Soc Sec XX: Reframing the Trust Fund
Well I want to get back to some of the basics. Much of the confusion around Social Security, and this is true as much for supporters as opponents, is a failure to understand what the Trust Fund actually is. This failure has led to such myths as ‘The Great Raids of Johnson/Reagan/etc’, the idea that something nefarious was going on, as well as the counterpart myth ‘Pre-funding’. This post aims to get people to see that Trust Fund in a new way and show that there really is nothing to see here, this accident scene turns out not to be an accident and in historical and numeric context not much of a scene to start with.
First and most important concept: the Trust Fund is not an investment fund, it is instead a reserve account maintained by the Treasury Department. In design and through much of its history it simply served as a buffer to protect retirees benefit checks from temporary fluctuations in revenue through such things as spikes in unemployment.
Second: while the Trust Fund balances are reported in total dollars ($2.2 trillion today) that is not really the best way to measure it, between inflation, changes in real wage, and increases in population it makes no sense to compare the balance today as opposed to fifteen years ago. Instead on a year to year basis the SSA examines the cost/income ratio and its trend. On a longer term basis it relies on the Trust Fund Ratio. The TF Ratio is the current balance expressed as a function of time where 100=1 year.
Third: before examine the numbers I want to introduce two concepts, that of Short Term Actuarial Balance and of Long Term Actuarial Balance. Short Term in Social Security terms means 10 years. If the projected Trust Fund Ratios are projected to be at or over 100 then Social Security is judged to be in Short Term Actuarial Balance, if not then the Trustees are supposed to urge Congress to do something about it, to that degree the ten year forecast is the official measure of ‘Crisis’. But the Trustees also keep an eye on Long Term Actuarial Balance which is the same test over 75 years. And now to the numbers:
Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds,Calendar Years 1957-2007 [Amounts in billions]
Discussion under the fold.
The three columns to pay attention to are the three far right ones under the heading assets. The first of the three measures cash flow to or from the bottom line in any given year, the second shows the resulting cumulative total, the third shows that total in terms of Trust Fund Ratio. If we examine the years from 1957 to 1965 we see a real Pay/Go system, with some years showing small surpluses while other years showing somewhat higher deficits with a result in cash terms of a roughly steady state balance. But if we examine the last column the picture darkens somewhat, we have a TF ratio that drops from a more than comfortable 298 in 1957 to 110 in 1965. Given that the official target is Short Term Actuarial Balance and a TF Ratio of 100, not a call for action but something to keep an eye on.
Now if we examine the period from 1966 to 1969 and so including the last months of the Johnson Administration we see a system in almost perfect balance, in all four years the system ran small but fairly consistent surpluses leading to a modest increase in total Trust Fund balance from $22-32 billion, but it is the last column that really tells the tale, the TF Ratio stays right around the level of Actuarial Balance with a low of 95 to a final of 103.
So time to bust Myth #1, that Johnson raided the Trust Fund to pay for Vietnam or the Great Society programs and created the Unified Budget to cover his tracks. Well sorry the actual numbers simply don’t support that, the $14 billion dollars added to the Trust Fund balance between the end of 1965 and the end of 1969 (with $5 billion of that coming in the last year and so mostly under Nixon’s first nine months) was much bigger money then than today, but it wasn’t enough to pay for the War nor for AFDC either. Instead Johnson and Congress did exactly what the law called for them to do, ensure that Social Security had a line of credit equal to around one year of expenses.
Line of Credit? What the hell, aren’t those assets Real as Real? If not why call them assets? Well the answer is to step back and think of the whole idea of dollar denominated assets. In the end the dollars you have in a bank account are in reality just a legal claim against the bank. If the dollars are in a savings account the bank will credit that account with a modest amount of interest, if the dollars are in a more volatile checking account (and so not as available in principle for the bank to lend) the bank may charge fees from small to extortionate, but really you don’t have any physical dollars in any of those accounts, just the right to exchange a portion of that balance for cash or services.
So in real world terms the Trust Fund balance is just a legal claim on the Treasury in exactly the same way as a savings account is a legal claim against the Bank, each in the end quaranteed by the Federal Government, in the case of the Trust Funds directly, in the case of the bank through various types of federal insurance. So why do we also track those balances in the form of Special Treasuries? Why not make the claim explicit and direct? Well I expect that the answer is partly Constitutional and partly just one of convenience. In Article 1 Section 9 (Limits on Congress) we are told: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” On the other hand the Treasury has the routine and regular authority to borrow money and issue debt instruments. Rather than entangle Social Security and Medicare in the Appropriations process, the Special Treasuries offer a convenient way to recast the whole thing as a series of borrowing and repayment.
Okay back to the numbers. Having introduced the concept that the Trust Fund is simply a reserve account to buffer short term variations in revenue, and that holding it in Special Treasuries is just a matter of convenience, what do the numbers show from 1970 to 1980, that is from Nixon to the election of Reagan? Well it sure as hell wasn’t a raid on the Trust Fund, instead surpluses dropped sharply and went to deficits in 1975, with the result that over this period the TF balance went from $38 billion to $27 billion even as annual cost went from $39 billion to $119 billion. And the arithmetic result in the TF ratio is stark, from 103 in 1970 to 25 in 1980. That is when Reagan took office the SSA had only three months of excess claims on Treasury in case of a revenue dip that sent Income below Cost. Now that is a system in crisis.
So time to bust myths 2 and 3. Because while you can indict Nixon, Ford, and Carter for letting the system decay, they did in fact honor the Trust Fund right down to the last, those Special Treasuries were paid off with General Fund transfers, they did in fact keep the checks flowing. So much for myth 2. As for myth 3, the Reagan raid on Social Security to pay for the Defense buildup. Nonsense. If fact laugh out loud nonsense. He was handed a lemonade and despite all entreaties from ideological opponents of Social Security did not let the system go to default, instead between him, the Commission, and Congress they implemented an interim patch designed to put the Trust Fund back on a path to Short Term Actuarial Balance, a task that was accomplished right in time to hand the system over to Clinton. Plus if you go back and actually look at the cash surpluses from 1982 to 1986 and so for most of Reagan’s remaining time in office you see a balance going only from $24 to $46 billion with half of that in the form of interest. Which left Reagan the opportunity to ‘loot’ Social Security over that five year period of $11 billion or a $2.2 billion a year. Needless to say that was little more than a rounding error is then current defense budgets, the notion that Social Security funded a fleet of supercarriers vanishes into thin air.
If you look at the numbers.
One last myth, that of prefunding. When you think about Social Security in terms of a reserve fund whose measure of adequacy is a TF ratio of 100, you have to conclude that in any year that ratio remains below 100 you have not pre-funded anything, if anything your account is in arrears. So it is not true that Boomers started pre-paying for their retirement in 1984, instead they were simply maintaining Pay/Go while slowly building the Reserve, aka Trust Fund back to 100, a goal that was reached by 1993. It is true that a period of strong growth in the economy after that served to drastically improve actuarial balance, but even now the TF ratio is only at 341 and only projected to rise modestly over the next four years and then to decline after that. In real terms Boomers have only prefunded the next 3 years and 5 months, or more precisely 2 years and 5 months once you subtract out the mandated 1 year reserve,
Conclusion. The Trust Fund should not be seen as an investment fund because functionally that has not how it has operated historically and that is not how it is expected to operate projected forward. Under Intermediate Cost projections this period of strong surpluses is going to be temporary and talk about reallocating assets doesn’t make sense. (Different story under Low Cost but opponents of Social Security have to date not been willing to go there). In any event the history of Social Security from 1957 to at least 1993 can be summarized “Promises made, promises kept”. There simply was no dirty work done by anyone, not LBJ not Reagan not any of them. But the myths die hard on both the Left and the Right.