Unraveling The Mysteries Of Social Security

When I last wrote about social security in Another Year, Another Social Security Shortfall, I said some misleading things that require clarification. I also said some things which are accurate but deserve a more complete explanation. Let's start with The 2012 Annual Report of the social security board of trustees (pdf). This text appears on page 2.

At the end of 2011, the OASDI program was providing benefits to about 55 million people: 38 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 11 million disabled workers and dependents of disabled workers. During the year, an estimated 158 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2011 were $736 billion. Total income was $805 billion, which consisted of $691 billion in non-interest income and $114 billion in interest earnings. Assets held in special issue U.S. Treasury securities grew to $2.7 trillion.

Based on Bruce Krasting's account, I had initially reported that social security ran a deficit, but if we count the interest income from U.S. Treasury securities, social security ran a surplus of $69 billion. Otherwise, based on 2011 tax collections alone, social security ran a deficit of $45 billion. If that's not clear to you, do the math.

Now, what about that T-bill income and the $2.7 trillion trust fund? I will quote David Kay Johnston, who was interviewed by Aaron Task in Social Security Is the Best-Funded Government Program (video below, Daily Ticker, December 13, 2012).

Social security is the best-funded government program we have. It has its own dedicated stream of income, last year it ran a surplus of close to hundred billion dollars...

[My note: see the calculations just above].

..., it has overcollected from us since 1983, and ya' know, rule #1 of tax [???], pay a tax 30 years from now, it doesn't cost you anything, pay a tax 30 years before you have to, each dollar costs you a number of dollars...

Very minor adjustments are needed to social security. Under Ronald Reagan, 90% of wages were taxed... [explains some hypothetical stuff that would make the funding problems go away]

Up until 1983, social security was pay as you go. And Alan Greenspan, then an obscure economist in New York, persuaded Reagan that we need to tax today for a benefit [we] would get in the future.

In my previous post, I had noted that the social security trust fund has already been stolen, and a young reader wanted to know how that happened. Now we are in position to fully answer that question.

Under the law, if the government runs a social security surplus, that money must be used to buy government debt, i.e. the trust fund money is held in treasury bonds. However, by that very action, the surplus becomes available to the government as money it can spend in any way it sees fit.

This is not rocket science. In effect, the government, starting with Reagan in 1983, who was following the advice of Alan Greenspan—where have we heard those names before?—began over-collecting from The People via the social security tax to create a huge pile of money—$2.6 trillion to date—they could spend in any way they chose. And spend it they did.

But what about that $2.6 trillion trust fund? This is accurately said to be money the government owes to itself. As noted above, social security does indeed receive interest income on this big pile of treasury bonds, but let us look at future deficits where payouts exceed revenues (tax collections + interest income).

Treasury bonds are government IOUs. In this case, in so far as the money has been stolen as just described, the government must sell off treasury bonds held in the social security trust fund to cover the shortfall. In so doing, the government effectively transfers debt it owes to itself to debt held by the general public. Either way, debt is debt, but that does not become obvious until the debt must be sold to cover the deficit.  (I will ignore the case where the Federal Reserve buys the debt, although that is a growing concern to some of us.)

To bring this point home, let's look at two hypothetical cases.

1. The government never over-collects from taxpayers, i.e. social security is still pay as you go. In this case, the current revenue problems likely disappear, but it is hard to say. The $2.6 trillion remains in the private economy over those 30 years, which is certainly a desirable outcome.
2. The government does over-collect from taxpayers, but the law says that social security surpluses must be invested in assets (e.g. equities, property or commodities) which the government can't touch. Then the social security money is still there, but the size of the trust fund depends on the current value of those assets. In any case, at least some of the money is still there, whereas none of the money is there under the current arrangement.

Now you can see exactly how the social security scam was run over the last 30 years. In effect, the government carried out a transfer of $2.6 trillion dollars from you (American taxpayers) to them, and then proceeded to spend the money. No doubt many of those dollars lined the pockets of special interests whose undue influence on government policy haunts us still.

So-called "liberals" have their story about social security, and they're sticking to it. So-called "conservatives" have their story, and they're also sticking to it. Both stories are inaccurate and deficient in predictable ways. But as I've said on many occasions, Politics Makes You Stupid.

I've told you the only story that matters today. Is this a great country or what?

 

Comments

[Oliver]

If I was a builder adopting the same modus operandi as the government, I would be able to continue constructing a taller and taller building with surprisingly few real materials, by surreptitiously loosening and removing certain bricks at the bottom, so that I could add them to the next layer at the top. The increasing height of this proud edifice would be a marvel to all who beheld it - until the day the whole structure collapsed because the foundations had been raided once too often.

When the dust settles ... just debris for as far as the eye can see.

[David P.]

There is a good scene from Dumb and Dumber which nicely sums up what happened: http://youtu.be/7GSXbgfKFWg

[Don Levit]

Dave:
The excess FICA taxes were not invested in Treasuries. They were loaned to the Treasury to pay for current expenses. Treasuries were issued as collateral for these loans.
The interest income of Treasuries in the SS trust fund is credited to the fund with additional debt. From a cash perspective, interest is considered non-cash income.
From a cash perspective, trust fund principal is non-cash income as well, for the excess cash was loaned to the Treasury.
There are basically 2 perspectives on the trust fund balance. One is called the Trust Fund Perspective. The second is called the Budget Perspective (or government-wide perspective).
From a paper entitled "2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds," published by the Boards of Trustees, Federal HI And Federal SMI Trust Funds:
Pages 234-235 "One can view the financial operations of Medicare and Social Security in the context of the programs' trust funds or in the context of the overall federal budget. The financial status of the trust funds differs fundamentally from the impact of these programs on the budget, and people often misunderstand the relationship between these two perspectives."
"This trust fund perspective is important because the existence of trust fund assets provides the statutory authority to make such payments without the need for an appropriation from Congress."
"The budget is a comprehensive display of all federal activities, whether financed through trust funds or from the general fund of the Treasury. This broader focus may appropriately be termed the
'budget perspective' or 'government-wide perspective' and is officially presented in the Budget of the U.S. Government and in the Financial Report of the U.S. Government."
"The financial status of a trust fund appropriately considers all sources of financing provided under current law for that fund, including the availability of trust fund assets that Medicare or Social Security can use to meet program expenditures. From a budget perspective, however, general fund transfers, interest payments to the trust funds, and asset redemptions represent a draw on other Federal resources for which there is no earmarked source of revenue from the public."
www.healthreformgps.org/wp-content/uploads/tr2012.pdf.
Don Levit

[Ken Barrows]

And what will be the trend for interest income? What with rates on newly issued paper I expect a decrease.

[Dave Cohen]

@Don

And I quote --

"The excess FICA taxes were not invested in Treasuries. They were loaned to the Treasury to pay for current expenses. Treasuries were issued as collateral for these loans. The interest income of Treasuries in the SS trust fund is credited to the fund with additional debt. From a cash perspective, interest is considered non-cash income. From a cash perspective, trust fund principal is non-cash income as well, for the excess cash was loaned to the Treasury."

If I may be blunt, what I said and what you said here amounts to the same thing, doesn't it? Where I was "wrong" was in saying that FICA taxes went toward buying treasuries directly. Mea culpa.

However, there is one difference, which makes the bad situation I described worse -- The interest income of Treasuries in the SS trust fund is credited to the fund with additional debt

Which means, if I am reading this correctly, that interest income is not directly available as cash for payouts.

If I were you, I would not get too lost in the details of the swindle. In fact, that's what humans do. They make it complicated to obscure the theft.

I should have known better.

-- Dave

[Alexander Ač]

OT, but for interest of readers, "HAPPY" peak farmland is here???

http://www.reuters.com/article/2012/12/17/us-crops-idUSBRE8BG0QH20121217

Alex

[Don Levit]

Ken:
It matters very little from a cash flow perspective what the interest rates are. Because interest is additional debt, higher or lower interest rates simply extend or lengthen the trust fund's "life."
However, from the budget perspective, the trust fund is empty not in 20 years; it is empty today. The reason is that every dollar of interest and principal redeemed from the trust fund requires new general revenues - the same way we pay all expenses. When the trust fund is exhausted (the numbers go down to zero), the same process is used to make up for the cash shortfall: new general revenues will be needed.
Don Levit

[Ben]

THANK YOU DAVE! It's just unbelievable man, so some clowns play accounting games, and the most vulnerable people in the nation are ... well you know.