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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.

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CRS: Social Security: What Would Happen If the Trust Funds Ran Out?

Very interesting paper that I missed in real time.
Social Security: What Would Happen If the Trust Funds Ran Out?

Almost everyone who addresses this question assumes that the answer is pretty simple: if either of the Social Security Trust Funds goes to zero than benefits will automatically drop from ‘Scheduled’ to ‘Payable’ which translates to a 22-25% overnight cut depending on which Trust Fund we are talking about. But I had an interesting conversation with Andrew Biggs some years back. Andrew is a very prominent advocate of Social Security ‘reform’ which he sells on the basis that the system is ‘unsustainable’. As such he and I and Coberly and he have had some vigorous debates over the years, and mostly he is firmly in the ‘bad guy’ category on policy. For all that he is a nice guy and really, really knows the numbers and laws in play. Not least because he spent some time as the Principal Deputy Commissioner of Social Security (the no. 2) during the Bush Administration.

With that as background Biggs told me that the situation at Trust Fund Depletion was not as clear-cut as almost everyone assumed and had been the topic of some high end discussion at SSA. And their conclusion as related by Biggs to me mirrored that of the Congressional Research Service in this Report from last year.

The Social Security Trustees project that, under their intermediate assumptions and under current law, the Disability Insurance (DI) trust fund will become exhausted in 2016 and the Old-Age and Survivors Insurance (OASI) trust fund will become exhausted in 2034. Although the two funds are legally separate, they are often considered in combination. The trustees project that the combined Social Security trust funds will become exhausted in 2033. At that point, revenue would be sufficient to pay only about 77% of scheduled benefits.
If a trust fund became exhausted, there would be a conflict between two federal laws. Under the Social Security Act, beneficiaries would still be legally entitled to their full scheduled benefits. But the Antideficiency Act prohibits government spending in excess of available funds, so the
Social Security Administration (SSA) would not have legal authority to pay full Social Security benefits on time.
It is unclear what specific actions SSA would take if a trust fund were exhausted. After insolvency, Social Security would continue to receive tax income, from which a majority of scheduled benefits could be paid. One option would be to pay full benefit checks on a delayed
schedule; another would be to make timely but reduced payments. Social Security beneficiaries would remain legally entitled to full, timely benefits and could take legal action to claim the balance of their benefits.

The Report proceeds to outline the possible responses and is interesting for that alone. More important for my purposes though is the suggestion that the “conflict between two federal laws” precludes the option of Congress just sitting back and letting “automatic” cuts happen. Because as Biggs some years back and CRS last year point out, there is nothing automatic about this at all.

Anyway something to talk about for those of us jonesing over the release of the 2015 Social Security Report. Which my fellow junkies is scheduled for tomorrow (Wednesday) probably at 1PM Eastern. If past file name practices are observed the web version should be available via URL:
while a PDF version should be viewable or downloadable at:

I should have another post up with these same links prior to Report Release. But anyone who wants to bookmark the URLs and try to get a jump on just about everyone else in the country should feel free.

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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’

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Social Security under ‘Sustainable Solvency’: Debt & Deficit Revisited

The current Chief Actuary of Social Security is Stephen Goss and on the occasion of the publication of the 75th Anniversary issue of the Social Security Bulletin he contributed what may be the most valuable single piece you will ever read on Social Security financials. The article carried the title The Future Financial Status of the Social Security Program The abstract/teaser for the article starts out with this:

The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood.

To which I can only add “Boy Howdy!”
Steve is perhaps best associated with the concept of ‘Sustainable Solvency’ which he describes as follows:

Sustainable solvency requires both that the trust fund be positive throughout the 75-year projection period and that the level of trust fund reserves at the end of the period be stable or rising as a percentage of the annual cost of the program.

Well this requires some unpacking. Under current law the Social Security Trust Funds are considered ‘solvent’ if they have a Trust Fund balance equalling 100% of the next years cost at the end of a given actuarial period. Stronger versions of this would require that the Trust Fund meet this standard in every year of the period and/or that it be trending upwards at the end. That is Steve’s “stable or rising”. Well all that is reasonable enough, but what would it look like under standard budget scoring? Well the answer is either “kind of odd” or “mind-bending”. Which will be explored under the fold.

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Fed Treasury Holdings, ‘Real Debt’ and ‘Real Debt Service’

It is not difficult to determine a dollar figure for Total U.S. Public Debt. In fact you have to round UP from the Treasury’s Debt to the Penny and Who Holds it web application which tracks that number daily. As of end of business Thursday that total was $17,472,051,696,926.14. Which is a lot of money however you slice it but doesn’t really get to the issue of ‘sustainability’. First this number includes Intragovernmental Holdings amounting to $4,993,180,664,362.07 which while are certainly full obligations of the U.S. government and backed by Full Faith and Credit or in fact obligations that are under the control of that government and are largely in held as rolling reserves for various programs that ideally will never be redeemed in full. For example over half of that $4.9 trillion is the $2.8 trillion held by the Social Security Trust Funds which, if prudent and necessary steps were taken to shore up its ‘sustainability’, might never have to be redeemed on net and indeed would need to grow over time. So it would make some sense for calculations of ‘Real Debt’ to use the remainder, which Treasury tracks under the name ‘Debt Held by the Public’. Which to my mind is too close to ‘Public Debt’. But it is what it is.

And what is it? $12,478,871,032,564.07. But even this doesn’t get us to a good measure of ‘Real Debt’ because it doesn’t address the issues of Rate, Maturity and Term. To take this to an imaginary limit, what if every penny of that $12.5 trillion was in 30 year Bonds bearing a Maturity ranging from 2039 to 2044 and carrying a Rate of 0.025%. Well whip out your Financial Caclulator and do some PV calcs and that wouldn’t really be ‘Debt’ at all. And in particular it would incur no ‘Debt Service’ in the meantime. Now take it to a different imaginary limit. Assume every penny of that $12.5 trillion was held in 6 month or 1 year notes at a Rate of 6.0% but was all held by the Federal Reserve. Well that would imply a HUGE amount of Debt Service. On the other hand the Fed rebates all profits to Treasury so the net effect would be Treasury writing a ‘check’ to the Fed that would be ‘signed over’ back to Treasury. So that too means no ‘Real Debt Service’ in practical effect.

Now we don’t exist in a world near either of those limits. But that doesn’t mean we shouldn’t net out Public Debt that is held by either Government Trust Funds or the Fed from ‘Real Debt’. And equally important we need to understand what portion of total debt service is ‘Real Debt Service’ that is payable to non-Federal entities out of actual tax collections. That is we get exactly nowhere just stating: “The U.S. has $17 trillion in Public Debt”. Instead we need to have a grasp on the questions of “Debt to Whom? At what Maturity? At what Rate?” before we can put our fingers on ‘Real Debt’ and ‘Real Debt Service’. Answering those questions would require more than a single blog post and comment thread, but I suggest we start by looking at Fed Treasury Holdings under the fold.

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Social Security: Trust Fund Ratios, Solvency and the Reagan ‘Raid’

What does or would it mean to say that Social Security was ‘solvent’? Under the rules that govern the Trustees of Social Security the test for any given year is pretty simple: did or will the year end with all obligations/cost met while still retaining assets equal to the next year’s cost. To determine this you take the year end Trust Fund Balance and divide by Cost to get a Trust Fund Ratio where 100 = 1 year. If the TF Ratio is 100 or above Social Security is solvent for that year, 99 or under not. It is important to note that a TF Ratio under 100 doesn’t mean any change in benefits being paid out, instead benefits can and under current law must be paid in full as long as there are any assets to draw on, that is a TF Ratio greater than 0. Still any number between 0 and 100 is worrisome.

Is Social Security ‘solvent’ today? By this test certainly, at least for the Old Age/Retirement (OAS) Trust Fund, at years end 2012 OAS had a TF Ratio of 391. Has Social Security OAS always been ‘solvent’. Well no, and we can track its performance since 1937 in the following Table for the 2013 Report.
Table VI.A1.— Operations of the OASI Trust Fund, Calendar Years 1937-2012
By this simple TF Ratio test OAS was solvent every year from 1937 to 1965 and again from 1967 to 1970 only to fall under the 100 mark in 1971 enroute to its lowest year end point in 1982 at 14. At that point full payments of benefits were at serious risk, literally SOMETHING had to be done. And lo! the Greenspan Commission. More below.

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Social Security: the Shape of Solvency

2011 II_project_IID6 (1)
Well lets try again (two hours of draft having just disappeared)/
The above figure is II.D6 from the 2011 Social Security Report. The reasons why I didn’t use the 2013 version will become clear later, short version is it doesn’t show ‘The Shape of Solvency’ while the longer version is, well, long.

This figure shows the projections of three different economic and demographic models for Social Security expressed in terms of Trust Fund Ratio where 100 = next year’s projected cost. Now Trust Fund Ratio is in some ways an odd beast because it is to some extent after the fact yet also prospective. This is because it reports Trust Fund balances AFTER the calculation of current revenue minus current cost and does so in terms of NEXT year’s cost. For example it is possible for Trust Fund balances to increase in a given year and have Trust Fund Ratio decline, that is SS can be in surplus and yet weakening by the metric deployed by the Trustees. And we can discuss the arithmetic of this in comments, for now let me just assert that there is a good reason to measure Solvency in terms of Trust Fund ratios even in a system that operates on a Pay-Go basis.

The Trustees measure ‘solvency’ in terms of ‘actuarial balance’ over periods of time including ‘short term’ (10 years), ‘long term’ (75 years) and ‘infinite future’. Figure II.D6 shows a combination of a prospective ‘long term’ 75 years and twenty retrospective years for 95 years total. This 95 year period also happens to cover the entire lifespan of nearly everyone in the workforce today. The three graphed lines going forward represent three different economic and demographic models where I represents the projection of ‘Low Cost’, III the projection of ‘High Cost’, and II the projection of ‘Intermediate Cost’.

In this figure from the 2011 Report both High Cost and Intermediate Cost project to intersect the bottom line representing a Trust Fund Ratio of 0%. Which is to say a Trust Fund with no remaining principal. Now under a Pay-Go system where all or most benefits are paid from current revenue, or in SS terms where ‘revenue’ entirely or mostly meets ‘cost’, a Trust Fund with a zero balance/Trust Fund ratio doesn’t equate to “No check for you”. But it DOES mean no reserve funds to maintain Scheduled Benefits. Instead under current law the intersection of the graphed line of II and III would require a reset from Scheduled Benefits to Payable Benefits of greater or lesser severity. On the other hand if the graphed line NEVER hits zero then Scheduled Benefits can be paid in full and so ARE Payable Benefits.

But for very good reasons the Trustees are mandated to not allow things to get that close to disrupting the relation between Scheduled and Payable and instead have set up a test point that serve as the Canary in Social Security’s Coal Mine. And that test point is a Trust Fund Ratio of 100, or one year of next year’s cost for any given year tested. If that tested or projected ratio is set to stay above 100 for each year of the selected time window then Social Security is ‘solvent’. Which gets us back to our Figure II.D6.

In 2011 Figure II.D6 showed High Cost and Intermediate Cost not only busting downwards through the 100 mark and so failing the test for solvency in that year, but also hitting the zero bound of Trust Fund Depletion. On the other hand Low Cost or line I only nudges the 200 mark and then rebounds from there. Making this curve A shape of solvency. But many other curves would meet that test and in fact any such curve that exited the 75 year window between 100 and 200 would equally be A shape of solvency and in some important respects THE Shape of Solvency. Because odd as it may seem an overfunded Trust Fund would be a bad thing. On the other hand so preventable as to not even be a concern. Questions about that can be deferred until comments.

Backtracking a little bit, there are good reasons to call Intermediate Cost projections ‘realistic’ and Low Cost and High Cost ‘artificial’. But this does not have to do so much with a committment to ALL of Intermediate Cost projections as hitting the EXACT median point but instead to a methodology that has Low Cost having all its variables come in in a way positive for solvency while High Cost has them all coming in negative even where there is no reason a priori to believe that all dozen or so will move in the same direction. So while it is tempting to call Low Cost ‘optimistic’ and High Cost ‘pessimistic’ this is only true as narrowly applied to Social Security Solvency as defined. For example people living longer, healthier and happier lives is taken in isolation bad news for Social Security solvency. Yet most of us wouldn’t consider a wave of untreatable pneumonia that wiped out 90% of all residents of nursing homes overnight ‘Good News!’. But it would do wonders for Social Security Solvency and after the immediate medical expense for Medicare as well.

On the flip side most of the economic numbers that undergird Low Cost and nearer to Low Cost outcomes would be positive for society as a whole. For example lower levels of unemployment coupled with higher real wage would go a long way towards restoring Social Security to solvency even if that better resulting standard of living meant more workers living to be Great Grandpas and Grandmas. So we can with a clear conscience root for Full Employment while avoiding construction of Soylent Green facilities or ramping up Ice Floe manufacturing to launch Gramma on a one-way trip into the Artic.

Snark aside what this means is that we don’t have to commit without reservation to every particular projection that goes into Low Cost, just enough of them to bring the tail of Intermediate Cost first above a TF Ratio of 0% and then ideally to a level that never hits 100 from the upside. We DON’T need a tail going out through the 75 year window at the 300 level and trending up. On the other hand a curve that bottoms out at say 128 and stays steady from there would be almost ideal. Though to be safe one would want to have that tail tick up a bit. But there are any number of ways to accomplish that. One way is just to assume Intermediate Cost economic and demographic numbers and make up the difference on the revenue side. This is basically the position of the ‘Raise the Cap’ folks. Another would be to make a conscious and sustained effort to postively change those economic and demographic numbers of Intermediate Cost in a way that moves them towards Low Cost without resorting to putting Gramma on the Ice Floe. That is basically the little known position of the ‘Rosser-Webb’ folks. Or you could go for the ‘First Do No Harm’ position of baking revenue increases into the pie while having a mechanism to back off if ‘Rosser-Webb’ actually comes through.

Which is in a nutshell the meat of the Northwest Plan. It seeks to achieve as close to a perfect Shape of Solvency as possible by introducing the right changes to the formula at the right time in reaction to real time data as it comes in. The various authors of Northwest have varying opinions as to the merits of say Intermediate Cost vs Low Cost but in the end it matters not. Because the methodology adapts to the data and targets the Shape.

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NW Plan for Social Security: Abridged Spreadsheet

First attempt at putting the NW Plan 2012 into viewable form. This graphic compresses the original spreadsheet in both axes. I will be putting links to the full spreadsheet in comments because I am not sure this one will share correctly (I am bouncing between Google Accts) link.

In any event the key columns are those marked NEW, especially the fourth column from the left ‘New Payroll Tax Rate’ and the last two ‘New Calculated Trust Fund’ and ‘New Trust Fund Ratio’.

This version of the spreadsheet terminates at 2045 simply because of graphic limitations, the original extends right through the 75 year window, but the key factor is that the Trust Fund Ratio stabilizes right at the 125 level right into the 2080s and still remains above 100 through the end of the range. In Social Security talk this means the NW Plan passes the Long Term Actuarial Balance test but just fails to meet the threshold for the stricter Sustainable Solvency measure which requires the TF Ratio to be trending at least slightly up.

On a final note. In the 2012 based NW Plan year end TF balances never drop in nominal terms meaning there is NEVER any net redemption of Trust Fund Principal. Which throws a whole new light on the asset/debt conundrum. But of that more in comments.

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CBO 2013 Economic Outlook: Soc Sec Trust Funds

By request of frequent AB commenter and SS contrarian Bruce Krasting. He claims vindication of claims from four years ago that the Trust Funds would top out at a much lower level than then estimated. And there is some support to be had here. Also lots of numbers and data points. I’ll have my say in comments, over to you all.

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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.

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