"House rich & cash poor": Why Social Security can’t be Raided(Part 2)
(Still cross posted from dKos. But since coberly and I have an extended colloquy there maybe not a bad place to start)
Part 1 was kind of a set-up in both senses of the word in that it didn’t really deliver on the post title. But I think a necessary set-up and so lets resume.
When we left off we had Social Security after having a long period of positive cash flow from 1936 to 1956 and so a lot of pre-funding, leveling off in terms of Trust Fund Ratio through the 60’s, only to go into some decline in the 70s. And if we return to Table VI.A2.— Operations of the OASI Trust Fund, Calendar Years 1937-2010 we can see a system that was by any measure you like very sick by 1981, and much sicker than today. Whereas the year end balance for OAS in 2010 still represented 4 full years of 2011 cost (TF Ratio of 400) the corresponding balance in 1981 was less than a fifth of a year (TF Ratio of 18). Action was imperative and the motivation was not Reagan’s desire to tap into worker pocketbooks to fund tax cuts, as far as the Trust Fund was concerned it was the farthest thing from a piggy bank. Which gets us to our second set-up point: the Myth of the Reagan Raid. Onward and lowward (i.e. below the fold).
The Trustees measure the health of the Trust Funds in terms of Actuarial Balance. A Trust Fund in annual balance ends the year with a TF Ratio of 100 or above. But the Trustees have a longer horizon than just the next year, instead they consider the Trust Funds to be in Short Term Actuarial Balance if they project to have TF Ratios of 100 or more in each of the next 10 years, while they are deemed in Long Term Actuarial Balance is they project to have those levels of TF Ratio in each of the next 75 years.
Now the vast majority of Trust Fund assets since inception of the program have been in Special Issues of Treasuries at times with an admixture of regular Treasuries (but at no point I am aware of ever representing more than a fraction of total assets). The restriction to Treasuries is a direct consequence of language in the 1939 Amendments to the Social Security Act of 1935 mandating that all funds credited to the Trust Fund and not needed for short term benefit payments has to be held in “instruments fully guaranteed as to interest and principal by the federal government”. Meaning it would take a change in the law to have them in any other asset class, and except for short term payment purposes even in cash. While some people see something nefarious in this practice it has served the system well over the years, for example large balances built up over the 40s and 50s were successfully used to bridge gaps between income and costs through the 60s and especially the 70s. The historical record shows that every obligation was honored down to the next to the last penny (and for DI starting again in 2005). Because in the eyes of the U.S. Treasury those Special Issues are just as good as cash, in fact they pay interest on them just as the Federal Reserve does on reserves deposited with it by member banks.
Which brings us to the first point here. There can be no ‘raid’ of Social Security in any year that has a TF Ratio less than 100. Instead the federal government via the Trustees has a positive legal obligation to buy Treasuries to build up that ratio back to a minimum of 100. And if we look at Table A2 again we see that Reagan inherited a Trust Fund that has fallen out of actuarial balance in 1971 (TF Ratio of 94) and never recovered. Indeed without a temporary loan of $17.5 billion from DI to OAS in 1982 checks might have been delayed for the first time ever. But between the loan and the fix installed in 1983 during the process that included the Greenspan Commission, the Trust Fund began to recover. But only just. In fact by the end of Reagan’s second term the TF Ratio was only up to 41 or less than half the target, if anything the argument would run that Reagan should have taxed workers even MORE so that the Trustees could buy even MORE Treasuries. Instead the fix was deliberately phased in with a ten year time table with remarkable success with the TFs finally get back over 100 in the course of 1993. Which in respect to Social Security takes both Reagan and Bush 1 off the hook, when examined dispassionately all they did was restore the Trust Funds to its minimum required reserve. Now as it turns out that reserve was mandated by law to be in the form of Treasuries which by definition meant cash going to Treasury, that is what buying a bond does, you give the government money, they spend it on what they want and give you a promise in return. There is nothing ‘Phony’ about that process, not at all. And certainly no ‘raid’, instead we have the Trustees fulfilling their mandate to restore actuarial balance with any cash flowing to the General Fund being a simple byproduct of that legal requirement.
Okay that settled, back to the topic of the posts. Over the course of the mid to late 90s the solvency of the Trust Fund continued to improve by every measure: TF Ratio, year end balance, and increase in assets. But even then this risks exaggeration of actual cash flow, instead you get that by netting out interest which came only in the form of Special Issues and so were not financed out of the outside economy. In fact in Clinton’s last year 2000 the actual cash flow was $74 billion out of total SS Surplus of $132 billion. And for the most part it never got better than that, though assets in the OAS Trust Fund grew from $931 billion in that year to $2.4 trillion today (in both cases excluding DI) a growing piece of that was simply interest credited to the Trust Fund.
And here is the key point. That interest is an obligation to the General Fund, it cannot by its nature be borrowed. It can and does score as income for both Trust Fund and overall Budget accounting, for those purposes it is considered as real as real. But it can’t be tapped for any other purpose even in theory, in the metaphor expressed in the post Title it is home equity and not cash, and in this case not subject to refinance to extract that cash, which in any case wouldn’t serve to increase net wealth as such.
No it is only actual cash flow above and beyond cost that is available for ‘raiding’ in any sense and examination of our table shows that cash flow stabilized and then dropped sharply after 2008 to the point that even though OAS returned a total $92 billion surplus in 2010 this represented negative cash flow for that program alone of $16 billion. And OAS is by far the healthier of the two OASDI programs, comparable numbers show that DI went cash flow negative in 2005 and actually started cashing in its principal in 2008. This contrasts to OAS whose total Income including Interest exceeds Cost at a rate that will keep its total balance growing until 2023 with assets sufficient to bridge its cost gap until 2038. On the other hand DI’s income imbalance is such that it projects to get totally out of assets by 2017. (Combine those two and you get the 2036 date reported for THE Trust Fund.)
You can’t raid Interest and even though cash flow for OAS was projected to go back positive briefly in 2013 it was never projected to be that much, to run out by 2017 anyway, and at this point probably won’t show up at all.
The history of Trust Fund operations from 1936 to 1982 shows us clearly that Trust Fund Assets are exactly that, assets available to the Trust Fund. But only in years of positive cash flow are those assets ever tappable for other purposes, (for example setting up personal accounts alongside Social Security on which fees can be charged by Wall Street). And the days of strong cash flows are over. Not a crisis, this outcome was fully projected in the 90s, and on balance things turned out better than expected on net. In 1997 the date of Trust Fund Depletion on a combined basis was set to be 2029, we actually gained 7 years of projected solvency since. So there was nothing wrong with the planning, this is the way the Trust Funds were designed to operate. As noted earlier balances built up from 1936 to 1956 were tapped starting in 1957 to bridge the Income Excluding Interest and Cost gap until funds ran short in 1982. And we are just repeating that process today with balances built up from 1983 through now started being tapped by DI in 2005 and OAS in 2010. The difference being that we still have a TF Ratio of 400 in 2010 compared to the 22 TF Ratio of 1982. The Trust Funds are real, they are just no longer stealable. The dollars flows were such starting in 1996 that raiding to fund private accounts almost penciled out, but that window slammed shut by 2004. (The plans floated by Bush in 2005 having seriously cooked the books to make the numbers run, subject for another post.)
Social Security: house rich, cash poor, and unable to be burglarized. Not because the walls are so secure, though they are pretty good, there just isn’t anything inside the house that you can actually sell to a fence.
Bruce: “But the Trustees have a longer horizon than just the next year, instead they consider the Trust Funds to be in Short Term Actuarial Balance if they project to have TF Ratios of 100 or more in each of the next 10 years, while they are deemed in Long Term Actuarial Balance is they project to have those levels of TF Ratio in each of the next 10 years.”
Some typos in the last clause? Long and Short both 10 years?
Short term actuarial balance is ten years. I suppose long term is 75 years, which is why it’s not worth getting excited about.
Unfortunately we have a yearly bout of headlines when the Trustees tell us that SS is “insolvent” and the same people who are telling us about phony iou’s start screaming that we are all going to die because Social Security is going to run out of phony iou’s thirty years from now.
Fact is it wouldn’t matter if they ran out of them today. Social Security is “essentially” pay as you go. The Trust Fund is just where SS puts the extra money it gets from taxes over benefits to wait until a day comes when it needs to pay more benefits than it has income from taxes. The “same people” call this “bankrupt.” As in you are bankrupt if you have a going business with a huge income and trillions of dollars in the bank but today you spent more than you took in.
Even if the Trust Fund were “raided” by flying saucers and that three trillion disappeared overnight it wouldn’t matter much. As long as SS remained intact, it could simply raise the payroll tax about a tenth of a percent per year for a few years, the boomers would still get the retirement they paid for, and the after-boomers would pay a little higher tax a little sooner than they might have expected, but they would still get their money back when they retire. The “higher tax” will pay for their longer life expectancy at a higher standard of living than our grandparents had.
I am a little unhappy with the title of this post. While Bruce is right as to the facts he presents, Congress could change the law and Social Security can certainly be raided in the sense that most people understand.
Benefits could be cut, or the retirement age raised, or the program could be destroyed utterly by turning it into welfare, either flagrantly with means testing, or subtlely by “taxing the rich.”
Also, while perhaps the TRUST FUND cannot be raided under present law, the money in the Trust Fund is real money… the Boomers and others gave up something to pay the money in and the post Boomers would have to spend real money to make up the difference if it disappeared…. even though as I argue above, this would not be a real injustice to anyone. If Congress found a way to change the law so the money disappeared or just became unreachable (as by a benefit cut)… that would count as raiding in my book.
So I worry a little that saying it can’t be raided may give people a false sense that everything is okay.
And while Reagan et al did not steal the money, they did “use” it, by borrowing it to replace money that would otherwise have had to be raised by general taxes.
Being a supporter of Social Security can be a difficult balancing act. On another site I visit one of the regulars feels that we should “fix” SS by adding more means testing. He feels that there is too much benefit to rich people. A writer to our local paper is concerned that he could have gotten a better return on investment if he pt his payroll taxes into the market. He knows that workers who made less than he did get a better return, so he feels that rich people are subsidizing the program too much.
It is impossible to change SS in ways to satisfy both of these detractors. SS is actually a pretty complicated political compromise that has aspects of saving, of insurance, and of promotion of the general welfare. It needs to be able to adjust to changes in demographics and the economy, but it has been effective for 75 years, and you just don’t fix what is not broken.
I have never been a great believer in pleasing all of the people all of the time. Everybody has some “idea” about how to “fix” Social Security. Most of those ideas are based on the Big LIe, which of course they do not know is a lie. Social Security does not need fixing.
Your friend who thinks he is paying too much “for the poor” or not getting as much as he could… has completely forgotten that SS is insurance. For him. against the possibility of becoming one of the poor. against the possibility of his “investments” going bad on him at a bad time.
And of course “means testing” would turn SS into welfare as we knew it. There is no need to do what these people want. They are wrong. There is a great need to try to educate them, though not much hope. There is some hope of educating enough of the people so that they will fight to hang on to what they have got… an insurance program that guarantees them “enough” to retire on, or to support their kids if they die, or themselves if they become disabled.
There comes a time in your life when “enough” can look better than “all the money i “might have” gotten “if only.”Today, 9:56:37 AM PDT– Reply – Delete
SS already adjusts to demographics and the economy. As professor Rosser points out, with no changes at all SS will provide the next generation with a better “real” benefit than retirees get today. I have argued that that generation will not agree that that is “enough.” But there is no reason we can’t leave it to that generation to make that decision for themselves. Except of course that they will have their share of Liars and fools just like we do.
Here is an important point not at all understood as long as the Big Liars keep shouting about bankruptcy or staggering burdens ..
With no changes in the structure of SS at all, what would happen if the demographics or the economy went “bad” from the point of view of tax providing “enough” at some future time, is that the people of that time would do what people have done for a thousand generations: they would share the good with the bad. The workers might have to pay a lower tax in order to keep enough to feed the kids, and the old people would then have to take a lower benefit. That would not be what we would want, but it IS the way people deal with bad time. And SS is the ONLY way that I know of that could make that adjustment without skipping a beat, without leaving many of the old to starve, or without forcing the workers to starve so their employers could pay “promised dividends” to old people who had got lucky on the stock market.
SS is just “honor your father and your mother” made for modern times when no family has the power to resist economic forces, and we are all in this together… essentially one big family.
i know the brave rugged individualists, who had no mother and no father, will hate the whole idea of that.
The genius of SS is the fact that it does work as an insurance, you pay in and you are covered. Even someone with higher income may need to make use of the insurance protection early and can get back more than a lower income person, in case of disability or survivors benefits for example.
We should have that principal working in HC. People pay income taxes, financing SHIP and Medicare. People who can’t afford health-insurance for their own children resent paying taxes for SHIP and Medicaid for low income families. We should include all children, regardless of family income in SHIP or Medicaid, better yet, add all children on to Medicare.
SS and Medicare are great programs and for the life of me, I can’t understand why the wealthiest object and want to destroy it. They don’t even pay for it, and if they do pay, it is a pit-tens of their income.
Yes typo for 75
i suspect it’s because rich people don’t think any better than poor people and they are more likely to hear the propaganda solemnly intoned by their financial advisors.
I actually watched Bill Moyers sitting at Peter Peterson’s feet taking it all in, eyes wide in wonder at the staggering cost and cruel burden of Social Security.
Some goes back to Malthus, others to certain brands of Calvinists with a more modern variant in Social Darwinism.
At basis it is a separation of the poor into the “deserving” and the “non-deserving” which devolved an odd amalgam of Social Darwinism & Libertarianism that seems to be the foundation of Randian Objectivism and seems to simply define the “deserving” as a near null set with possible exceptions for near family.
Every server I have ever talked to confirms that the wealthy are generally the worst tippers. Seemingly because they live in fear of being seen as an easy mark.
Or they as a class just be sociopaths.
Because we are allergic to Spam?
Fixed. Via a just released Blogger editor for iPads. Which actually works.
So double thanks Roger
I favor sociopaths as the explanation. Best tippers are waitresses themselves. They know what it’s like. The rich probably have no idea. And don’t want to know. Best comment on this I have ever read was in G.K.Chesterton’s The Queer Steps. I’ll leave it for your reading pleasure.
I hadn’t thought of Rand as having a foundation. It looked like the kind of stuff a fourteen year old would come up with out of his own head.
To be fair, I think, Rand had exposure to Soviet Russia when young. Sort of experience that could turn anyone off “state” control of much of anything. What is unforgivable is anyone who grew up in America since the depression having any patience with her stuff. John Wayne does it better.
I always liked Bill Moyers. He was always a respectful and deferential listener and I truly believe he does not have one cynical bone in his body. I guess that makes him so likable.
I go with the “class of sociopaths” too. Ayn Rand had issues and it is amazing how her preaching of greed is great is still the Republican religion. Maybe it is because greed is so much more human and asks of no sacrifice or sharing at all.
well, greed works. if you win.
blind stupid greed doesn’t work so well. and humans evolved by learning to cooperate. i think there is, and has to be, a tension between cooperation and …. well, call it enterprise. But your Randian, Libertarian, Conservative, Republican worship of greed, pfreedom, enterprise are first self delusions, and second a confidence game to get votes from people who don’t understand that they are the mark.
which is a long winded way of saying, don’t be too hard on the Republican “marks.” They are not greedy in their personal lives, and they are not more stupid than Democrats. They are people who don’t think long thoughts who have been stampeded to believe that their way of life is threatened by a kind of soviet style government take over of everything they hold dear, and the rhetoric of “greed”… honest competition… is the only thing that can save them.
The lying politicians on the other hand care only about winning.. whether it is elections, or just beating you on the deal. And of course if “you” are their customers, or workers, or just neighbors, well, “if you snooze you loose” appears to satisfy their moral conscience. Civilization can tolerate a few people like this, may even need them. But when it lets itself be led by the principles of greed uber alles, it is setting itself up for decline and fall.
i am a moderately lazy person and i don’t do well in an excessively competitive setting. on the other hand, with a modest degree of protection from hourly hand to hand combat with my co-workers, i can be remarkably productive, and even “competitive” in the sense of doing things better than most people can, or would under highly competitive circumstances.
a good boss understands that. a bad boss thinks that all workers have to be motivated by fear, and everybody has to be just like him… competitive to the n’th degree to be worthwhile humans.
amoynahan: “…but this goal was not achieved since the trust fund ties at the hip social security with the rest of the U.S. federal budget. There is no free lunch, either we raise taxes or cut spending in other parts of the budget to pay social security benefits.”
Ties at the hip? No more so than China, Japan, Korea and JPMorgan Chase Bank are tied to the “rest of the U.S. federal budget. You have managed to discover in a most round about manner that creditors have a common bond to their debtor. They have lent money to the U.S. government, and those invested funds are represented iconographically by the issuance of Treasury Notes. The Trust Fund is but one of many creditors of the U.S. federal government. One of the bigger lenders no doubt, but still a lender, a creditor as it were.Worker’s FICA deductions and those of their employers have been invested with the U.S. government. How the government chose to use those funds is not relevant to the obligation to pay those debts, to honor the validty of the Treasury notes issued in place of the borrowed excess Social Security funding stream.
It is no more valid to speak of disregarding the reality of the debt represented by Trust Fund Treasuries than it would be to call the soveriegn banks of China, Japan, Korea and many others as well as the many commercial banks across the world and suggesting to them that repayment of their notes will be interrupted while the Republican lead Congress tries to decide what debts to pay, if any. Does your 401K plan consist of a US government bond fund? Are they just a bunch of IOUs? Certainly they are, but they are backed by the full faith and credit of the US government. That’s why you and all others bought them in the first place. The Trust Fund Treasury notes are no different in any way.
I am all on Bruce and coberly’s side on SS. But if you can’t see the difference between the US Government Treasuries owned by China vs. the ones owned by the US Government then there is no basis to talk. You need to read Bruce’s SS primer. amoynahan is correct.
I’ll make it real clear. With china there is two parties to the transaction, with SS there is only 1 (the US Government)
Islam will change
Wrong as usual. There is no part of the legislation describing the SS Trust Fund that subordinates its holdings in Treasury notes to any other Treasury notes. Are the notes held by sovereign investors ahead of those held by individual investors or corporate commercial financial organizations? Lead me to a reference for such a rank order requirement of U.S, creditors. If China, Japan et al come first before all others then I suggest selling your holdings now. Funny, but the market for Treasuries doesn’t seem to believe there is such a rank ordering.
there isn’t as much difference as you think. the Trust Fund is a legal entity, and the government owes it money in exactly the same way as it owes whoever else buys its bonds. it is true that congress could change the law, but that would be theft and there is a small chance the people will notice. no, they have cleverer ways of defaulting… unless of course that is what you mean by “different.”
i think you should try to think of “the u.s. governmetn” as not one person. we are a nation of laws. and if congress decides that “Social Security” is different from “Treasury” then it is.
I wonder if you think there is any mystery to the fact that the government can find a way to pay your income tax refund. After all, it doesn’t have your name on it.
Jack who is AM? Just a ghost in the machine. If you have to respond do it in the form of an e-mail to the site-owner. He literally isnt’ worth your time, not least because using variants of his name migh well catch your comment in the spam filter. And when the mostly invisible moderators (basically three of the Bears) catch up to him, poof.
AB is pretty close to a First Amendment Absolutist site. Except in a literal handful of cases where that stops. At which point we try to do Orwell and Stalin’s airbrushers proud. “Who is this Trotsky you speak of? I see him nowhere in early photographs of comrades”.
It takes a lot to piss Dan off. But it can be done.
Too bad Krasting is not here Jack. Or maybe he will show up. Because he thinks he has an offical government document that proves exactly that Specials are junior to Regulars. Well he is dead wrong the passage he cites deals with certain tactics and not legality but give him a chance and he will talk your leg off on this one. Forewarned is forearmed.
Total bullshit. But like almost all enduring con jobs plausible at first glance.
Krasting? One, two, three—
by the way… look at that “ties at the hip clause again.” when you pay back the trust fund you are NOT paying for Social Security. You are paying for whatever the Congress bought with the money it borrowed FROM Social Security. If you can’t understand this then there is no basis to talk.
(actually there is. i was just being mean because you were being silly when you said that. what i am not sure of is whether there is any hope of explaining it to you. Have you ever lent money to your brother i law? Or borrowed it? Maybe he’d explain it to you in terms you can understand.)
I believe it is just because rich people don’t think any better than poor people. Also, they are more expected to hear the misinformation seriously uttered by their financial advisors.
12 month loans
How the heck can you tell the spambots? Yes, there was one way above and I laughed at your witty reply, but AM here seemed to be a ‘real’ person. I don’t have any problem with you zapping them, but I’m curious how you picked it out?
I like the Trotsky line also…your on a role
Islam will change
What I’m saying is that the US Gov controls both sides of the transaction when it comes to the SS Treasuries. I totally agree they are just like any other. You missed my point (as usual). Are spambot above pointed out (or should I say the Trotsky you speak of… :)) there is a real difference there.
For example, Congress could pass a law to ‘reform’ SS tommarrow that folds the entire program into the general fund and zero out the SS treasuries. From the perspective of the SS recipients you would see no difference in payouts since the money is still going in and coming out in much the same way. And there would not be much if any repercussions. Or we could remove the FICA cap (which is being pushed on many of the progressive statist blogs) and never pay back a penny of the trust fund. Just keep it around as an accounting trick. Again, no repercussions and you never pay back a penny spent by the general fund.
Now try telling the Chinese that the Treasuries they hold are worthless…
Islam will change
I agree with you. But there is a world of differnce between a two-party transaction and a 1-party transaction. You hit it on the head here:
” if congress decides that “Social Security” is different from “Treasury” then it is.”
And if congress decides that “Social Security” is NOT different from “Treasury” then it ISN’T.
What I find fascinating is that is exactly how you (and Bruce) explained it…
Islam will change
That’s a lot of legislative action that woould high light to the general public that the Trust Fund is real and that the Republicans mean to steal the assets in the interest of the wealthiest Americans. It’s a hard sell made more difficult is Obama keeps his back bone.
I’m not suggesting that the Chinese or any other holder of Treasuries be told that their holdings are worthless. I’m simply pointing out the reality of Trust Fund Treasuries. They are backed by the same government that backs the rest of the debt.