly that “Bruce you don’t know what you are talking about.” Well it wouldn’t be the first time. But did I say ‘stubborn’?
Little John,
I don’t know if the latest CBO projection counts as HC or not. certainly a good deal higher cost than the last SS Trustees projection. It turns out that the one tenth of one percent increase per year will pay for that as well… though with a few more of those increases than the previous Trustees Report projected would be needed.
If the “HC” were to come much faster than projected, the “northwest” plan could be modified. IT wouldn’t take much. I showed in an earlier article here that raising the increase to 1.7 TENTHS of a percent per year would equal the CBO “immediate and permanent” 3.4% increase by the twelfth year… it has to go a little higher than CBO’s in order to bring in enough in the payroll tax that CBO is collecting as “interest” on its earlier larger increase… interest that comes from the general taxes taxpayer.
So short answer… any HC you are likely to see does not change the principle of “gradual tiny increases” to keep up with the rising cost of retirement (and the otherwise falling tax collected from workers who not getting the raises they expected.
And the ultimate 2% increase appears to be pretty robust.
On the other hand, I wouldn’t trust the “full faith and credit…” anymore myself. But that is what all the shouting is about. We are trying to keep the Big Liars from fooling the people into accepting the theft of their payroll taxes… or what amounts to the same thing… delaying the payout so long that the people who paid it in are not the people who will collect the benefits.
Or what is much worse… changing SS so that it is no longer worker paid, guaranteed to be “enough” to retire on at a reasonable age.
The bad guys don’t want you to retire. They make too much money out of you while you are working. Heck, even in the unemployment line they make money out of you by keeping wages low.
Bruce Webb said
“Despite assertions to the contrary, cuts in Social Security outlays do reduce the most common metric of budget ‘deficit’.”
This is misleading. The use of ‘deficit’ by people who talk about “the budget” does not count the borrowing from Social Security as an increase in the debt. This gives “deficit” in their terminology almost the opposite meaning of what “common” people mean by “deficit” in common usage.
The budget-speakers are only interested in “cash in” to their spending “budget” without regard to whether it is from borrowing or from taxes, and they are only interested in “cash out” from their spending budget regardless of whether it is for purchases of goods and services or cash payments to reduce debt.
This is fine for their purposes. The difference between this measure of cash in and this measure of cash out tells them how much they have to borrow “on the market.” But it gives a misleading, false, picture of what effect Social Security, and Social Security cuts, have on the “real” budget… the one that keeps honest accounts of what money is borrowed FROM Social Security.
I do not have “credentials as long as anybody’s arm.” But if you hear anyone claiming that cutting Social Security “reduces the deficit”, better ask him to explain exactly what he means, in honest “common” language; and listen carefully for doubletalk.
“Of the three main contributers Coberly was initially most committed to Intermediate Cost, at least implicitly, his solution just ran with its numbers and was somewhat steady state.”
I can see why Bruce might have thought this… “at least implicitly.”
But I have never been committed to any “Cost,”. I used Intermediate Cost because that was the by far “most probable” scenario offered by the Trustees and it was the one used to generate most of the scarey numbers by both the Trustees and the Big Liars.
I did not, at first, offer so much as “a plan” as I just calculated what the actual cost to a worker would be over a “pay period” that would be easy for him to understand… in order to pay for the “Five Trillion Dollar Unfunded Deficit!” that everyone was screaming about. It turned out to be about 20 cents per week.
Then, pressed by someone to offer “a plan” that Congress could “enact” I offered the “one tenth of one percent whenever the Trustees Projected short term actuarial insolvency” and showed that according to the Trustees then current projection this would occur about twenty times over the next seventy five years. That one tenth of one percent was about eighty cents per week from a 40,000 dollar a year wage.
Subsequent changes in the projections due to the Great Recession have turned out not to affect that eighty cents per year except to move forward the year that it would have to start and increase the number of years it would occur during the first fifteen years.
Even the latest CBO huge increase in projected costs, has not affected the basic eighty cents per week for about twenty years… as far as I can tell given that I have not seen the schedule of CBO’s projected increases. If they come soon and fast, the eighty cents per week might need to be about as high as a dollar thirty per week, and run for about 23 years.
This is still a very small price to pay to guarantee at least “enough” for a retirement that starts when you are 67, or 62, and runs for 20 years or more.
But I don’t play the projection game. I don’t believe in guesses about the next 75 years meaning much. All I can show is what the guesses made by others actually mean in terms of what the average worker would pay over a time that means something to him.
And, of course, what he would get for his money. Security.
I misspoke
the dollar thirty per week per year increase would only have to run about twelve years to catch up with the CBO projection. it would catch that projection in 23 years by running at the eighty cents per week per year of the “original NW plan.”
point being that even the latest scariest projection does NOT amount to “huge” costs for the worker.
Or we could just take a history lesson. The govt issued “greenbacks” during the civil war to pay for the war. The govt did not obtain this money by taxing or borrowing. The govt created it. It was fiat money. The only worry was the acceptance of the money. The govt agreed to accept greenbacks in payment of taxes or people could earn interest by using greenbacks to buy govt bonds. This gave greenbacks value and they were accepted.
Today all money is fiat money. The govt can make any payment it wants. The only concern is the value of the money (inflation). But the only concern I hear is over being “out of money”, or “too much debt” or “we can’t afford…”. The true concern is “will we have an inflation problem if…”. But I never hear this discussion. Sad.
I see. I guess we can see what the next Report says.
Markey
I’ll have to defer to you and Bruce about “history.” But wasn’t the civil war followed by the great industrial development of the united states into a world power?
I think there is not much reason to worry about inflation. The Fed does not like inflation and tends to err on the side of recession. There are factors that are beyond the control of the Fed, but I don’t see any on the horizon. Government printing money is not one of them. Governments don’t like inflation either.
A certain amount of “stimulus” is necessary to make modern economies run. That means a moderate amount of inflation. Without it we’d all be raising feral pigs and making moonshine for a living.
And the politicians you are listening to on the subject haven’t changed their tune since the Whiskey Rebellion. It wins them elections. They used to be not stupid, or powerful, enough to actually do what they said they were going to do.
Coberly,
You completely missed my point. Reading the comments in this thread, I see mention of budgets, taxes, trust fund amounts, unfunded liabilities, cbo projections, etc. The reality of a fiat money system is the treasury can make any payment it wants without worrying about trust fund amounts, taxes or borrowing. The only concern is will the added spending exceed the real resources (labor, materials, goods) available resulting in inflation. The Fed has nothing to do with it.
Mark I agree on the larger point about a fiat money system only being ultimately constrained by inflation or at least fears of inflation. This is why it doesn’t make sense to talk about Federal budgeting as if it were the same as State, Corporate, or Family budgeting, because none of those get to pay debts in their own paper by law. (Nobody has to accept U.S. paper dollars in exchange for direct services, but they do have to be accepted for “all debts public and private”, i.e. don’t extend credit if you won’t take payment in U.S. bucks)
On the other hand I can’t go so far as to say “The Fed has nothing to do with it”. For one thing it has been decades since Treasury actually issued its own currency, that old Silver Certificate is worth more as a collectible by far than its face value, instead all current circulating currency are Federal Reserve Notes. Now Treasury can indirectly control the supply of those notes by varying the amount of Treasuries it sells and so either sucking more or less of them out of circulation, but under law it seems it is the Fed that is mostly in control of money supply because it can issue it directly. Moreover the Fed is officially tasked with controlling inflation. Or letting it roar. For example if some future QE4 strategy actually had the effect of flooding the world markets with Federal Reserve Notes in a way that risked triggering hyperinflation it is hard to see what any other entity of the Federal Government could do about that in the short run.
So yes the U.S. operates on what is in the final analysis a fiat currency. But it is not necessarily Treasury which does the ‘fiat-ing’.
Though it would be an interesting though experiment that had Treasury just flat out issuing Treasury Bonds and daring the Fed to do anything about the flood of cash coming into its own hands for subsequent spending. Because Treasuries are their own form of fiat currency, at least they are treated as such by such foreign entities that don’t relish trading billions of dollars worth of commodities via transfers of pallets of Benjamins (which is to say most foreign entities that are neither arms dealers or drug cartel members or often both).
Marky
I guess I am still missing your point. The fault may not be mine. Saying the government “only” has to worry about inflation, is a bit like saying the guy who wants to fly “only” has to worry about gravity.
Meanwhile there are laws… and “traditions”… that restrict what people can do with money. People like to be able to see a “chain of ownership” and they like the idea of being able to say “I paid for it myself.” I can’t guarantee that will always be the case,but for now it saves a lot of confusion.
You may be sure that if the government issued “fiat money” for some purpose, but then, in fear of inflation, refused to issue it for some other purpose, there would be hell to pay. The people who didn’t get that fiat money would scream, with justice, “No Fair!”. So meanwhile it’s better to “issue” money in return for some service or product or promise to pay (in future out of money “earned” by performing a service or providing a product or handing on someone else’s promise to pay… etc.
Well Dale I suggest you are missing Mark’s point, or perhaps better his context.
When you back right out and examine U.S. currency it is correctly described as ‘fiat’ (Latin for ‘let it be’) currency. Basically it has exchange value because Uncle Sam says it does. And if push comes to shove can only be exchanged for goods priced in dollars or to purchase U.S. public or private debt. But should you demand a portion of the gold stored in Fort Knox or in the basement vaults of the N.Y. Fed in exchange for those dollars you will go away sad but perhaps better informed.
Now Uncle Sam does not unilterally set the level of that exchange value and no one is compelled to exchange his goods for that price, certainly no foreigner. On the other hand for certain markets like oil the dollar is mostly the only game in town (mostly because countries like Iran and China can and do set up side deals direct).
In exchange for nations around the world agreeing (or being forced) to accept U.S. dollars or dollar instruments in payment for their goods and/or using dollars as their main foreign exchange reserve, or in some cases like Equador simply adopting the U.S. dollar outright the U.S. has assumed a more or less explicit obligation not to allow the actual exchange value to be inflated away in an uncontrolled fashion. Because that would, and in the 70s did, raise havoc with world markets.
So that I think is what Mark meant by saying that issuers of fiat currency ‘only’ have to worry about inflation. Because a relatively stable dollar is the anchor and port in a storm for the world economy, the so called ‘flight to safety’ instrument of choice. Not that a sound dollar is everything that a government has to worry about, but it is a key to the willingness of the rest of the world to organize the global economy around it. Inflation puts ALL that at risk.
BTW none of that was intended as a defense of strong inflation hawks or even less Gold Bugs. Because too many of them are some mixture of shills for bond holders and monomaniacs. And doubly so when U.S. Treasuries are trading at the lower bound and returns on simple savings are close to having two zeros after the decimal point.
The world wouldn’t end if people were still earning 3% on simple savings and paying 6% on their 30 year mortgages. Even if it meant candy bars no longer selling for the dime they did when I was a kid.
Bruce
actually I have no idea what you are talking about. I think I understand about fiat money and inflation.
i don’t think i agree that any country, fiat money or no, can just print dollars and give them out for some specific purpose. Even fiat money has to be exchanged for something of value.
And, though I don’t claim to understand the process in detail, issuing money through the Fed (?) to the banks to be lent to willing borrowers… may, or may not, stimulate the economy at some risk of inflation, which can generally be managed, but not always (as in the seventies).
even printing some dollars to pay a guy to build a new federal building is an exchange of dollars (however fiat) FOR something of value. I would guess, that it the stimulus of that act of printing doesn’t grow the economy, so that the money is not inflationary, simply raising the taxes of those who indirectly get the benefit of the federal building would reduce the inflationary impact.
But i am no expert… maybe not better than an ignoramus…. but whatever you, and Marky, are talking about, it doesn’t seem to be what I was talking about.
Dale while you are one of my better friends (admittedly a pretty small universe) I have to gently remind you of something. Not every comment on an AB post, particularly one of mine, is a direct response to a comment of yours. For example we have this:
“But i am no expert… maybe not better than an ignoramus…. but whatever you, and Marky, are talking about, it doesn’t seem to be what I was talking about”
as responding to this:
“Or we could just take a history lesson. The govt issued “greenbacks” during the civil war to pay for the war. The govt did not obtain this money by taxing or borrowing. The govt created it. It was fiat money. The only worry was the acceptance of the money. The govt agreed to accept greenbacks in payment of taxes or people could earn interest by using greenbacks to buy govt bonds. This gave greenbacks value and they were accepted. Today all money is fiat money”
Well you are certainly no ignoramus. And I may think all too much of my own contributions to any particular comment thread. Even one that I initiated. But forgive me for thinking that Mark’s original comment at 8:08 wasn’t necessarily addressed to you at all. Maybe it was and maybe it wasn’t but the fact that you don’t seem to see that it has any relevance to “what I was talking about” might just suggest the latter.
Maybe at some point Dan will decide it is worth the bother to institute threading to AB comments but until that happens we would best respond to specific signals like ‘Sammy’ or direct quotes to clue us in.
It is not always about me or the first or second responder to a post. And sometimes if people seem to be talking about something entirely different it may just be that they are talking about something entirely different.
That you and Mark may be talking past each other might just possibly be a feature and not a bug of the commenting format at AB. Just a late night thought on a probably deadish thread.
Bruce,
Actually the Treasury does still issue money – coins. But I am just being a smartass nitpicker for that comment.
As far as the Fed creating “money”, the Fed (typically) buys Treasury securities in exchange for Bank Reserves or Fed reserve notes. Lets say you had a $100 bill and a $100 US Savings bond (a Treasury security). The Fed buys your bond leaving you with $200 in Fed reserve notes. Your net worth did not change. The Fed cannot control the financial wealth of the private sector. The Fed can only control the mix of interest earning and non interest earning “money” held by the public. It is highly debatable whether controlling this mix is inflationary or not. QE I, II, III is providing some good evidence that it is not.
On the other hand, when the Treasury deficit spends (actually it is Congress), the amount of Treasury securities held by the public increases (assuming the Fed does not buy an equal amount but in either case the net financial wealth increases). Could this increase in spending above taxation and/or increase in the net wealth of the private sector lead to inflation? At some point yes.
And yes, we do have laws like the debt ceiling, or the Fed cannot buy directly from the Treasury. But these are self imposed restrictions.
My whole point is to change the discussion away from budgets, trust funds, running out of money, etc. and towards the operational reality of the monetary system we have. I would suggest reading the works of Marriner Eccles. He was the Fed chairmen from 1934-1948 (when we left the gold standard). The Fed headquarters building in DC is named after him. Smart guy!
Bruce
all true enough, but in fact both you and markg addressed me by name.
otherwise i take the attitude than anything posted on a blog is open for comment. certainly my first reply to markg did not assume he was addressing me personally, but i thought he was implying that the government could just print the money to pay for Social Security, which is a position I have heard maintained.
markg
and while changing the discussion etc might be timely, the Trust Fund running out of money is not something that can or ought to be cured by “just printing money”, which is what i thought i “explained” above, and what i thought you were talking about in the first place.
this doesn’t mean i don’t think the government can’t or shouldn’t “print” money. it can and should at the right times and in the right amounts (as best as it can guess), but the legal chain of “money” as “something for something” cannot be broken without destroying the meaning of “money.”
you could drop dollars from helicopters… to no good effect. you CAN print dollars to pay for some “economic good” and hope the good actually materializes in time for the “created” dollars to be just what the now bigger economy needs to manage the normal demand for dollars [some confusion here between “paper” dollars as medium of exchange… and “dollars” as a measure of the sum total of all exchanges … or recent exchanges… in the economy.]
i don’t know which of us understands this better… or if we are still talking past each other.
“The problem here (it seems to me) is that it builds in the assumption that federal borrowing needs are somehow fixed and the only question is the allocation. ”
In terms of how the debt ceiling impacts paying SS benefits, borrowing needs are fixed. We are talking about next week, not about budget policy. How much the government needs to borrow depends on making the ledger balance. Since the total borrowed cannot increase, what changes is the mix. Since bonds are still being retired, the mix can change. More Special Treasuries for SS means less regular Treasuries.
And as Bruce said from the start, the debt ceiling should not stop any SS checks from going out.
Arne
you are correct.
please forgive me if i “translate” that to make it clearer to any “laymen” who may be listening.
over a short period of time, or when the “debt limit” has been reached, and even for puposes of “the budget” (the special and rather different “budget” that congress keeps to monitor cash in and cash out while ignoring the legal status of that cash… as in did it come from borrowing or taxing)…. it is true to say that if more (less) is borrowed from Social Security (more or less “special treasuries”) then less (more) is borrowed via “regular” treasuries.
But over a longer (not much longer) time, the borrowing that Congress decides to do changes (increases) and there is NO relation between how much it borrows (pays back) from (to) Social Security and how much it borrows (pays back) from (to) buyers of regular treasuries (United States bonds).
This is important because folks will try to fool you by pointing at the instantaneous moment, or the peculiar definition of “deficit” that “the budget” uses, to make you believe that by paying less out to Social Security (by cutting benefits) they will be decreasing the deficit by decreasing the “need” to borrow from those buyers of regular treasuries. it is all fast talk, double talk, designed to confuse and mislead you.
The government owes money TO social security… money it borrowed FROM social security. paying it back does NOT increase it’s debt (deficit by any normal understanding of the word). It REDUCES it.
I hate to have to say this again and again. But lots of people really don’t understand it.
Sorry that everyone has gone away. This business about “the deficit” vs “the debt” has been a source of confusion for some time. And, despite my confusing use of “more (less)” construction above, I think we were getting close to clarifying how the word “deficit” is used inappropriately in discussions about “the debt” in general and Social Security, in particular.
“The Budget” as it turns out is NOT the means by which the United States keeps track of its DEBT. For example the wars in Iraq and Afghanistan were “off budget” (at least for a while) and did NOT contribute to “the deficit” but they most certainly DID increase the DEBT.
“The Budget” is a limited purpose document. Probably akin to what accountants call a “ledger [i am not an accountant and this may be wrong]. It is a record of money (cash) that comes in, or is expected to come in… without regard to origin (taxes or borrowing) that Congress has available to “spend” or “authorize” spending. That spending includes any “cash” that is spent on purchases, but also any that is spent on paying (with cash) debt or interest on debts. For the purposes of “the budget” no distinction is made.
At the end of the budget process, authorizations to spend that are in excess of the available cash, are called “the budget deficit” and provisions are made to borrow that money from “the public” by issuing “regular treasuries” (bonds).
This deficit… borrowing… adds to the National Debt. But so does the borrowing that takes place “off budget” (the wars and other “special appropriations”), but so does the money that comes into “the budget” by borrowing from the Social Security Trust Fund… even though “the budget” does not explicitly acknowledge that that money is “borrowed”.
Similarly, when…. as sometimes happens, and will happen more and more in the near future.. when Congress has to make an appropriation to pay… with cash… some of its debt (or interest on its debt) to Social Security, that cash shows up on the expenditure side of “the Budget” and is most likely to contribute to “the deficit”… but that is the BUDGET deficit, which is not at all the same thing as the National Debt. In fact, by paying off part of its loan FROM Social Security, Congress would be to that extent REDUCING the National Debt.
I hope this is clear, or gets us toward clear. I am not sure if the budget-talkers fully realize this. I think many of them do not. And I am sure some of those who do are happy to exploit the confusion to leave the public with the idea that Social Security contributes to the DEBT of the Unites States… which it does not (except in the backward sense of lending TO the United States.).
Dale
As you previously implied few make it passed the first page. Worse yet most of the public seems to feel blase about the issue of Social Security and its relationship to the debt or deficit of the general budget. Undoubtedly the fault lies in the major effort over the past fifty years or so to destroy the program by many diverse parties, all of whom I think grow out of the same cabal. Also the so called liberal establishment seems not to be interested in a vigorous defense of the realities of the Social Security program, its funding stream, Trust Fund and its benefits process. I can’t recall a Democrat politico who has offered a truly aggressive stand on the issues.
As with so many aspects of economic and political debate in this country the news media in particular and the general media have played a significant role in propagating the canard. Even Krugman seems to be less than fully invested in examining this specific issue. And his cohorts at the NY Times are often specifically intent on distorting the role and specific aspects of Social Security. Look at Friedman’s recent column which is clearly intended to foment generational decisiveness. There are several distortions within a context of a few general observations which are more opinion than facts.
http://www.nytimes.com/2013/10/16/opinion/friedman-sorry-kids-we-ate-it-all.html?partner=rssnyt&emc=rss
What I’m curious to know is just what do these people think they’ll accomplish? FICA is legislatively dedicated to Social Security benefits. The funds can only be accessed for general government spending via the Trust Fund’s excess FICA collections. Do they want to reduce benefits in order to have a slush fund to borrow from that is inter-governmental and less obvious as debt? And when the Trust Fund is over flowing with assets which it doesn’t spend, what then? We all need to be on the same informational page on this issue or we will some day soon see FICA revenues morphing into general tax receipts. Thereby further distorting the working classes’ tax contributions relative to the One Percent.
Sorry for the typo, but the second to last sentence of the second paragraph, “to foment generational decisiveness,” should read “generational divisiveness.”
Jack
i don’t think we’ll see generational decisiveness very soon… except to the extent they decide to be passionately wrong about something.
what the bad guys expect to gain… mostly to sow confusion and so weaken the support for Social Security.
what do they expect to gain by that… probably this: they believe that Social Security “reduces savings”… which is nonsense. And they believe that Social Security “reduces the incentive to work,” which can only mean that if you must “work or starve” you will have incentive to work. But if a government program allows you to protect your own savings so you can actually retire before you are ready to die, well, you might not have the requisite “incentive to work.”
I think all the other things they might “gain” are just pennies, but they really, really hate to see “the help” idle.