by Bruce Webb
In response to my Pelosi Rule post of yesterday commenter Darms plays Devil’s Advocate in asking the following shrewd question.
Bruce, Since the commision may be looking for a mechanism to delay redemption of those SS trust fund bonds and I’ve read that some of these bonds are routinely redeemed & renewed each year, would that not provide those on the commission with an excuse to cut SS funding now even though the actual problem is not until 2030 or beyond? In contrast to your thesis above? Possible quote come December – “Yes, we know the problem w/SS funding won’t be upon us for decades but we have to defund SS now as paying off this year’s (& next thru 2015’s) maturing SS trust fund bonds is pushing this deficit to unmanageable levels!!! You lame ducks have to support this NNOOOWWWWW!!!!! Thanx Nancy!”
Well the answer is that “They will try, unfortunately budget scoring rules totally undercut their argument”.
To see why this should be we need to revisit the concepts of ‘debt’ and ‘deficit’ as they relate to Social Security reporting and CBO deficit scoring, the numbers just don’t move in the way you think they would. Discussion under the fold.
We start with the Social Security Trust Funds (there are two, more on that later). Currently the combined OASDI Trust Fund holds $2.5 trillion in Special Treasuries. These make up the majority of the $4.5 trillion in ‘Intragovernmental Holdings’ which in turn are scored as a portion of total ‘Public Debt’. The latter needs to be distinguished from ‘Debt Held by the Public’ which is all Treasury debt held by entities other than the Treasury itself. The balances of Debt Held by the Public, Intragovernmental Holdings, and total Public Debt can be checked at the Treasury’s handy Debt to the Penny web application: http://www.treasurydirect.gov/NP/BPDLogin?application=np . As of close of business Thurs these were $8.6 tn, $4.5 tn for a total of $13.1 tn. So for this purpose the Trust Fund Balances for Treasury score as part of Public Debt.
But seen from the perspective of CBO and OMB those balances are simply the sum of a set of SURPLUSES since 1983, in each of those years the increase in Trust Fund assets, scoring as a debt to Treasury, scores for budget purposes as a REDUCTION to the deficit.
Back to the Trust Funds. Contrary to the belief of some the Special Treasuries in the Trust Funds have specific rates and maturities, if the funds they represent are not needed to meet cost they are rolled over. Since neither the maturing bond nor its replacement actually has to be financed out of the public market, principal redemption results in no change to either debt or deficit. Interest is a little different. Interest accruing to the current TF balances that is not needed to meet current cost is credited to the TF in the form of new Special Treasuries. These add to Intragovernmental Holdings and so are scored as in increase in Public Debt to Treasury.
But the Treasury Secretary is also ex officio the Managing Trustee of Social Security, and while he is wearing that hat that same increase in debt scores as an increase in assets to Social Security, and in an odd twist score the same way at CBO, interest on the TF is added to any cash surpluses from taxation to make up total Social Security ‘surplus’ which is then deducted from any General Fund deficits to generate the top level number we generally recognize as ‘the deficit’ (as in Obama is on track for a $1.5 tn deficit in 2010).
Lets pause for a second, because this is totally counter-intuitive. How can interest transformed into Special Treasuries but not actually financed from public markets ever be considered an offset from real world cash deficits? What happens if Social Security goes cash flow negative as revenue from taxes dips below total costs and a portion of interest has to be paid from the General Fund in cash? Are you telling me that the remaining interest STILL counts as surplus for the top line deficit number!??
Yep. And we won’t even get into how it is treated by OMB for Budget purposes.
Which gets us most of the way towards answering Darms Devil’s Advocacy. First if Social Security is in overall surplus, meaning all income INCLUDING interest is in excess of costs, there is no effect on either debt or deficit to roll over TF principal, that is a wash. In this scenario any excess interest scores as new debt to the Bureau of Public Debt but as a surplus to both Social Security AND CBO, it serves to reduce deficits and not increase them.
Although combined Social Security projects to be in a state of ‘surplus/primary deficit’ in 2010 and 2011 with receipts from taxation failing to meet cost and a portion of TF interest having to be paid in cash, it will still be showing up in CBO scoring as a surplus on the top line number. And it is actually projected to return to ‘surplus/primary surplus’ from 2012 to 2017. Meaning that in 2015 Social Security will neither in accounting terms or in actual cash flow be contributing to the deficit at all, in fact it will still be offsetting it.
Now in theory the Commission could act to increase this offset by slashing current benefits between now and 2015, that would serve to boost TF balances and yearly surpluses, that is increasing debt while cutting deficits, but there are no proposals on the table to actually do so, even Alan Simpson, currently taking the hardest public line would exempt workers 60 and older from any near term benefit cuts, meaning no savings until at least 2017, and most other proposals out there would not effect at least initial benefits for workers 55 and older (viz Ryan Roadmap) meaning no top line savings until 2022.
The Commission can enact changes to Social Security benefit ratios that limit its share of GDP and also the dollar amount of its so-called ‘unfunded liability’ over the 75 year window. What they can’t do is make changes that will help them achieve their mandate of reducing the deficit to 3% of GDP by 2015, at least under CBO scoring rules.