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.