Why "Looting" the Social Security Trust Funds is Both Legal AND Fair
Having hopefully gotten some attention with THAT post title, let me start dispelling some misconceptions and myths about the Social Security Trust Funds, some innocent and some disseminated with malice aforethought. A common narrative among the left is that the Social Security Trust Funds were established after the Greenspan Commission in 1983 to one) pre-fund Boomer retirement and/or two) provide cover for Reagan to loot worker paychecks to pay for tax cuts for the wealthy and buy ships, planes, and missiles. Well every single element of that ranges between totally effing wrong and not quite right. I.e. wrong or wrong. In reality the Social Security Trust Funds were created pursuant to the Social Security Amendments of 1939 effective Jan 1, 1940. Explaining why the First Report of the Trustees of Social Security was released in 1941, it wasn’t until then either the Trust Fund or the Trustees had a full year of existence under those names. The first Report is not long, but goes a long way towards demythologizing the Trust Funds.
First and foremost the Trust Funds are an operational fund. All receipts and reimbursements are credited to the fund at regular intervals and all benefits and administrative expenses are debited with all this being reported at monthly and annual intervals. At the end of each year the Trustees make a determination of financial adequacy of the Trust Funds where the metric is the NEXT YEAR of expenses for each year of the projection period, whether than be annual, five-year, ten-year, 25 year, 75 year or Infinite Future, all of which have been used at times since the first Report. If the Trust Fund balance for each projected year equals one year of next year cost as expressed as a ratio where 100 = 1 year, the Trust Fund is ‘financially adequate’ and in ‘actuarial balance’. In the words of that first Report:
The old-age and survivors insurance trust fund provides a financial margin of safety for the system against the first impacts of unforeseen changes in the upward trend of disbursements as well as against these short-term fluctuations and contingencies.
That is in addition to its role as a operational fund, the original TF was designed to be a reserve fund, and this is crucially important, one that would be required to grow year over year to maintain financial adequacy and actuarial balance. Which gets to the post title. In order to achieve actuarial balance the Trust Fund principal needs to grow on net over the projection period. Which means equally that once again on net Trust Fund principal is NEVER redeemed entirely, just rolled over and AUGMENTED by retained income from interest and taxes. And in turn this augmented Fund is BY LAW invested in Treasuries, in this case a category called Special Treasuries. And like all Treasuries this means that actual cash collections in excess of benefit and admin costs are spent on other functions of government. Moreover the requirement for an ever increasing reserve means the following counter-intuitive combination of facts: Trust Fund assets are as real as real, honest to God Treasury obligations backed by Full Faith and Credit of the United States. That never have to be paid back if Social Security is maintained in normal operation. That is the Trust Fund just grows and grows to meet continued growth in anticipated cost. All you need to do is to secure it an adequate income stream via taxes to pay for whatever benefits are not covered by interest. Which under a condition of what is called ‘Sustainable Solvency’ means that something over 95% of cost has to come from current tax. Because the Trust Fund just isn’t an investment fund. It is an operational and reserve fund that facilitates a Pay as You Go system. And any “looting” is just an unfair way of presenting the legal requirement to invest those reserves in Treasuries. (You buy a bond and the government spends the money on something. How is that looting?). Over to you all.
And now to the data. Because what would an AB post be without SOME pointer to a table or graph?
2012 Report Table VI.A3 Operations of the Combined OASI and DI Trust Funds,Calendar Years 1957-2011
In this table you derive Cash Flow by subtracting Interest from Income. But note that Deficit/Surplus for Unified Budget calculations is the same as Net Increase During the Year which does include Interest. Meaning that Social Security can, and indeed under conditions of Sustainable Solvency always WOULD, be simultaneously in permanent surplus (Net Increase) and yet be cash flow negative (Income Excluding Interest).
Feature. Not bug.
“All you need to do is to secure it an adequate income stream via taxes to pay for whatever benefits are not covered by interest.” ISTM that you need to secure an adequate income stream via taxes to pay for the benefits ARE covered by interest too… Just like the interest on marketable treasuries too…
Under conditions of Sustainable Solvency Trust Fund Interest not needed to be retained to grow Trust Fund Balances would be sufficient to pay around 3% of total cost. Which taking out the 1% of cost represented by adminstration means that 97 points of the total 99 points of cost represented by benefits has to be covered by tax income. Or pretty dang close to Pay as You Go.
That is start with a reserve at 100 of next year cost and a requirement to grow it at a combination of interest and numeric increase in beneficiary population and it is arithmetically pretty easy to see that you need to retain all principal and around 40% of a nominal 5% interest rate yield on the Trust Fund just to maintain mandated reserve targets.
The Trust Funds are simply not investment funds on the same order as say CalPers and different actuarial standards apply.
Interestingly this implies that the real cash cost of servicing Trust Fund debt is discounted by that same 40%, since any such interest payments retained by the TF to meet reserve requirements come in the form of Special Treasuries, which while real obligations on Full Faith and Credit are pretty close to Gold Bugs’ definitions of ‘fiat money’ until or unless needed. Which under Sustainable Solvency they wouldn’t be.
So, the SSTF needs one year’s benefits saved up to be solvent. No problem with paying benefits until 2033 or more. Therefore, I conclude that all this hysteria about SS bankrupting the country is the bunk.
It’s a simple matter of rich guys who pay for politicians’ campaigns wanting to be sure they don’t have to pay taxes to cash the TF’s bonds and other ordinary expenses of government operations.
Simpson and that bunch moan and whine about how their kids and grandkids are being robbed of their benefits by soft-headed liberals giving away the Treasury. Bull. This is about not paying ordinary people what they need to live on when they retire. That’s cheap, mean, and stupid. End of story. NancyO
Nancy,
For the last 5 of those years (Intermediate Cost projection with OASI and DI combined) the TF will be at less than 100 percent. IMHO the only reason to not to start deciding on changes today is that the people who will be involved are not up to the task.
The people like Charles Krauthammer who dismiss the Trust Fund as containing just a bunch of IOUs, as an “accounting fiction,” a “mere bookkeeping device” are using the “Unified Budget” to form their perspective. But the Trust Fund is separate from the general fund as a matter of law. The funds may not be commingled without a change in law, an Act of Congress signed by the President.
This means it’s not the Social Security Trust Fund but the “Unified Budget” that’s a fiction — a mere convenience for economists and their ilk. It would be like saying a married couple with separate assets — without any property held in joint tenancy — nevertheless have “combined assets” as if that means something.
The Krauthammers have no respect for the law. It’s time they realized law matters and shut up with their babbling.
Arne
i remember (that is I think I remember) calculating that according to the 2012 projections the first time the Trustees will report “short term actuarial insolvency (The TFR ratio will fall below 100 within ten years) will be in 2018. That agrees with your comment to nancy that the last five years (2028 to 2033) the TFR will be below 100. But… ask Bruce… I think this means that something more or less “has” to be done in 2018. Oddly enough, a raise in the payroll tax of one tenth of one percent for each the employer and the worker would solve the “problem” for that year.
But the one tenth percent raise would have to be repeated again each year until just about 2033.
Some people who can do simple arithmetic but find it hard to compare numbers across different time periods are scared off by that “for fifteen years.”
They recognize this is a 1.5% increase for each over that time. And now instead of 80 cents, it’s 12 dollars per week. What they can’t keep track of is that over the same time… now twenty years starting now, wages will go up about 22% or about 176 dollars per week, leaving that worker with an extra 164 dollars in his pocket after paying for his Social Security and protecting his right to retire at 62 or 67 even though he is going to live longer, and his benefits will also be going up to eventually as much as two times the real value of today.
It is also worth noting that by 2033 the combined increase.. 3% of payroll is 3/4 of the way to the 4% increase that would be necessary to “fund” SS essentially forever according to current projections.
This last one percent increase could be phased in over another fifty years… that is, at a rate of about 16 cents per week per year (that 16 cents is in “present value” for those who care about such things.
And yes, I know you know all this already. But the “people who will be involved” don’t know it, and I keep hoping they will be reading Angry Bear.
KISSWeb. The question isn’t whether the trust fund is legally separate. The question is which budget deficit has more effect on the government’s ability to borrow, the unified budget or the general fund budget. Which number figures larger in the minds of those considering the purchase of government bonds? And that is an unanswered question, at least partly because a flight from sovereign debt tends to be very non-linear. Borrowing ever more works until it stops working. And when it stops working it really, really stops working as it did in Greece, or indeed in the market for CMBS.
KISSweb
Althought the Trust Fund is legally “off budget” it is included in top line budget surplus/deficit numbers by both CBO and OMB, the latter of which still uses the term “unified budget” in such documents as the authoritative Analytical Perspectives on the Budget (a VERY long and VERY detailed treatment of the Presidents Annual Budget and associated budget concepts and budget processes).
That is “off budget” doesn’t quite mean what it would appear to mean at first glance, in fact the interactions between “off budget” “on budget” and “THE budget” are surprisingly complex and convoluted.
well, i don’t know what off budget means to those in the know, but from here it looks like it’s pretty simple. I will be glad to be corrected and explained to if the following is “too” simple:
workers pay a “tax” that goes to “the Social Security Trust Fund.”
Most of the money from this tax goes directly “pay as you go” to “benefit” checks for the retired, disabled, or surviving dependents of those who paid the tax in prior years.
The “surplus”… money not needed this year (this month?) to pay those benefits… is “invested” by buying U.S.Treasuries, which means “it is lent to the government of the United States of America.”
The government is always glad to borrow money. In fact it borrows more money than Social Security has to lend it. It borrows this money by selling Treasuries to “the public,” that is, to private investors or other governments.
This means the U.S, government owes money… has a debt… to two kinds of creditors: the public, and the SS Trust Fund. It will in the course of time pay… and have to find the money to pay… back both kinds of creditors (lenders.)
There is no “essential” difference between both debts. There may be consequences in “the Bond Market” which are different. Hopefully someone who knows more than I do will explain those.
But meanwhile “the government” owes the money it borrowed from the Trust Fund just the same way it owes money to “the public.” There is no difference “financially,” legally, or morally. The Congress might face different consequences from stiffing one group or the other… again, an interesting subject for those who care, but one that remains to be explained so the “people” in our democracy, and especially the “workers” who paid the money into SS, can understand and decide if that’s what they want their government to do.
As far as I can see, the only thing that makes this complicated and convoluted is that for reasons of its own, “the government” publishes two budgets which treat the money owed to the SS Trust Fund differently… “as an item in the budget”… but this is a matter of bookkeeping, not a matter of law, or real world consequences.
This means that for some bookkeeping purposes, “the government” counts the money it borrows from Social Security as “income” without noting that it is debt. But it remains debt nonetheless. And in spite of the “convolutions and complications” treats it as debt… that is, it pays it back when required, and borrows it very formally and separately from other money it borrows… being careful to keep track of it as “owed to the Trust Fund” and not owed to “the public” or simply mixed with tax revenues and spent without regard for the legal need to pay it back.
It is, perhaps, as if you borrowed money for your own household needs… buy a car or a house or start a business… some from a bank, and some from your children. But wait, your children’s money is in a Trust Fund set up by their grandfather, and you can’t just “borrow” it “because it’s there.” You have to sign papers and promise to repay with interest. After that there is no “essential” difference between the two loans. If you “have to find” other resources to pay them back… either one.. then you do. No, the “iou’s” in the children’s Trust Fund that you signed are NOT assets to you. No one ever said they were…
except those who want to confuse you by pointing out the are not, and acting as if that was some kind of mystery or fraud.
Again, if this is too simple, explain the complications and convolutions in more detail so i can understand, or at least get a sense of why i can’t understand. generally i have a hard time understanding my brother-in-law’s excuses for why he can’t pay back the thousand bucks i lent him.
simonator
i am one of those who does not worry about the minds of the bond market. people who buy bonds are taking a chance. hopefully they know what they are doing.
it is no part of my view of “government” that we need to baby sit the bond buyers.
no doubt there will be consequences one way or another. trying to outguess the market was a big factor in the inflation and depression of the late seventies early eighties.
i suspect that if we get on with taking care of the country’s needs, the bond market will take care of itself.
Dale when I said ‘complicated and convoluted’ I meant it. For example the HI Trust Fund (Medicare Part A) is invested in precisely the same kind of Special Treasuries as are OAS and DI. Yet all four Parts of Medicare, no matter that they are financed in different ways between them (yet in the case of one the same way as SS) are ALL ‘off budget’.
Because it has nothing to do with the fact that the non-SS Trust Funds (and there are like 19) are invested or not in the same instruments as SS, the logic such as it is for ‘on-budget’ and ‘off-budget’ and particularly how that has changed over time doesn’t clarify itself readily by recourse to asset type.
Why is Medicare ‘on budget’ and the Post Office ‘off budget’? Well I could tell you but to double check me you would have to slog through some really dreary text in the Analytical Perspectives. Actually quite valuable, you just have to be a little masochistic and/or fascinated by arcane bureaucratic language and thinking.
Bruce
I will defer to your scholarship about our government’s way of accounting for its budget.
i won’t silently accept “it’s all too complicated for your pretty little head” while the bad guys are playing the “complications” to disseminate lies.
my first guess about what is on budget and what is off budget is “where the revenues come from.” The post office pays for itself. Medicare has been welfareized as it ought not to have been done, by the same “logic” that wants to welfareize SS proper.
Using general revenues. even mixed with a nominally dedicated tax.. does seem to make for the sort of wonderful confusion by which the politicians lead us to our destruction.
now, i am running out of time, and have never been masochistic enough to spend a lot of it trying to untangle a gordion know, espcially one i think was created exactly to frustrate, confuse, and waste the time of people trying to “examine the books.”
but you are young, with a scholarly bent, and apparently fascinated by “bureaucratic thinking,” so I hope you will eventually actually “explain” the arcane and not just leave us in awe of the great minds that understand the maze.
meanwhile, i think the reality, once you get rid of the language, is really pretty simple. certainly simple enough for us peasants to understand and do the right thing.