Social Security Zero: the Basics Revisited & Three Myths

Or perhaps we could call this ‘Social Security basics as seen by Bruce’. In any event.

Some recent e-mail exchanges and comments have led me to conclude that there are certain misconceptions about Social Security finance, misconceptions that both feed on and feed into certain pernicious myths initiated by people who oppose Social Security on principle but want you to believe it is all about the finance.

The first misconception stems from the fact that the Treasury Department taken as a whole doesn’t need the equivalent of a Savings Account, that is a place to hold large amount of actual dollars in reserve. The reason is simple, when put in the crudest terms it not only has excellent credit which it exercises daily, if it comes to it Treasury owns the printing press. On the other hand it manages a number of programs who do need that equivalent of which the three largest are Social Security Retirement, Social Security Disability, and Medicare. So how do they handle this. Well the mechanism is simple, it just results in some conceptual confusion. More below the fold.
The mechanics of Social Security are pretty simple. The Federal Government collects taxes on wages and on high income benefits and then turns around and spends much to most of that right back out the door in the form of disability and retirement checks. If there are surpluses the money is credited to the Social Security Trust Fund which then turns around and invests them in the safest historical investment known, in this case a special type of T-Bill known as a Special Treasury. Like the case of all T-Bill sales the proceeds flow to the Treasury and are available for the government to spend as they like. Nothing wrong there, that is what happens when you buy a bond, they take the money, give you a promise to repay, and then they invest the money is hopefully productive ways. This is not ‘raiding’, this is not ‘looting’, but it is a promise that creates a specific future obligation, and is specifically booked as debt and shows up in the familiar $9 trillion total debt as seen on various debt clocks. Note too that this process can, and as we will see, has reversed. If there is a string of years when Income from taxes lags cost then the flow reverses, the General Fund makes up the difference and retires an equivalent amount of debt.

Which leads to myths one and two: the Great Raids of Johnson and Reagan. The narrative here suggests that Johnson raided Social Security Trust Funds to fund Vietnam and that Reagan raided it again to pay for the Cold War and that as a result the cupboard was left bare. This is just numeric nonsense and betrays both a misunderstanding of the nature of the Trust Fund and of the Special Treasuries they hold plus a total exaggeration of the dollars in question. The latter can be seen in Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds,Calendar Years 1957-2007 [Amounts in billions]. For our purposes the key columns are the right hand three under ‘Assets’. Taking the last first, the Trust Fund Ratio is the Trust Fund balance expressed as a ratio of time with 100=1 year. Legally the Trustees are supposed to monitor the Trust Fund ratio and alert Congress any time it falls out of Short Term Actuarial Balance, which is defined as a projected TF Ratio of at least 100 in each of the next 10 years.

Which gives us mythbuster one: any year that Social Security has a TF Ratio close to 100 is a year when nothing is being looted, instead the President, Congress and Trustees are all fulfilling their fiduciary responsibility. If we look at the table we see that Johnson maintained the Trust Funds at ratios between 97 and 110 at the end of each of his full years in office, and delivered a 101 ratio to his successor, in respect to Social Security he was practically the perfect steward.

Now if we look forward in time we see that Nixon allowed the TF ratio to fall below 100 and so out of Actuarial Balance, and that Ford and Carter did nothing about it. Though this made them perhaps poor stewards at one level, it didn’t make them thieves the direction of cash flow during these years was actually from the General Fund to Social Security (third column from right).

Which leads us to the Reagan Administration. Reagan inherited a lemon, Social Security was coming off a string of six years of cashing in Trust Fund assets with money from the General Fund, although all the bills had been paid and all legal obligations met, the cupboard was in fact bare. The ideologues were howling to just let it die, they hated Social Security from the beginning and were just waiting for their day to come. It came and Reagan let them down, instead he instituted a medium term fix.

Which puts the lie to myth 2: the Reagan raid. First if we look at the Trust Fund year by year (third column) we see that one, the dollar figures in any given year are not particularly big, with half of the total increase coming in the last year of his term. Second the Trust Fund ratio although improving was only up to 41. But there was no raid, instead there was a simple accumulation of investments to get the fund back on track to a TF ratio of 100. Whatever else his faults, Reagan is totally blameless over Social Security. He did his job.

As did Bush I. He didn’t do anything dramatic but he did deliver a Trust Fund with a ratio of 97 and clearly on track for Actuarial Balance.

Which gives rise to myth 3: pre-funding. Any year that the Social Security Trust Funds have a ratio of 100 or less they are not prefunding anything, in fact they are in actuarial imbalance and in effect under water, which was true for every year from 1971 to 1993. There was a real crisis in Social Security in the early eighties but collectively this country fulfilled its responsibilities to Social Security retirees. (Although I will hasten to note that the entire net bill was picked up by workers, capital’s role was limited to not actually wrecking the system). But there is no hard evidence I know of that the Commission ever thought of their efforts of doing more than returning it to actuarial balance, and a recent interview with the Executive Secretary of the Commission confirmed as much. While they did present a set of numbers that would do the job, they were hardly in a position to predict that series of years in the late nineties when Social Security was actually set on the path to solvency.

The state of affairs under the Clinton and Bush Administration is in fact somewhat of an anomaly but there it is. Current surpluses and current economic growth are coming in at rates that should allow us to pay all or almost all of benefits going fowards. If and only if we are vigilent enough to keep future governments simply fulfilling their fiduciary duty. And the politics of that will have to wait on another day and another post.