Social Security: Solvency, (Unfunded) Liability, Debt & Crisis (Part One)
By law the Annual Social Security Report is due by April 1. But as in every year for the last decade this deadline was missed and of course without explanation or excuse, leaving Social Security hobbyists like me whimpering. Luckily there are not a lot of SocSec fanboys and fangirls. It might be a club of half a dozen. Anyway—–.
So while I wait for my annual fix of Tables and Figures I want to return again to the very odd and counterintuitive relations between Social Security and Public Debt. Because it turns out that little is what it seems to be, at least if you use ordinary language. For example what does it mean to say that Social Security is ‘solvent’? Well one definition would be ‘healthy and able to pay out all scheduled benefits for the conceivable future’ and that is true enough. But what does that look like in relation to the rest of Federal finance and debt?
‘Solvency’ in Social Security terms has a number of metrics: ‘sustainable solvency’, ‘short term actuarial balance’, ‘long term actuarial balance’, ‘actuarial balance over the infinite future horizon’ but all draw on the same basic concept. Social Security is ‘solvent’ in any given year if it has cash convertible assets in its Trust Fund equal to one year of projected next year cost. This is called the Trust Fund Ratio and is expressed simply enough as 100% = TF Ratio of 100. If the TF Ratio dips below 100 Social Security can be called ‘insolvent’ and indeed according the the various metrics referenced above if it is projected to go below 100 in any year of a set of future years it could also be deemed ‘insolvent’. And this true even if the reserve was such that full benefits could be paid out for years after that point of ‘insolvency’. Which explains why Social Security can have $2.8 trillion in the ‘bank’ and be projected to be able to pay full benefits until 2034 and still be considered a ‘crisis’ that needs immediate attention. But putting that last aside for now lets get back to the nuts, bolts and accounting. Under the fold.
Above I said that assets of the Trust Fund had to be held in ‘cash convertible assets’. This is operationally true but this is not a term of art used in the Social Security Reports, credit or blame for it can be laid to me. That said what form are these assets? Well the Social Security Amendments of 1939 codified what had been practice since the Act of 1935: Trust Fund assets have to be held in instruments fully guaranteed as to principal and interest by the Federal government. Which in practice means Treasury Bills, Notes, and Bonds. But mostly not regular Treasuries (though there have been such in the Trust Fund over time) but instead Special Treasuries. Which differ from regular Treasuries in that they can be redeemed at face value at any time irrespective of the face maturity. In this respect they are truly cash equivalents and indeed are treated as such for many internal federal accounting purposes.
But here is the point of this post and the place where things start going sideways. Because all Treasury Bills, Notes and Bonds whether Regular or Special are counted as part of Public Debt. That is when you hear that that the U.S. in $19 trillion in debt en route to $21 trillion this year that amount includes assets held in the various Federal Trust Funds, of which the largest is the Social Security Trust Fund, and which almost all serve as reserve funds. Which by their nature are never supposed to go to depletion. Instead they are all supposed to be maintained at whatever level meets their respective definitions of ‘solvency’. Which for Social Security is a Trust Fund Ratio of 100.
If we step back and take a quick look at Social Security ‘cost’, which is what establishes the denominator of the TF Ratio, we can see that under almost all circumstances it increases every year. Even in a healthy economy. ESPECIALLY in a healthy economy. Because that Cost is driven by a combination of population increase, inflation (however restrained), and growth in the real wage base. And this is true even if ultimate Cost projects to settle out as a relatively fixed portion of GDP (around 6.1% after mid-century), a steady state percentage of a growing GDP means an increase in nominal dollars. That is simple arithmetic. But the implications are not simple at all.
Lets posit that in some given future year Social Security’s Trust Funds have a Trust Fund Ratio of 101 and total costs projected to go up by 4% a year (2% interest and 2% real benefit growth). What has to happen to maintain ‘solvency’? Well cash convertible assets have to increase by enough to maintain at least a 100 TF Ratio which means the Trustees will have to be net ‘buyers’ of Special Treasuries. Each and every year that the economy isn’t is some sort of recession. But every new ‘purchase’ scores as in increase in total Public Debt, that is Social Security ‘Solvency’ means increasing America’s debt. Without end. And without payback. That is in a healthy and stable system the U.S. Treasury will ‘borrow’ from (by ‘selling’ Special Treasuries to) Social Security each and every year. And the answer to the question of ‘Hey when will you pay that borrowing back?’ is somewhat paradoxically ‘Well if everything goes well on the 33rd of Neverember’. Because once the Social Security Trust Funds are at a point of minimal Solvency they need to increase year over year forever with no NET redemptions of principal. And this by the way is true of most of the rest of the Trust Funds, to remain healthy they need to INCREASE holdings of US Debt each and every year and in principle NONE of the principal ever gets paid off on net. Which means that any time that total Intragovernmental Holdings of Public Debt are decreasing is a sign that one of more of the Trust Funds are approaching some sort of crisis. Within limits the more the U.S. is in debt to its Trust Funds the healthier it is. Which raises the question of whether we should even be counting Intragovernmental Holdings in our discussions of actual debt. Is debt a real future burden if there is no need to pay it back? Given a healthy economy?
More on this in Part Two. Which I promise will come out sometime before the 32nd of Neverember and maybe this year.
Good, but as a hobbyist (without being a fanboy) I was going to read the whole thing. You need a shorter version in your arsenal to get across “once the Social Security Trust Funds are at a point of minimal Solvency they need to increase year over year forever.” Few people get that this was the Greenspan rationale for supporting the Bush tax cut – surpluses (as defined) were not a good thing.
People who don’t already understand are likely to quit before getting to the key point.
‘Shorter’ ain’t my thing. I try–
And I took Greenspan’s point a little differently. To me he seemed more worried about the disappearance of the long bond and so its multiple functions in world finance (stock of wealth, safety instrument). A subject of a different set of posts in my head. Quite apart from the irreducible quantity of debt represented by Trust Funds being ‘solvent’ (if they ever get back to that), that is putting Intragovernmental Holdings aside, what proportion of Debt Held by the Public is itself structural and necessary to keep the world working where the dollar is a major reserve currency? How many Bills, Notes and Bonds are needed out there? In total and by category? By how much could we actually reduced the current $19 trillion in debt without wrecking things?
We know we can’t reduce the $6 trillion or so of Intragovernmental Holdings too much in the short run, and need to increase them in the long run to maintain ‘solvency’. But to what degree is that also true of the $13 trillion in Public Debt represented by Debt Held by the Public?
To the point: if the pentagon gets to spend $1.5T for the untestable, reliable as the space shuttle F-35 for the notion it might keep US infantry from being strafed……
what should the US spend to keep any aged US people out of poverty?
What kind of society would even do a cost benefit?
The pentagon has about $6T in weapons systems spending for R&D and procurement on the “books”. That is about 35% of the booked obligations, as using the stuff costs money for maintaining readiness through training, which the chiefs of staff say is not affordable with the unreliable junk sustained by inept contractors.
So the near future unfunded obligations of the pentagon are $17.2T. Add military personnel and you get $22.8T
That $22.T is for about next 30 years.
Does not include liabilities for 50% of OPM retirement, and all of military retirement/health care.
Or the DVA, which the thugs want to defund, make it fail and give veterans insurance with their cronies.
Military retirement was taken out of the pentagon budget to hide it more than 30 years ago!
What kind of country has to talk about affording to be human?
I had gathered that Greenspan was just being a Repubican hack and a Keynesian when he argued that surpluses were bad.
Kaleberg you can deploy an honest argument as part of a duplicious overall act. There was no way that Bush’s tax cut actually averted the elimination of the long bond, as Krugman pointed out back then he was triple counting the same $1.5 trillion and as we know now was even then committed to unlimited wars of choice to advance the PNAC agenda as promoted by Cheney and the rest of his foreign policy administration.
Still there was an honest argument that some fiscal space had opened up given the 10 surplus predictions in play. My personal hope was that President Gore would deliver some sort of PP/ACA plus with the money. But Antonin Scalia said no in Bush v Gore. So—
That is the answer to a shrinking pool of long term debt instruments was to spend more on actual priorities. There was no easier problem to address than the future disappearance of the long bond. Spend money. Bingo!
And BTW the long bond is again in ‘danger’ of disappearing. At least for operational purposes. The Federal Reserve as a result of QE1 & 2 now owns up to 70% of most issues. And given current interest rates could buy more if they hadn’t imposed that 70% limit on themselves.
You see a lot of typically murky claims that the Chinese either will or have started liquidating their supplies of Treasuries with the dark implication that this will spike rates. This is nonsense. It is somewhere between difficult to impossible to figure out how much of the Chinese holdings of Treasuries (about 1/3rd of their total foreign reserves) are even in the long Bond as opposed to shorter Notes. But I estimate somewhere South of $300 billion.The world is hungry for flight to safety instruments even at the ZLB and people are more worried that the dollar is too strong and interest rates too low than otherwise. And what effect would a CCB dump of long bonds have other than pulling down the dollar and raising interest rates, each by modest amounts?
Sell, China, sell.
GAO is timely on the March annual review of last year’s DoD “selected acquisition reports” (SAR’s) down to 79 reports reviewed.
Just found it from 31 March [your SS forecast plight is a reminder].
This year more [42:37] “acquisitions” had overruns than under runs!
I have something to help me sleep!
The 2008 report was on time, so not every report in the last decade was late.
“Sell, China, sell.”
What a strange thing to root for. What does Webb gain from this? What does anyone gain from this?
Webb is a huge fan of SS. He knows full well how the financial picture at SS cratered as a result of the big 2009,10,11 recession. Now he wants China to go into the crapper.
Concerned about solvency at SS?? Then don’t be praying for chaos in China.
Krasting not every scenario that has China selling Treasuries is the result of China going in the crapper. And certainly not the scenarios sold by the perennial panic merchants at places like Seeking Alpha and Motley Fool.
Bark up another tree. And the financial picture of Social Security didn’t ‘crater’, not in the big picture. For example the dates of Trust Fund Depletion didn’t move that much and the long term actuarial imbalance is not out of line with where it was in 1997.
Thanks Mike. Sure enough March 26th 2008. Oh well 9 out of 10 ain’t bad (or in this case ‘good’)
Webb the 2009 SSA report had SSTF at $4T in 2018. In 2011 SSA revised down the 2018 # to $3T. So the recession I spoke of cost SSA at least $1T. I guess you think that is nothing….
The Treasury portion of QE3 was $300b. When China sells T bonds it is reverse QE (look it up) It took more than a year for QE3, If China sells $300B in a month it would be a very big deal. And no, I can’t think of a single scenario where China dumping T Bonds is a “Good Thing”.
Krasting most of the Fed’s Treasury buying was in QE 1 & 2. You know that and your cite of QE3 in this context (when the Fed was mostly buying Agencies) is pure attempt at deception. Sad!
And nobody has EVER suggested China would sell $300 billion in a month. Instead the figures bandied range up to $100 bn a month. But ignore the fact that there is no reason to believe these sales would be focused on the long bond rather than other components of China’s Foreign Reserves.
As to the revisions in future TF balances it is not as simple as “Ooops!! Who knew there would be a recession!!”. Instead there were other changes in assumptions that changed those numbers. Still I would concede that there was a price involved by the OACT having committed to much the same set of numbers that were accepted by almost everyone else in what is now fittingly known as “The Washington Consensus”. Who knew what a shitshow the Bush Administration had actually delivered. And I would note that the 2009 Report had been prepared by that Administration and reported on Calendar Year 2008 which of course was entirely within the previous Administration’s term.
China’s total holdings of U.S. Debt Held by the Public has been right at $1.1 trillion or so for years now. And while we don’t know the exact balance of long v short I think $300 billion long is reasonable enough. The question is whether the world market as it exists now could absorb $30 bn in sales of Bonds on a monthly basis. I think it could easily and if to the Fed is available as a back stop. After all the various rounds of QE were IIRC on the order of $40 billion a month.