Social Security: Cost, Solvency, Debt and TF Ratio

Cost 3
The Table above is extracted from Table VI.F9 in the 2013 Annual Report of Social Security. It is radically simplified because I want to make a very simple set of points, ones that have little or nothing to do with the proper policy approach to Social Security or to the adequacy of the model that produces the specific numbers at hand. And fair warning to long time contributers/commenters, this post will be strictly moderated to avoid hijacking. I don’t care if it seems less important than 80 cents a week or the impending doom facing Social Security because of inadequate modeling. This isn’t about that and off topic comments will be treated accordingly.

That aside what we have here is a simple projection of Social Security total Cost in current (non-inflation adjusted) dollars over the standard 75 year actuarial period. And not surprisingly that total goes up year over year due to a combination of inflation, population growth, and shift between demographic cohorts. What doesn’t change a lot, at least after mid-century is cost as a percentage of GDP which stabilizes around 6%. If that was relevant to this post, which it isn’t.

Now what does it mean to say that Social Security is ‘solvent’? Well in terms internal to Social Security financial reporting ‘solvency’ means ending each year in the given period with a Trust Fund balance equal to 100% or more of the NEXT year’s cost. As most of us know by now the Social Security Trust Funds are required by law to maintain its reserves/balances in interest earning securities guaranteed as to principal and interest by the federal government. Which in practice means Treasury Bonds, and in the case of Social Security so-called Special Issue Treasuries. These Special Issues are legal obligations of the Treasury and backed by Full Faith and Credit of the United States, there is nothing ‘Phony’ about them. On the other hand simple inspection of this table reveals something rather interesting: under conditions of ‘solvency’ as defined they would never need to be redeemed on net. Because the requirement to maintain a 100% minimum reserve (aka a Trust Fund Ratio of 100) means that a minimally solvent system would have to roll over 100% of its balance each year and then augment THAT by the amount of projected increased cost. Which makes the Trust Fund an odd kind of obligation or burden on Treasury or to future taxpayers, although it represents real borrowing from the economy and does require debt service under ideal circumstances it would never need to be paid down. In fact any such repayment which drove the balance under 100% of next years cost would make the Trust Fund ‘insolvent’ by definition. Which leads to the rather counterintuitive conclusion that a Trust Fund with a balance of ‘only’ $33 trillion in 2090 would be ‘bankrupt’ and ‘flat broke’. This despite the fact that the ‘shortfall’ represented less than 1% of cost. To say the least this does not resemble the kind of budget balancing households or even corporations do.

Now to another curious point. The Special Issue Treasuries that comprise the Trust Funds are counted by the Bureau of Public Debt as ‘Intragovernmental Holdings’ and indeed make up over half of all such holdings. And in turn ‘Intragovernmental Holdings’ are with ‘Debt Held by the Public’ the two components of ‘Total Public Debt’ and its close analogue ‘Debt Subject to the Limit’. What this means is that under conditions of Social Security solvency as defined the U.S. would never be ‘debt free’ or even want to be. That is while we might want to drive ‘Debt Held by the Public’ down to much lower levels than today this doesn’t mean that we would ever drive ‘Total Public Debt’ down to that degree. In fact by 2090 the U.S. will need to be maintaining $33.3 trillion in Public Debt simply to ensure that Social Security is ‘solvent’. Even though none of that $33.3 trillion would ever need to be paid off on net.

Is any of this important in a real world sense? Perhaps not. Except for the fact that it turns a lot of concepts of ‘Public Debt’ and ‘Debt Subject to the Limit’ on their heads. Because we could balance the General Fund tomorrow and even start to pay down ‘Debt Held by the Public’ and yet never see net reductions in ‘Total Public Debt’ simply due to the need to maintain a 100% Trust Fund Ratio. That is by 2074 we need to be $17.038 trillion in debt, or roughly the same amount we are in today, simply to make Social Security ‘solvent’