What Would it Mean to “Save” the Social Security Trust Fund Surplus?

A recent post by Dean Baker made me think about this question – If the routine complaint that “the government has spent the Social Security Trust Fund Surplus” is inverted to ask what would it mean if the government “saved” it instead, what would that mean?

First, lets recap what Dean said in his post – The trust fund uses its surplus to buy Treasury bonds which are specially designated for that purpose. That is, they don’t just go to the market and buy garden variety T-bonds but get ones that are in all respects the same except that they cant be traded on the secondary market. What has the government done with the proceeds of these SS bonds? If we assume that the SS bonds are the marginal debt issued in each year then in every year except the brief period around 2000 when the budget was in surplus they spent the money. During the brief surplus period they used the money to reduce the national debt.

Suppose they had saved the money instead. They could have done any of several things. One is that they could have put the money in a savings account (which would mean that the bank involved would then invest the money in stocks, bonds, loans, or some other asset). Another is that they could have bought some stock. Another is that they could have bought some bonds. But if they had done any of these things there would be no reason to buy Treasury bonds at all – The Social Security Trust Fund could just as easily buy any of these assets directly on their own account without using the government as an intermediary.

But it was clearly thought that using the Federal Government as an intermediary was preferable to any of these alternatives. And it is also worth emphasizing that there was no ex ante expectation as to what the government would do with money – indeed, we have had both surplus and deficit years since 1983 without causing any trouble to the Trust Fund. Why was using the Federal Government as an intermediary preferred?

There is one reason and one reason only – Treasury bonds are the nearest thing to a risk free asset that could be imagined in 1983. What the money was spent on was irrelevant. The key is that regardless of future economic events, the one entity that could be counted on to honor its debts was the Federal Government. THAT is why the SS bonds are specially designated – not to protect the Federal Government from having to pay them off, but to protect the SS beneficiaries from any attempt to invest the surplus in something less rock-solid than T-bonds.

So, any complaint about the Federal Government “spending the surplus” is in reality an argument against the profligate debt accumulation strategy of the past 6 years. This affects the SS system only insofar as it erodes the status of T-bonds as a risk free asset, something that nobody could even imagine wondering about 25 years ago. If the Federal Government had been running itself on as sound an actuarial basis as the Social Security Administration does it would still be unthinkable. That it isnt is a testimony to the lunacy of our fiscal policy, but is in no way an argument for Social Security “reform”.