Social Security and Deficit Reduction: Some Fun with Numbers
by Bruce Webb
Well it looks like we are going to get a Deficit Commission and one way or another Social Security will be on the table. But what exactly does that mean for either Social Security or the total deficit picture? Before answering that lets review a couple of basics.
In talking deficit reduction we need to distinguish between ‘deficit’ and ‘debt’. A ‘deficit’ is basically an accounting convention, it is worthwhile to calculate various gaps between income and cost. But not everything labeled ‘income’ actually represents cash extracted from the economy, in particular interest on Intragovernmental Holdings is not in fact financed by such dollars, although it is real as real in the long run, in the immediate term it is simply a bookkeeping entry. Which leads to some really odd results. In order to keep things straight the CBO maintains two different measures for deficits: ‘primary deficit’ which measures actual cash flow and ‘deficit’ which includes that interest. Now in general newspapers report the deficit and not the primary deficit, when we talk about an Obama $1.6 trillion deficit for FY2010 that figure silently includes interest on the Intragovernmental Holdings as a positive number, whereas a calculation of primary deficit wouldn’t include it at all.
Turning to ‘debt’. Last week Congress raised the debt ceiling from $12 trillion to close to $15 trillion. But this does not mean Treasury is free to borrow up to $3 trillion in cash prior to going back to Congress, because there are two different components of debt subject to the ceiling. You can check out both the total debt and its two components via a web application maintained by Treasury called Debt to the Penny which would tell you that as of Monday ‘Debt held by the Public’ was $7.849 trillion while ‘Intragovernmental Holdings’ were $4.499 trillion for a total of ‘Public Debt’ of $12.349 trillion, which is the number you normally see reported in the newspapers.
Mostly when people talk ‘deficit reduction’ they do so not in the context of opening borrowing room in the current year or its effects on interest rates, those those are pretty important things indeed. Instead they tend to think of it in terms of debt reduction or perhaps just a slowing in the growth rate of Public Debt. And one way to accomplish that is to cut spending. Or so you would think, once you start factoring in the curious treatment of interest on Intragovernmental Holdings things start getting strange. Follow me below the fold if you dare.
More than half of the $4.499 trillion in Intragovernmental Holdings are held by the two Social Security Trust Funds, in fact they have $2.5 trillion in Treasury obligations that score as part of Public Debt. But for the sake of this argument I want to simplify that a little:
Suppose you have a Trust Fund with a balance of $2 trillion in notes earning 5% a year which operates along side a benefits program with its own dedicated revenue stream that either will or will not pay all costs in any give year. Now imagine three different scenarios:
A1: the benefits program self-funds with non-interest income equalling cost
B1: the benefits program runs with an operating loss of $100 billion
C1: the benefits program runs with an operating surplus of $100 billion
What are the subsequent impacts on total Public Debt?
Under A1 there is no call on funds from Treasury nor is there any cash flow to it. But Treasury does have to create $100 billion in the form of new Special Treasuries to credit to the Trust Fund to account for interest. This $100 billion adds to Intragovernmental Holdings which in turn adds to Public Debt for a net increase in that debt of $100 billion.
Under B1 there is a call on $100 billion in funds from Treasury to meet costs. To meet that call Treasury has to borrow (or find revenue, same thing for our purposes) $100 billion in Debt held by the Public. In turn it offsets that by not giving any credit to the Trust Fund for accrued interest, instead ‘taking’ it in exchange for that other dept. The end result is that $100 billion is added to Debt held by the Public and so to Public Debt while nothing is added to Intragovernmental Holdings with a net increase in total Public Debt of $100 billion, i.e. the same amount as A1.
Under C1 the operating surplus of $100 billion flows to Treasury and in principle pays down that same amount in Debt Held by the Public (or reduces borrowing by that amount, same thing) which reduces Debt Held by the Public and hence Public Debt by that amount. But under the rules in play Treasury is required to issue $100 billion in Special Treasuries to ‘pay’ for that borrowing and another $100 billion in such Treasuries to account for the interest which increases Intragovernmental Holdings and so Public Debt by that amount for a total net increase in total Public Debt of $100 billion. Same as A1 and B1.
So for the specific purpose of calculating Public Debt A1=B1=C1. I suggest this result is pretty damn counter-intuitive but absent some mechanism I am missing that is how the numbers run.
Okay now say in the interest of deficit and debt reduction we cut our benefits program by $100 billion a year while leaving its revenue constant.
A2. The benefits program, previously revenue neutral, now provides a $100 billion cash surplus to Treasury reducing Debt Held by the Public by that amount. In turn Treasury issues $200 billion in Special Treasuries to account for the borrowing and the accrued interest. Net increase in the Public Debt is still $100 billion.
B2: The benefits program, previously running at a $100 billion loss, is no revenue neutral with no cash effect on Treasury meaning that Treasury only has to issue a Special Treasury for $100 billion meaning a net increase in Public Debt of $100 billion.
B3: The benefits program, previously running a $100 billion surplus now is running a $200 billion one, reducing Debt Held by the Public and hence Public Debt by that same amount. But Treasury has to issue $300 billion in Special Treasuries for a net increase in Public Debt of $100 billion.
Now this is getting kind of spooky, not only does A1=B1=C1 for the purposes of the number on the Debt Clock, they are also precisely equal to A2=B2=C2. That is no matter whether the current system is running cash surpluses, cash deficits or is cash neutral cutting $100 billion in spending doesn’t move the Debt Clock at all.
Does this mean there is no real world effect? Well of course not, between the six scenarios we have impacts on Debt Held by the Public from up $100 billion to down $200 billion depending on the before and after states, that is real money. But all it really is is a transfer from Social Security beneficiaries to holders of Debt Held by the Public, it is just robbing Grandma so as to make it easier to pay off the Chinese Central Bank.
Making the attempt to attach at least this component of Entitlements Reform to raising the Debt Ceiling kind of a sham. Because for the specific purpose of calculating total Public Debt subject to the limit it is a wash.
Now lets turn to Deficits. Under Unified Budget scoring any surplus to Social Security including accrued interest counts as a positive meaning a $100 billion annual cut in Benefits will yield a $1 trillion ten year score plus any additional interest effects on the Trust Funds which actually would be substantial. Because every $100 billion added to or not subtracted from the Trust Fund will be generating 5% compound interest. But those same interest dollars which score as a positive on a 10 year deficit total actually score as an equal increase in Public Debt. This too is pretty damn counterintuitive, we have the same factor driving deficit and debt in opposite directions.
And just to insert some final confusion what does $100 billion in cost cuts per annum do for our old friend Unfunded Liability. Well it wipes it out, the problem being that it is simply replaced by Public Debt in the form of Special Treasuries even as the dollars used to build that fund were spent long since. Given all this I can’t see why any worker would support cuts to Social Security, all that does it cut current obligations while replacing them with Public Debt in the future, a debt that we can’t expect the capitalists of the future to be any more willing to pay back than the capitalists of today. As long as the Social Security Trust Funds are throwing off enough interest dollars to cover the gap between Income excluding Interest and Cost there is absolutely no reason why workers should simply sacrifice their own interests here. In this scenario all of the benefit simply flows to the bond market. Now theoretically there would be positive impacts on interest rates which might create some indirect benefits for consumers, and if we were experiencing Carter/Reagan double digit interest rates then maybe a case could be made. But under current conditions I just don’t see it.
Anyway the next time some one comes waving that $12 trillion figure as a reason to cut Social Security be sure to ask him to show his work, in this particular case cutting spending actually serves to increase debt. And weirdly enough so does increasing revenue. Such are the weirdities of Trust Fund accounting.
____________________________________________
Final bonus nugget. What would a perfectly balanced Social Security system look like?
One it would run a small cash flow deficit, Treasury would be transferring some money to SS each and every year.
Two still Social Security would overall score as being in surplus for Unified Budget purposes.
Three beyond whatever borrowing was needed for One, Social Security would be adding to Public Debt every year.
Yep a system that is cash flow negative, in permanent surplus AND adding to debt. Perfect! Wrap your head around that for awhile.
Trying to get this, using example B. I get that Treasury has to borrow money for that $100B not in the SS revenue that was collected. So, debt increased. But, now Treasury is not paying interest of $100 B because the “take” it. But it doesn’t wash, because it just means Treasury is only having to pay out $100 B instead of $200B (new cash flow debt plus interest)?
In C1. The $100 borrowed is accounted as borrowed because the cash flowed to the SS fund and then was “borrowed” from the fund? While at the same time Treasury is obligated to pay interest on the new cash into SS that Treasury just borrowed?
So, if we can’t cut spending in the Trust fund to reduce debt and deficit, we can reduce it by cutting general revenue expenses such as defense? Or, we can raise non-payroll taxes (the MC and SS part of our deductions) such that the revenue goes directly to Treasury as general revenue? I assume raising MC and SS taxes would serve to increase the debt/deficit because of the money flowing to the “Fund” that Treasury then has to use via borrowing it and paying interest on it?
Did you know you can actually go to Treasury and put up your credit card to contribute to reducing the debt? http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm
I wonder if any bankers have stepped up to the plate?
Bruce,
You need to add this one to your archives…
Well I don’t see where you get the $200 billion.
Think of two parallel operations. One is the Trust Fund. The other is a Benefits Program.
The Trust Fund is going to generate $100 billion in interest no matter what, the question is how it gets allocated when it actually accrues at the end of the year. If the Benefit Program is revenue neutral, it will accrue in the form of an additional $100 billion in Special Treasuries in the TF. Since Special Treasuries are not financed out of current year borrowing or revenue this is more or less free money for Treasury. But it will score as $100 billion increase to Intragovernmental Holdings and so Public Debt.
In B1 we assume an operating loss of $100 billion. As things operate that actual cash deficit has to be made up by Treasury in the form of borrowing from the public. In the absense of interest the result would be a simple debit of $100 billion from the Trust Fund Balance. But since there is interest on that balance that happens to exactly equal the operating loss the response of Treasury is just not to create a new Special Treasury at all. This has no real world cash impact on Treasury it simply cancels out what would have been an IOU added to the TF balance. The net effect on the TF is thus zero, it ends the year with the same $2T it started with. On the other hand Treasury now has an additional $100 billion in borrowing on top of existing Debt Held by the Public.
In C1 don’t think of the excess cash as flowing to the Trust Fund. Instead think of it as sitting in the Operations Account until year end reconciliation. At the end of the year there is $100 billion in that account which is used to ‘purchase’ a Special Treasury. At the same time the Trust Fund has accrued an additional $100 billion in interest which it exchanges for another Special Treasury. Now the Trust Fund has $200 billion in new Special Treasuries while the Treasury has on the one hand met its interest obligation and on the other has $100 billion in cash with which to pay down $100 billion in Debt Held by the Public. Net effect is $100 billion deduced from Debt Held by the Public and $200 billion added to Intragovernmental Holdings which combines to add $100 billion to Public Debt.
In this simplified model it is assumed that surpluses in the operating account don’t earn intra year interest. That would just complicate things needlessly.
which is only then deposited in the Trust Fund. Treasury then takes that money for which they exchanged a Special Treasury and uses it to redeem $100 billion in regular Treasuries
As to your second question. With the General Fund you don’t have TF interest complicating everything.
Lets imagine you have a $5 trillion discretionary budget, and $2 trillion in accrued Debt Held by the Public at 5% meaning an annual cost to service the debt at $100 billion.
Scenario D1. You have $5.1 trillion in revenue. $5 trillion pays for discretionary spending, $100 million ofr debt service leaving no borrowing needs but equally the same amount of debt.
E1 You raise revenues by $300 billion and keep discretionary spending level. $5 trillion goes to spending $100 billion to debt service and $200 billion to redeem accrued Debt. Once again no borrowing needs but debt reduced to $1.8 trillion.
Keeping everything steady the next year allows you to pay $90 billion in Debt service and $210 billion in accrued debt. Eleven or so years after that you have no Debt at all.
F1 You cut spending by $300 billion and keep revenue level. Now $4.7 trillion goes to spending, $100 billion to debt service, with $200 billion to to pay down accrued debt. The math works the same as in E1.
So either raising taxes or cutting spending have the same direct effect on debt, they reduce it dollar for dollar in the first year while also cutting the cost of debt service by the same percentage that they pay down the debt. There are no weird effects because the Defense Department has no claim on the General Fund. In theory you could have a dedicated War tax and a Defense Trust Fund and end up with the same issues just as I believe there was a time in the past when no one was willing to spend down the Highway Trust Fund because those expenditures were considered on budget. But only Social Security has the size and time lags needed to grow it so large that interest becomes an actual issue.
So in your posting we are not even considering the general revenue funds? Just the moving of money between the Benefits Account (say checking account) and the Trust Fund (say savings account)?
I got my $200B from the $100 borrowed and the $100 interest.
So, to see if I got it, B1 example, Trust Fund ran short $100 that would have funded Benefits, Treasury borrows from JQ Public to fund the Benefit instead of paying interest to the Trust Fund?
We have 3 players then that Treasury is juggling? JQ Public, Benefit Fund and Trust Fund?
Let me try to sum up the POTENTIAL situation I see unfolding.
Worldwide we are seeing a government debt issuance bubble unfolding, propped up by central bank debt monetization (e.g. Federal Reserve is buying new debt to keep rates down, China buying debt).
Potential problems will not play out immediately as is happing in Greece, but will take 3-5 years to develop. But we could see more Greek situations in the next 5 years.
The potential problems will be averted, or delayed, if a strong non-governmental economic trend emerges (e.g. tech boom, or green boom).
We need to talk about the government budget as one pot of money. SS is fine in and of itself, but looking at the total US government budget picture things are not so great.
What can go wrong:
1) Debt issuance snowballs and rates begin to climb thus worsening the budget picture as our borrowing costs go up further pressuring the budget, and the debt hinders job/economic growth. We end up in a wordlwide glut of debt with low demand for the debt.
2) The big purchasers of debt dries up China, Federal reserve
3) Other countries debt problems begin to affect ours
4) Raising taxes begins to crowd something else out – private investment capital
5) Economy plods along and tax hikes do not generate needed revenue
What can slow the problem:
1) We raise taxes, an option we have room for, and for example Greece does not. Danger is that incomes continue to be stagnant so revenues are not that great
2) Health care reform that actually slows expenses
3) Cut spending, but this could further depress the economy as related jobs might dry up
This won’t unfold tomorrow, will take time, but it is unfolding. Like the housing bubble took time to burst, this will too if it continues, and I see every sign of it continuing.
Some related links:
http://seekingalpha.com/article/184381-debt-and-debtors-why-greece-matters-for-governments-and-investors-part-ii
http://seekingalpha.com/article/125072-debt-loads-of-g20-nations-japan-u-s-deep-in-the-hole
Interetsing stuff on Japan and tehir SS-like system, and why they can carry such a huge debt load:
http://seekingalpha.com/article/167802-japan-s-sovereign-cds-indicates-higher-relative-risk
“We have 3 players then that Treasury is juggling? JQ Public, Benefit Fund and Trust Fund?”
Well except the Benefit Program is best not thought of as a fund. In the real world there is not the kind of wall between the Trust Fund and the Benefit Program that this model suggests, the Operations Account is conceptual.
But yes we have two players: Debt Held By the Public and Intragovernmental Holdings
And then we have a program with two inputs and an output: Income Excluding Interest, Interest, and Cost. In both reality and the model Interest is only credited to the actual Trust Fund periodically, in this model only once at the end of the year.
In this model Social Security operates as it if had a deposit account and a line of credit at the Treasury. As Income Excluding Interest comes in it goes to the deposit account and similar costs are drawn out of that account, if over the course of the year that income doesn’t fully equal cost SS draws on the line of credit and at the end of the year they reconcile the accounts. In an optimal year the deposit account and line of credit will cancel themselves our. Which allows the interest check to bypass the system and just be deposited into Intragovernmental Holdings in the form of a Special Treasury. Nice and easy.
But say Cost exceeded Income excluding Interest and that there is a balance on the line of credit. In this case instead of cutting a ‘check’ for the amount of Interest, Treasury first deducts the amount owing to the line of credit and writes a check to Intragovernmental Holdings for any balance. But if we back up a second we realize that the net cash drawn on that line had to come from somewhere which in this case means borrowed from the Public, which means Treasury having issued a debt instrument there. In the end the $100 billion in interest earned ends up in two different pieces of paper, one held by the Public, the other by Intragovernmental Holdings but in each case always adding up to $100 billion.
I am not sure what in this “not even considering the general revenue funds” would mean in this case.
Now if we turn it around and imagine a situation where Income Excluding Interest comfortably covered Cost and the line of credit was never touched. In this case the operating surplus is used to purchase Special Treasuries. And where the actual cash money goes is not the concern of Social Security. Now in the model every dollar would be used to pay down Debt held by the Public creating not net change in Total Public Debt. In this version the entirety of the Interest is availble to buy another Special Treasury with no cash actually changing hands, Treasury simply exchanging a current year obligation to pay interest with a future year obligation to redeem the Special Treasury.
Which may resolve your $200 billion problem. Treasury ends the year with a $100 billion interest obligation. It will first offset that obligation with any money borrowed from the Public to fund the line of credit, if there is anything left over it will fulfill the rest of the obligation by issuing a Special Treasury, so the operation is not one of addition but instead subtraction. But in all cases that $100 billion obligation ends up scoring as Public Debt, either as Debt held by the Public that funded the Line of Credit, or as leftover Special Treasuries..
At some point I will write a follow up post explaining what happens when the Line of Credit is drawn on for more than the amount of Interest. But enough for know.
Bruce,
Final bonus nugget. What would a perfectly balanced Social Security system look like?
A sufficient condition for a perfectly balanced system would be one where all the benefits owed and paid were paid from current payroll taxes. The social security accounts would be independent totally independent from the general fund. There would be no borrowing or lending between the two.
Bruce,
Final bonus nugget. What would a perfectly balanced Social Security system look like?
A sufficient condition for a perfectly balanced system would be one where all the benefits owed and paid were paid from current payroll taxes. The social security accounts would be independent from the general fund. There would be no borrowing or lending between the two. Social security would never have to be funded from general taxation. I think this was the original plan and if it had it been done this way then there would be no need for a debate today, and no threat to the solvency of the system.
Some interesting numbers from Treasury: http://www.treas.gov/tic/mfh.txt
Major Holders of Foreign Treasuries Data only goes to Nov.
Foreign Holdings went up from $3.036 tn in Nov 2008 to $3.292 tn in May 2009 to $3.595 tn in Nov 2009 holding those percentages pretty even as a share of total Debt held by the Public. And the rate of accumulation was pretty steady indicating so far no real slackening in global demand.
But an interesting thing happened. In May China’s net buying simply halted. They peaked at $801.5 billion and six months later were sitting at $789 bn. Over that same period Japanese and British holdings surged with Japan adding $90 bn to reach $757 bn and Britain adding an astonishing $114 bn to get to $277. In fact Y of Y Great Britain and Hong each doubled their holdings.
It would not surprise me, based simply on trends to see Japan over taking China on this measure. Because the old stand by of “China is buying debt” may not be serving us well here. There are other players. For example Cananda is about a third of the way down the list but in Nov 2008 might have been in ‘All Others’ with $7.8 bn. They have more than quintupled that to $46 bn.
Maybe we are not as much at the mercy of the Chinese Central Bank as the standard Setser narrative would have us.
I agree, all the China talk has always ignored the fact that Japan is the biggest foreign holder of our debt, and a big buyer.
I am trying to figure out with the worlwide debt supply growing, what mechanism will soak it all up? Not sure if central banks can keep up this pace for several years – unless we get some decent growth.
Cantab. Please stop.
The perfectly balanced Social Security system would have a Trust Fund Ratio of exactly 100 and have a Trust Fund growing at the precise pace needed to maintain actuarial balance. Since the total amount of benefits paid grows year over year, the TF would have to also, and since a bigger balance scores as more debt that means it would be adding to Public Debt. If all benefits were paid from current payroll taxes then the interest would compound and ultimately take the Trust Fund out of control. In order to prevent that you have to limit interest income actually credited to the Trust Fund down to the amount needs to accommodate the need principal growth to maintain a TF ratio but no more. The only way to do this is to cut FICA just enough below Cost that transfers from the General Fund would prevent too much interest accrual. The actual amount of the transfer might be relatively small, perhaps 1 or 2% of cost but it likely would not be zero in a typical year after mid-century. Thus the second condition of my perfectly balanced system. Because the interest allowed to accrue to the Trust Fund would be a positive number and because such interest scores as a positive for Unified Budget purposes Social Security though drawing GF transfers to limit that interest by the same token would be scoring a surplus. The third condition.
You know I do think these things through before just plopping them on the screen. Something you might consider as a policy as well. I could add one condition to your scenario and make your version pretty perfect, but as it is your model has a huge hole in it where Trust Fund Ratio management should be.
Bruce,
I think your wording on the primary deficit might confuse some folks. I can see where someone who wasn’t familiar with the term could misinterpret your comment to mean that only intragovernmental interest is subtracted from the total deficiit. The primary deficit is total deficit less all debt servicing costs. When most economists ask whether or not deficits are sustainable what they are really talking about is the growth in the primary deficit and not the total deficit.
Bruce,
So a pay as you go 100 percent self funded system that pays its bills each period, no surplus, and no deficit is not a sufficient condition for the system to be in balance?
Cantie said: “There would be no borrowing or lending between the two. Social security would never have to be funded from general taxation. I think this was the original plan and if it had it been done this way then there would be no need for a debate today, and no threat to the solvency of the system. ” Actually the originating legislation had all these things included. So, no, the original plan was just the opposite of what you presumed.
The first few years were obvioulsy funded out of the GF, as there was too lttle being collected. Excess collections was always meant to go to the GF.
No it would not meet the Trustees’ requirement to maintain Short Term Acturial Balance and where possible Long Term (I.e. 75 year) Actuarial Balance defined as a projected Trust Fund Ratio of 100 or one year of reserves in each of those 10 or 75 years. This requirement allows Treasury to maintain benefit payments in times of employment downturns that disrupt revenue. Under your system every short term economic disruption would require an appeal to Congress and expose Social Security to such things as short term electoral concerns and simple demogoguery. Besides Banks and Insurance companies in the private sector have similar reserve requirements, it is not wise for any financial institution to run that close to the edge, even with government insurance. The requirement that SS seek to maintain actuarial balance is in effect a requirement for Social Security to self-insure its operation and so to that degree defend its independence.
The requirement to have a trust fund ratio of 100 means that the general fund would contribute 5% (or the prevailing interest) to the costs of Social Security benefits. This would mean that payroll taxes could be 5% lower, as Bruce suggests.
Of course if a trust fund ratio did not need to be kept so high, or if the money could be lent to someone other than the genral fund, the “problem” disappears. I would only suggest that however the tRust fund money is invested, it be remebered, orthught of, as “extra” so that if the Trust Fund bonds went to zero the people wouldjust say, oh, well, eat their losses, raise their payroll tax and keep on.
there is nothing hard about this, except that everyone is out there trying to get something for nothing.
and the big brain experts have paralyzed themselves with their false paradigms. someday I’ll tell you about Zeno and the framing error.
Hmm. Well no.
Social Security was originally two programs Title 1 and Title 2. Title 2 was what we know as Social Security today and was supposed to be self-financed which certainly did not preclude invertment in government securities while Title 1 was a straight out General Fund welfare program which was planned to phase out. Which it did sometime in the late fifties. I don’t think Title 2 was ever designed to direct funds to the GF after that twenty year transition period.
2slug I am away from home but was under the clear impression that interest on Debt Held By the Public was on budget and so included in primary surplus since after all it is paid out twice a year in cash. Got a link to help me out here?
Moody’s warns US of credit rating fears
Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the county’s budget deficit.
In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”.
http://www.ft.com/cms/s/0/a82cfe04-10f5-11df-9a9e-00144feab49a.html
oh, it needs to be said
the general fund gets the use of the money for its 5% or so. used to be people understood the value of borrowed money, but people who borrow and lend all the time in their own lives go absolutely insane when they talk about government borrowing.
It is wrong to separate DoD spending from a freeze in outlays, and exclude the war machine from limits on budget growth.
SSTF money was horridly “invested” in war profiteers to build a constituency for militarism.
Pay good engineers and technicians to develop things to destroy foreigners, blow up things and send them overseas at huge cost, rather than make life better for US citizens.
The debt is unsustainable because the money spent was wasted on militarism, and corporate pork which added nothing to the productive base of the US.
Laffer was quite wrong, even as Reagan used surplus receipts badly, Bush II refused to pay down any publicly held debt wasting all surpluses in sight on phony wars, paying the war profiteers’ constituency.
The US needs to depose the militarists.
Is this the same Moody that managed to score just about every contrived MBS and CDO promoted by Wall Street as AAA but now is running down Full Faith and Credit? Anyone but me think the ratings agencies are maybe not neutral players here?
There are words to describe the overall performance of rating agencies over the last decade. Bad words. Ones not to be repeated in polite company even by people like me that are not polite company to begin with.
In the words of Monty Python I can only reply “I laugh in your general direction”
Moody’s? Really? Pull the other finger.
Bruce,
http://www.socialsecurity.gov/history/fdrstmts.html#message2
Three principles should be observed in legislation on this subject. First, the system adopted, except for the money necessary to initiate it, should be self-sustaining in the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation. Second, …
I take this to mean that FDR believed the system should be de-coupled from general taxation. The social security trust fund conflated the two. That violated his general principals.
Bruce, go read the bill!
Pretty funny Bruce. Your skepticism is obviously warranted.
But what about:
1) The GAO:
“As shown in figure 1, GAO’s simulations continue to show escalating levels of debt that illustrate that the long-term fiscal outlook remains unsustainable.”
http://www.gao.gov/new.items/d10137sp.pdf
2) Fitch: “Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders”
http://www.telegraph.co.uk/finance/economics/6969163/US-must-cut-spending-to-save-AAA-rating-warns-Fitch.html
3) National Research Council: “The debt level of the United States is unsustainable, something has to give,” said the co-author of a new joint report released last week by the National Research Council and the National Academy of Public Administration
4) The CBO: “Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run”
http://cboblog.cbo.gov/?p=328
5) President Obama: Obama Says U.S. Long-Term Debt Load ‘Unsustainable’ http://www.bloomberg.com/apps/news?pid=20601087&sid=aJsSb4qtILhg
Cantab it is de-coupled from the General Fund. It just assumed that people who borrowed money from it would not prove to be thieves and liars. And if workers allow those thieves to get away with it they kind of deserve what they get. We will see but this is not a design flaw, just a misguided faith in humanity.
The Social Security Act of 1935? Subsequent legislation? What the hell are you suggesting here?
6) The IMF: issued a warning about U.S. public finances, saying government debt “could become unsustainable”
http://www.msnbc.msn.com/id/33116718
7) The Federal Reserve: “How Long Can the Unsustainable U.S. Current Account Deficit Be Sustained?
http://www.federalreserve.gov/pubs/ifdp/2008/935/default.htm
8) The United Nations: “The United States dollar is facing imminent collapse in the face of an unsustainable debt, the United Nations warned today.”
http://www.leap2020.eu/notes/US-debt-could-trigger-dollar-collapse,-UN-warns_b658597.html
You mentioned the Unified Budget a couple of times. It’s true that it is what is used today. But unless I am overlooking something, my guess would be that the Unified Budget will disappear without a trace within a year after revenues from FICA taxes fall below OASDI payouts. The Social Security surpluses will no longer be available to make the deficits in the on-budget acticivities look less bad and “they” will, I project, rather quickly deunify the budget.
Bruce and coberly,
I do have to hand it to you: you were right and they were wrong when they said “Social Security will bust the budget.” However the reverse may be true – the budget will bust Social Security. We’ll see how it plays out. It is going to be exceedingly hard for any politician to lop 25-50% of recipients off the rolls.
Sammy
the debt may be unsustainable. i don’t know. but robbing and murdering social security is not the answer to the debt. you still don’t understand that social security pays for itself. Medicare can and should pay for itself.
neither of these programs have a damn thing to do with the current debt. and there is no reason they should have anything to do with any future debt.
sammy
they won’t lop. they will cut benefits for future retirees. that won’t hurt anyone today… and theyoung are too stupid to see what is going to hit them when they get old. this is not about saving money, it’s about killing Social Security, which the bad guys want to do for reasonst that have nothing to do with money… not theirs, not yours. it makes NO sense from a money standpoint. it does make sense from a general hatred of working people standing on their own two feet.
I want someone to actually describe what they think will happen when our debt level actually hits that magic level where it all comes tumbling down.
Are you suggesting that our govt will lose its ability to buy something?? HA! Absurd to the extreme
Are you suggesting that people will demand payment on whatever bonds they are holding? Before taking any more? A run on the “Big Bank”? This will just lower the debt PROBLEM SOLVED!!
Are you suggesting that our currency will be so devalued that no one will accept it as payment for goods and services? Really? Even if the govt still demands it as payment for taxes?
I dont think any one parroting this deficit terrorist line has any kind of coherent story that has any credibility to it. They just idelogically are against govt spending so they whip up frenzied antagonism to it using words like ” dangerous levels”, “unsustainable”, “unprecedented” or “irresponsible”. I’m all ears if any one can present a non ideological (meaning you cant frame your argument around what you “believe” or “dont like”) case that our deficits and debt represent anything terrifying.
Oh, and you cant just throw out the word inflationary either because there is NO evidence that inflation is well understood by mainstream economists. I use as evidence for that claim the number of references to Zimbabwe and Weimar Germany these people use as if the modern US economy bears any resemblance to a post war economy in the grips of abusive reparations (Weimar Germany) or a mostly agrarian subsaharan African nation still battling against Apartheid type conditions, a civil war so to speak (ZImbabwe)
Sammy
The budget can NEVER bust social security. We can always spend whatever we wish on the senior citizens of our country. It is not a financial constraint only a poltical one. Each generation can make whatever allocation of its real resources it wishes with no consideration given to what their parents did if they choose. WE ARE NOT CONSTRAINED FINANCIALLY. Only by real resources
This needs to be repeated a thousand times til everyone memorizes it.
Yes but none of that has much to do with Social Security. And mathematically cutting Social Security doesn’t cut long term Public Debt, it simply shifts the burden from the Debt Held by the Public side to Intragovernmental Holdings side, increasing a promise that the Peter G Peterson’s of this world have made clear they have no intention of honoring to start with.
There is a surefire way that you could change Social Security and reduce total needed transfers from the General Fund to Social Security over the next thirty years. Cut FICA to a level that would require benefits to absorb all interest in the short run. This would stop the effects of interest on interest and rapidly bring forward the time of repayment of principal. In the long run this would save the General Fund many, many billions of dollars and put Social Security back on the Pay-Go status it should never have left to start with. If Bush had cut FICA instead of top marginal rates we could have entered a period of rapid cutting of Public Debt on the Intragovernmental Holdings side and take the Trust Funds down to a 100 TF ratio while planning for reversing a portion of those FICA decreases sometime in the early 2020s. Instead we ran up a huge amount of accrued interest while simply shoving responsibility for repayment of the TF a couple of decades down the road. It is kind of rich for people who took the tax cuts and equally and breezily offered to pay back what will be a near $5 trillion debt instead of addressing the issue of excessive SS surpluses. But it was just easier to take the free money. And now take it out of our hides again. Well screw that.
Maybe. But the Unified Budget is not just a PR tool, you need to have some way to measure total demand for borrowing on the public markets and the Unified Budget more or less serves that purpose (though distorted by interest effects).
I have never accepted the notion that the adoption of the Unified Budget ever had any real connection with some desire to make on-budget activities “look less bad”. On inspection the numbers, and particularly in the sixties were never big enough to actually do much disguising, the then Social Security surpluses being only a fraction of the size of the financing needed either for the Great Society or Vietnam. If it was a PR tool it was significantly ineffective, people were still talking about deficits even then, though they were quite small by comparison with Reagan/Bush ones.
You can make a good case that both Reagan’s and Bush’s tax cuts were actually designed at least in part to set the stage for destroying Social Security, David Stockman essentially admitted that with his “starve the beast” comment. Something that was repeated with Norquist’s “drown it in a bathtub”.
The entire Leninist Strategy promoted by Butler and Germanis can be summed up as a campaign to induce workers to cut their own throats while capitalists stand by crying crocodile tears about how social democracy is just doomed to failure, just unsustainable pipe dreams by soft-headed liberals.
Kind of a “starve it and drown it and then blame it for being skinny, wet and breathless” deal.
Bruce
I agree with you. I appreciate the fight you are engaging in. And while your sort of correct that my response had nothing to do with SS I would counter by saying that it has everything to do not just with SS but Medicare or any other “entitlement” program that is in the crosshairs of the deficit terrorists. The whole notion that we have to “afford” or “finance” these ventures cedes ground that need not be ceded if armed with an understanding of the true possibilities of a sovereign currency issuer in a NON gold standard regime
It is a fundamental……………. cognitive dissonance, I suppose, to conflate household and govt financing and debt. Putting these voluntary restrictions on our govt without really looking at the economics of the situation is senseless and will never get us out of this cycle we find ourselves in.
You and Coberly do outstanding work on this subject and I have learned a lot but I think we are fighting a losing battle as long as its agreed by everyone that we need to “finance” these ventures. I mean to say that the use of finance in the private sector sense and public sector sense are nowhere near the same and I THINK that is where this issue needs to be attacked from.
Absolutely. People like to think that privatization is primarily driven by Wall Street greed. I don’t think so, there just is not enough money in those millions of tiny accounts that would be held by lower income workers to really justify the cost of managing them. If it were all about Wall Street they would have pushed for lowering the cap by say half and requiring everyone between the old and new caps to participate in mandatory PRAs while leaving people below that in traditional Social Security. That would give you money in big enough chunks to warrent the account management. But that would leave lower income workers even that much more grateful for the existence of Social Security.
For advocates of the “Big government is not the solution, big government is the problem” folks Social Security can’t be allowed to be seen as a success. There worst nightmare is a Social Security Report that comes out with the message: “False alarm, Social Security is fine, claims to the opposite just being a product of inadequate data and misinformation”. A solvent Social Security system known and reported to be so is these guys worst fricking nightmare. Which is a big reason why I have mostly dropped the ‘Nothing’ plan in favor of the NW Plan, the latter allows us the “fix it and forget it” high ground.
If you needed proof it was in Bush’s insistence that payroll tax increases could not even be part of the solution. While there may have been a component driven by dislike of taxes in general, it is hard to believe they were really concerned about the impact on worker pocketbooks, not given their virulent resistance to helping that out directly through minimum wage increases or health care subsidies. Just as they as they are about Obama, they need FDR to fail and be seen as a failure. Despite the existence of such things as Hoover Dam and the Golden Gate Bridge.
“I take this to mean that FDR believed the system should be de-coupled from general taxation. The social security trust fund conflated the two. That violated his general principals.”
Whether or not it violated his general principles, it certainly go the assent of some of his principal generals. FDR was President in 1942 when the 2nd Social Security Report was released.
http://www.ssa.gov/history/reports/trust/1942/1942.pdf
This Report signed by Morgenthau (Treasury), Frances Perkins (Labor) and Altmeyer (Chairman Social Security Board) on page one tells us:
“Securities eligible for invesments for the fund are interest-earning obligations of the United States and obligations guaranteed as to both principal and interest by the United States”.
So I think your reading is just wrong. Instead FDR seems to be insisting that payments be made from within the resources of the system but by no means saying that some of those resources couldn’t come from interest on investments in Treasuries. There is no conflation here.
Coberly this was gone over at Social Insurance.
About 55% of Medicare (Part A) comes from payroll contributions
Another 12% or so comes from premiums.
The other 33% comes in the form of General Fund Transfers.
In light of this it is just not right to say that Medicare either does or should pay for itself. This would mean maybe increasing payroll tax by 60% or so (to about 5%) or boosting premiums by around 400%.
I see no good reason why Part A should be paid for by the sub-set of wage workers instead like Part B and D paid by the total set of income tax payers. I don’t see any reason why medical care should be delivered on an insurance model any more than personal protection from fire is. Your house catches on fire, the fire department rescues at least your person (and maybe your cat), if you get sick the doctor helps make you well, each seems just an obligation by the government is promote the general welfare.
But in any event we shouldn’t be tempted to say things like Medicare supports itself. Because it doesn’t.
Social Security can properly be seen as a form of wage or at least income insurance, linking it back to wages and income makes conceptual sense to me. I don’t see that same logical link between wages and medical care or a justification for the disconnect between Medicare and Medicaid. It adds up to some pretty odd slicing of the health care pie.
Bruce
maybe. but let us at least begin by looking at it as insurance. that is,after all, what it is called. if you get a good estimate of what your “expected” costs for health care after 65 are…. and as good an estimate as you are likely to get is today’s costs, because under pay as you go, tomorrow’s workers will be paying your “today’s”(then) costs, and unless costs are expected to go down significantly, no one will experience any injustice.
putting part D on the general budget was just a licence to make it stupid. i pay a premium for part B. I don’t know what part of part A is subsidized by the general fund, but i suppose i should do some reading, unless you have the twenty five word answer.
frankly, i can’t see any reason why people shouldnot pay for their own health insurance. if they are too poor, they need an income boost, not a tax subsidy. moreover, to a considerable extent the insurance policy could be written so that it insures you for being too poor to pay the full premium.
in my part of town the property owners pay the cost of the fire department, and we also pay our own fire insurance. this looks to me like a sounder model for paying for the needs of the community than an automatic recourse to welfare as we knew it.
Mediare pays for itself or it can and should pay for itself. the logical operators are all in place.
Greg
I think I agree with you. note that pay as you go insurance is not “finance.” though i have no doubt i am not using the words the same way an “expert” would.
bruc
i dunno, if the public market folks aren’t smart enough to look at the budget and make their own calculation then they are in big trouble. meanwhile the “unified budget” is just a way for congressmen to fool the people they fear while they are fooling themselves as well.
Greg
there is another way to say this, but i hate to say it when children are listening: you can restart Social Security in a day on a pay as you go basis.
When I say finance these ventures I mean that it is not “necessary” to tax someone in equal proportion to the payment that is being given out. This cedes the ground that all govt spending must be financed with taxation which of course gives the deficit terrorists ammunition against increasing the amount of govt spending ” ITS GONNA MEAN A TAX INCREASE!!!”
Now this is not to say that the govt or any entity can spend at any level whatsoever. It simply is saying that spending decisions should be about; Do we need to do it? What level should we do it? Can we purchase it without competing wit our private sector for it (and driving prices up)? Can we produce it? While taxation decisions should be only about do we need to reduce demand in a particular area by raising the price of something (cigarettes)? Or do we need to decrease over all private spending power to control inflation? Thats it. Stop conflating the two unnecessarily. Its a relic from the gold standard days that is not only unnecessary and unhelpful it leads to people making claims like “They aint gonna use MY money for that”
The MONEY belongs to the state. You may find that repugnant but its as true as your name. The STATE simply has a responsibility to use the money wisely and to the benefit of those who seek it so they can pay taxes.
Greg
i am half disposed to agree with you in part because there is a gram of truth in what you say. but money is how we keep track of all those things you mentioned. the nice thing about paying for what we want out of money we get for doing what someone else wants is that it leaves us not feeling crappy about taking welfare.
i don’t much like the idea of using taxes to reward or discourage behavior. it’s offensively manipulative, and in the end it just means that rich people start demanding tax cuts so they will create jobs, don’t you know.
i would make an exception: i think a fairly large gas tax would be a long step toward forcing people to confront wasting energy. right now the “market price” is too low. it does not factor in the future value of the stuff after we run out. the market has no foresight.
Well I dont disagree with you about using taxes as a way to reward or discourage behavior. It is offensive, but so is any way you attempt to manipulate behavior, at least in the view of he who is manipulated. Manipulation is a necessary evil. I’ve manipulated,( I prefer coerce), my wife, my children, my coworkers and my boss and I’ve been manipulated by each as well.
Our govt has a responsibility to meet certain needs of the citizens and as a result of capture by the rich has mostly catered to their wishes. In meeting that responsibility it will have to manipulate the behavior of some or it WILL get manipulated. I want the govt to take its proper role and not cede that responsibility to private interests which care only about themselves.
Bruce, “ There worst nightmare is a Social Security Report that comes out with the message: “False alarm, Social Security is fine, claims to the opposite just being a product of inadequate data and misinformation”.”
You are too kind. That statement should read, “claims to the opposite just being a product of the misrepresentation of the data and disinformation regarding its consequences.”
Bruce, “ There (sic) worst nightmare is a Social Security Report that comes out with the message: “False alarm, Social Security is fine, claims to the opposite just being a product of inadequate data and misinformation”.”
You are too kind. That statement should read, “claims to the opposite just being a product of the misrepresentation of the data and disinformation regarding its consequences.”
Greg
but the private interests will end up manipulating the government. you have half a chance with a straightforward tax on income. once you start picking winners and losers you will get crushed by the mob of “deserving” causes.
Coberly
Maybe I’m not making my self very clear (sometimes I dont write gooder enough). I am in no way suggesting a total abandonment of current tax codes. There are good reasons to have some progressivity to taxation and taxation is necessary, not for funding decisions per se but as a way to keep people seeking our currency. In fact some would argue (quite persuasively I believe) that it is only the ability to levy taxes that gives fiat currency its value. We have forgotten that years down the road but that doesnt mean it isnt true. ( Ive forgotten many true things and there are even more true things Ive never forgotten because I’ve never known them 😛 )
Yes private interests will manipulate govt they certainly do currently but I think if each taxation decision is simply made for economic reasons (will this stimulate/slowdown aggregate demand) and not as a source of funding our govt spending, we will take a large step forward and squelch some of the current gridlock. There will still be problems (there will still be republicans I imagine 😉 ), but at least we can change the paradigm to a more productive place.