Brad DeLong's Semi-Daily Journal (2004)

Okay, so lets look at these four arguments:

1) They buy treasury bonds because the government tells them to. This investment is nto real, as the proceeds from the bond sales to the SSTF are used in day today government operations. This is a tax, plain and simple. Writing fake script to an empty lockbox does not increase the wealth of the government. Now, if the investment was *really* made in emerging markets and other countries stock markets, etc. you might have a real argument. Otherwise those bonds look like they will be sold to the Federal Reserve when needed and simply monetarized until gone.

2)Banks owed the SSTF money? who guarantees the banks will exist? Oh wait, the gummint. Um, still my empty pocketbook as a taxpayer.

3) See the end run that will be done under #1- the Fed will buy them allowing politicians to escape momentat.

4)The SSTF could only be invested in everything (with a heavy bias to overseas to raise enough real wealth), and that would be costly- isn't it cheaper just to give in and raise taxes? Hey let's invest in Fannie Mae and Freddie Mac! Oh wait, those might actually have a real income! But what about house prices falling? Not with our inflation rate going up?

I advocate that we tell the public the truth- we screwed up and you will have to pay for it. Continually fudging the numbers eventually gets a number so far removed from reality that event the person reporting it can't keep a straight face.
Higher taxes, and less benefits. Flat out.

As for jsut selling those bonds into the market- good luck, aren't the markets nervous about the near trillion dollars that the far east *already holds* over our heads like a sword of damocles? Oh yeah, sorry Taiwan, you are being sold out because Beijing holds our markers. I am sick of this, I went into this profession to find out about how it all works, and now that I know, I wish I didn't. Ignorance may not be bliss, but it helps to sleep at night.

"Well, first of all these 'bunches of IOUs' are called U.S. Treasury bonds."

Uh, no, they aren't. They can't be traded openly in financial markets. They're simply an internal bookkeeping entry within the federal govt. The govt could "default" on them and that would not have any effect (except possibly the positive one of making the national balance sheet healthier) on the world's financial markets.

That's argument number 2. If the Treasury wanted (and if Congress allowed) it could transform the SSTF into bearer Treasury bonds tomorrow. (Which would make an interesting movie plot as the armored truck crosses the short distance from the Bureau of Engraving and Printing to the Social Security Administration.)

Patrick, the idea that the government could default on those bonds and have no effect on the credit rating is insane. And if you are really worried about it, lobby to have a law passed that makes those bonds the same as any other treasury. There, problem solved.

This ties into the belief that when the SS fund starts to go down the money must be made up by rasing taxes or cutting spending. No, the bonds can just be traded for other newly issued bonds by the government. This wouldn't be a big deal if issueing the new bonds weren't having to compete with huge deficit issues. But hey, what's cutting off future growth for a tax cut today?

Actually, that brings up a point. Since the government appears to being having to need to issue a huge amount of bonds when the SS fund is finally tapped, should the SSA lobby for transferrability and the ability to enter forward contracts to be able to lock in the current high prices?

I think we're missing the basic point: the whole bit back in the early '80's was a shell game by Alan G, and it's taken us all 20 years to realize it. Here's what he did: he hates taxes, and the only way to keep the Reagan cuts was to convince the rest of us that SSTF could be safe without the need to raise income taxes (as opposed to payroll). So, voila, he comes up with a lockbox, but the real idea behind it was to allow the Feds to still spend like a drunken sailor BUT not pay for it. What do we get out of this? 2 decades of Republican mismanagement.

I am not an economist, so don't look to me to do the theory; I am on the other hand a refugee from 30 years of working with people who really know how to cook books (the entertainment industry), and what I describe above is how I've seen more than one mega-flop buried.

Greenspan never meant us well; face it, we've been taken for a ride. 20 years of fair and reasonable tax revenues have been uncollected BECAUSE we all thought that the SSTF could be safeguarded. Now we face zillions of dollars on the downside, and the devil will take the hindmost.

You can arrange the accounting entries any way you want, but the fact is that the dependency ratio is rising and we have to pay for current consumption out of current production.

Pay as you go isn't just a good idea, it's a law of nature. We might as well face up to it bravely and stop playing at keeping a paper surplus.

If we repeal the Bush tax cuts and starve government services then we can just about afford Social Security through the boomers' retirement. If we can't make it, we can simply increase taxes a little.

More realistically we will raise taxes on workers a lot so that we can even expand Social Security a little. Old people vote.

Medicare can't be sustained at all if it rises at its current rate of growth (at a few percent of our economy now with 12% annual growth it will be bigger than our whole economy-even with high 4% consistent growth rates-around 2060). Things that cannot go on forever will not. Therefore Medicare will stop growing so fast. I don't know how. But it will become sustainable.

But when the majority of the population and the vast majority of the voters are recipients of government largesse as their primary income, I don't think we'll have democracy at all for long.

Every solution says, "give the government your money, and figure out a way to let them dole it back out to you again." Everybody is sweating over how the government should do this, what should happen to the money in the meantime, etc. etc.

How about a #5? Set an eventual goal of letting the citizen plan and pay for his own retirement, maybe supplemented in great need by welfare safety nets, and then begin a long-term plan to phase this in?

Is it completely inconceivable to pry the Federal Government out of this equation at some point? Does socialism run so deep in the bone now that it is impossible for people to think in any other way?

As for the poor slob who wrote you, tell him that the government took his tax money, loaned it to itself with interest that would theoretically be repaid with yet more tax money from the original source (the poor slob). Of course, the loan cash was instantly dumped into the Great Rathole of the Federal budget. Tell Mr. Poor Slob that his money is probably currently building a mass transit system somewhere in Alaska, or buying fuel for a Humvee in Iraq. And yes, the lockbox is filled to the brim with I.O.U.s There never was a trust fund, and never will be. General revenue money is flowing directly into the pockets of current recipients, and the trick is to keep the shells moving fast enough so nobody knows that the pea was eaten a long time ago.

And Brad, if argument #4 doesn't scare you, you haven't thought about it enough. I can think of a few politicians who probably prong wood thinking about the Federal government owning a major percentage of Microsoft, Disney, or General Motors, and that sure as hell scares me.

Argument 2 misses a step, which is that Social Security participants have no contractual or other guaranteed right to payments from the SSTF.

To be very clear about it, if Congress said tomorrow that no further Social Security payments will be made to anyone, and that the assets of the SSTF -- government bonds, blue chip stocks, whatever they happened to be -- will be used to build a gigantic monument to Warren Harding where the state of Wyoming used to be, that would be precisely what would happen. The nature of the assets would not matter at all.

The upshot is that while there are some tenable arguments for investing the SSTF in private stocks and bonds, the idea that such investments would "guarantee" the continuation of Social Security payments is absolute rubbish.

I have a simple question. If the money piling up in the SS trust fund is used to buy government bonds, this implies that when these bonds are redeemed that this money must come out of the general fund, possibly raising taxes.

Is this correct?

If so, what was the great virtue (explain slowly for the non-economist) of piling up with huge SS surplus.

Thanks.

Brad's uncertainty is not a sign of confusion. It is an outgrowth of the fundamental policy mistake "fatbear" discusses (whatever the motives) and the "combined budget" (or whatever its called) that policy makers now use to evaluate policy.

As an actuarial entity, Social Security is in fine shape. Cash flow problems that might emerge in 40 or so years should be fairly easy to fix as we get closer to the time and see whether they actually emerge.

The problem is the "Combined" budget that includes Social Security current cash flows that are quite positive and mask the enormous deficit in the rest of the government accounts.

Like Brad, I am of two minds. If one elects to advance fund Social Security as a stand alone entity (which I think was a major mistake but one we have made) then these funds need to be excluded from the government budgets.

Economists have argued against this on the basis that government taxing and spending is fungible and we must look at the overall picture, a premise with which I fundamentally agree. But they have been disingenous. The revenues have been combined and the expenditures combined but FICA taxes have not been treated as "income" taxes, grossly distorting the share of total federal governmental cost born by different income levels.

When Brad and his professional cohorts automatically add in the 15% or so of the first $80,000 or so of wage income only that is paid as federal income taxes when analyzing tax rates, then it is fair to use the combined budget to calculate deficits (or surpluses). Otherwise, the entire discussion of income taxes and the share of the tax "burden" (a term worthy of Ayn Rand) is an intellectual farce.

Combining a pay as you go governmental accounting system with "advance" funding of Social Security is indeed accounting worthy of the entertainment industry...as the perceptive Mr. fatbear has pointed out.

Sam

Brad DeLong writes, "Well, first of all these 'bunches of IOUs' are called U.S. Treasury bonds."

Patrick Sullivan responds, "Uh, no, they aren't. They can't be traded openly in financial markets. They're simply an internal bookkeeping entry within the federal govt."

Yeah, that's pretty pathetic, Brad DeLong. Why didn't you tell the lady that they are *special issue* U.S. Treasury Bonds, that can ONLY be given to the Treasury?

And why didn't you tell her that, when these bonds are presented to the Treasury, one or more of three things must happen: 1) the official debt of the U.S. must be raised, 2) taxes must be raised, or 3) spending must be cut.

And why didn't you tell her that this is *exactly* what would happen if the "special issue" bonds didn't exist at all?

Alkali is right, but I see this more as a point against the "Treasury bonds are rock solid argument." Nothing says we won't "honor" every single T-Bond in the SSTF, but this doesn't guarantee that we'll actually use the money to pay Social Security benefits. If the country is in a desperate financial situation, we will simply slash benefits and call it a budget cut.

Argument #3 is the most important of these. Politicians have to stop hiding their overspending in the SSTF. Our total deficit including SSTF borrowing is running near 6%-- about as bas as it gets-- but the SSTF borrowing allows politicians to hide this. It also lets them focus on lowering upper-income tax brackets while funding government out of regressive payroll taxes.

"Patrick, the idea that the government could default on those bonds and have no effect on the credit rating is insane."

It's not insane at all. Partially or even fully defaulting on those bonds would only result in breaking promises made to retired people. It would NOT result in breaking promises made to creditors of the U.S. government, because no one outside the U.S. government holds those bonds. It's an internal promise of one agency of government (the Treasury) to another agency of government (the SSA).

"And if you are really worried about it, lobby to have a law passed that makes those bonds the same as any other treasury. There, problem solved."

Oh, yeah. The U.S. government follows Patrick Sullivan's every whim. Oy, vey!

"

"Alkali is right, but I see this more as a point against the 'Treasury bonds are rock solid argument.'"

Yes, the "special issue" Treasury Bonds held by the Social Security Adminstration are completely worthless, by any sane definition of "worthless."

EXACTLY the same things would happen, whether they existed, or didn't exist. When payouts from Social Security exceed contributions, the Treasury must do one or more of three things1) the official debt of the U.S. must be raised, 2) taxes must be raised, or 3) spending must be cut.

Brad DeLong frags a little old lady (rhetorically speaking). :-/ "Shrapnel," indeed!
:

Larry writes, "I have a simple question. If the money piling up in the SS trust fund is used to buy government bonds, this implies that when these bonds are redeemed that this money must come out of the general fund, possibly raising taxes."

"Is this correct?"

No, this need several corrections. There is no money "piling up in the SS trust fund." Every penny contributed to SS in excess of what is paid out is being spent on other things: defense, education, agriculture, whatever.

All that's in the SS "Trust Fund" is promises from the Treasury to SS to do something when SS presents the bonds to Treasury.

Maybe when those bonds are presented, the Treasury will turn around and issue REAL U.S. Treasury bonds to the public, and the debt of the U.S. will be acknowledged to be higher. Or maybe the Congress will raise taxes. Or maybe Congress will cut other parts of government. Or maybe the retirees will be told that they're not going to get the full amount they were promised after all (i.e., the Treasury can partially default on the bonds).

I don't think anyone can say definitively what will happen. But one thing I *can* definitively say is that whatever happens would happen whether or not those *special issue* "bonds" existed or not.

The *special issue* "bonds" are therefore worthless. The same things would happen whether or not they existed or didn't exist.

I think point 2 is a fairly weak argument. If the govt wanted to raid the social security trust fund, it could do so by "cutting" payroll taxes and "raising" income taxes. That is even if banks owe the sstf and the treasury owes the banks, nothing forces the rest of the government to keep paying payroll tax revenues into the SSTF.

I also don't find argument 4 as written convincing.
It is not logically necessary to have some bureaucrat vote shares, if the SSA owns stocks. It is possible to require that the SSA's shares be voted proportionally to votes by non SSA shares. This is slightly different from just not voting the shares (see a comment below int he other thread). Now that might be crazy too. To own a huge chunk of shares and not vote them is to demand to be cheated if managers and other shareholders collude.

I don't see why the SSA doesn't buy corporate bonds. Default risk should be diversifiable (except when there is a major downturn and budget deficits are a good idea). The SSA has deeper than deep pockets and an infinite time horizon (I hope). Why is it investing in the safest of safe assets Why not buy x% of all corporate bonds rates A or above ?

Brad DeLong writes, "If the Treasury wanted (and if Congress allowed) it could transform the SSTF into bearer Treasury bonds tomorrow."

Yes, it could. But then Congress would have to tell the truth about the REAL debt of the U.S. government.

And it's very wrong for you to pretend like those SSTF bonds are ALREADY bearer Treasury bonds. Shame on you.

Brad says the "special" Treasury bonds are "much safer and more secure than, for example, gold". I'll take the present value of my SS in bullion please. Except the bonds are not in my name or hers. They are in essence held by future politicians. They are both holder and issueer. Is the system starting to sound schemish.

I'd like to ask the lady if she had to do it all over again. Would she sign up for an individual account and survivor benefit type system.

I know somebody will whack me with transition costs. But any group of lawyers(politicians) who can design a system where bond issueer(yersterday's and today's politicians) and bond holder(future politicians)are one in the same can manage a trifle like transition costs.

I'm not for an elimination of a national retirement system with safety net provisions. I just want to take most of the money out of the politicians hands and put it where it belongs. Similarly, 401k's are preferrable to company run pensions.

So many discussions of Social Security seem to become scholastic dialogues in a search of some theoretical certainty.

Perhaps I am wrong, but it seems to me that in any nation state, laws can be changed. No security, not even tangible possession of tangible property is ever "safe". Governments can and have done extraordinary things. Perhaps we should all buy guns and gold, or at least guns and ammunition.

A large bolide or global warming that produces massive climate disruptions or sudden massive eruptions from the Yellowstone volcano or some Dr. Strangelove with his or her finger on the US nuclear trigger might change a great deal of the things we take for granted.

But in the absence of these or other such unanticipated but possible scenarios, is it not reasonable to assume for purposes of day to day life that the US government will pay its legislatively contracted debts?

Perhaps Plato was right and the problem of government cannot ever be delegated to anything resembling a democracy. Maybe all humans bar the exceptional few are knaves as well as fools.

However, it does not seem rational to either live our lives or determine public policy based on such apocolyptic assumptions.

Should one posit for purposes of this discussion that the US government will pay its debts and recognize that non payment creates a totally new set of problems?

Sam

"I just want to take most of the money out of the politicians hands and put it where it belongs."

Brian is, of course, right. And there are ways to do this. But don't hold your breath.

You see, the function of Social Security, as far as the government is concerned, is not providing a reliable retirement income to the elderly. The function is to enslave the most reliable voting group in America to the Federal government, and in this the Social Security program has been wildly successful. Nobody every makes enough off the program to achieve any real independence, and every few years politicians can haul the elderly out--WWII veterans, and those who built this country--and watch them shake in fear as the politicians threaten to set a match to their meager checks if they don't line up and vote the right way.

Actually, the politicians are a little more subtle, claiming their opposition are the ones who will light the check on fire if they don't vote the right way, but it's the same thing.

For those who believe in centralized political power, the ideal, of course, is to put all of us in this position of craven dependency one way or another, and this is one reason a government monopoly on health care is one of the Holy Grails of the Left.

"I think point 2 is a fairly weak argument. If the govt wanted to raid the social security trust fund, it could do so by "cutting" payroll taxes and "raising" income taxes."

Yes, Robert, and this is precisely the point: the scenario you suggest is functionally identical to our actual situation. But by doing it in the manner you suggest, they would have to actually admit to the voters that they were doing it, and that wouldn't fly.

We have the system we have (which is the same as every other country's social security system) because when it was established no one who got benefits had paid into it. To do otherwise would have required waiting a generation for the assets to accumulate. The social security system is not a shell game. It was designed and must be designed as a pay-as-you-go system. That system is vulnerable to demographics -- no one could have predicted the baby boom, which was great for the retirement package of our parents (nicely augmented by measures taken under the Nixon administration). Everyone could predict the consequences of the baby boom. The 1983 decision to raise payroll taxes was taken in response to those predictable consequences. That decision has been undone by the recent tax cuts.

I'm glad I moved to Canada, where the social security deficit is real but manageable. Plus we have single-payer medical insurance. Believe me, if you're not super-rich, it's great. If you are super-rich, you can always buy what you need in the states or Switzerland.

Someone pointed out on the SS thread a few days ago something that needs to be remembered. SS is not simply a retirement system; it also provides insurance in the form of disability income and survivor's benefits.

Also, most people don't understand how benefits are calculated. They are related to how much you paid in but with the first so much you've paid in worth more than the later; this progressive calculation is meant to help low income workers. Another item is that about the max an individual worker retiring today can get is $1400 a month in today's dollars; we're not talking vast fortunes here.

Now a question for you economists. I thought one argument against investing in private stocks, etc. was that SS provides a guarantee against rampant inflation eroding the value of what you get. Is this true?

Krugman thinks that bogus Treasury Reports are adding to the confusion of people like your writer.

http://www.nytimes.com/2004/03/05/opinion/05KRUG.html

I don't know why no one has brought up the real solution to the Social Security "Crisis". There is a simple solution to the problem that will leave the country vastly better off than if there was never a problem in the first place. The only solutions I ever hear are either a)raising taxes, which with the 4 options presented in Brad's post is obviously a waste while there is a current SS surplus, or b) cutting benefits, which has a few drawbacks of its own.
Neither one is a solution because the problem is not a lack of money. The problem is a demographic imbalance. If every senior had a $1m nestegg then there would still be only 3 workers for every retiree by 2040, which is not enough. Rampant wage inflation will quickly transfer those nest eggs to the productive sector of the economy.

The real answer is immigration. The US has the ability to turn on the immigration spigot and allow 50 million or so young adults into the country. They'd pay the SSN taxes and even out the baby boom demographic bubble, while also providing the work force needed to keep the economy on track. Now this is stealing a important resource from the rest of the world of course. Europe, Japan, even China will have average age populations > than the US in 20 years. But you can't make an omlette without breaking a few eggs. The thing is we've got to start soon in liberalizing our immigration laws. If we start letting in 10-15 million 18 - 30 year olds each decade between now and 2040, I am confident the whole SS crisis will just evaporate, while providing some much needed youthful invigoration to our society. If we give priority to Indian programmers and engineers we can solve the outsourcing problems too.

The problem, Teddy, is who's going to create 50 million new jobs for these people?

Brad thinks that the political/economic arguments of the two approaches are in close balance, but that the current approach is slightly preferred.

Brad (and probably many other posters) are more qualified than I to argue which approach is best. But, if they are close and the future is unpredictable, a prudent and pragmatic answer would be to pursue both strategies - - half the surplus to T bond and half to non-governmental assets. Diversification is a pretty standard investment strategy.

Argument #1 seems to rely on the rate of return the SSTF earns, which is pretty much irrelevant to how Social Security obligations are actually funded. As the Social Security surplus decreases (and eventually becomes a shortfall), the question of how to fund both Social Security and the other programs that are affected by the decreased surplus depends on political decisions about raising taxes, borrowing money, or cutting programs (including possibly cutting SS benefits). It does -not- depend on the size of the SSTF except in as much as the size of the fund has symbolic, political importance. To see that this is true, ask yourself what would be different in practical terms if the SSTF was, for example, twice as big as it is now, or if it didn't exist at all. Not much, except for the political/symbolic aspects. The practical problem of how to fund Social Security obligations would be the same (though the political debate would be changed). Because the size if the SSTF is pretty much irrelevant, the rate of return on the SSTF is pretty much irrelevant.

IMHO, it's all actuarily equivalent. Future social security payments are pledged to be paid out of future worker's taxes, and what you name the money shuffling process is irrelevant.

1) When banks buy an investment, they're laying claim to future worker earnings, just like the SSTR. Unless you think changing the bond/stock allocation of the US significantly changes long-run growth, it doesn't

matter.
2) If I want to move some money from my left pocket to my right pocket, it doesn't change anything if do so by putting it all in a 3% money market account and get the same amount in a 3% loan. No one would

"default" on the current SSTR just for kicks; it'd only be a laughable attempt to cover up one of the budget threesome: running a deficit, cutting spending, or raising taxes. The "run it through the banks" system doesn't

change anything; if you want to run a deficit, you'd issue new bonds to pay off the money you owe the banks. If you want to cut spending, you just cut spending. If you want to raise taxes, you raise taxes.
3) I don't see how the incentives for politician behavior would be changed. It's not like everyone's unaware that we're going to have budget shortfalls in the future due to SS.
4) I think this is actually a good point; it creates all sorts of horrid opportunities for political market interference - most importantly, political interference by unelected officials, as I'm sure the people making the decisions

would be.

"But when the majority of the population and the vast majority of the voters are recipients of government largesse as their primary income, I don't think we'll have democracy at all for long."

http://www.cnn.com/ELECTION/2000/epolls/US/P000.html

Sic, only 22% of voters in 2000 were over 60. Even if that population group doubled their take they wouldn't be a majority, and I also sincerely doubt it's possible to put together a set comprising even 25% of the

population that has "government largesse as their primary income."

BTW, can I just point out how laughable it is to think that the Social Security program will be completely eliminated? It's about as mom-and-apple pie as defense programs; not going to happen. Maybe some tax and

retirement age tweaks, but the political likelihood of anything else is zero.

Our country is a system set up to funnel money to the rich. We can debate the merits of one approach over the other, but at the end of the day, we were had. Seems the bane of man is bad government.

Ask yourselves this question, regardless of the academic merits of the four options, do you want to keep paying into SS knowing that your chances of receiving any future benefit are small? Payback in debased currency doesn't count. We can talk about the merits of the different approaches, meanwhile we're going to end up broke.

tbrosz, Teddy: "The problem, Teddy, is who's going to create 50 million new jobs for these people?"

(1) The demand created by retirees.
(2) As that by itself can't do it, increased productivity to produce the goods and services for providing them with a living and an incentive to work.
(3) It has to be properly financed, possibly (i.e. surely) by creating new money.

If we don't have (2), we will be in deep shit.

Plus, in the absence of spectacular productivity growth that may be a "Ponzi scheme" in a different guise -- all those immigrants will supposedly also accumulate SS entitlements, and will create another demographic "hump". If for every retiree you import N immigrants (let's say M to provide services to the retirees and N-M to provide the living for themselves and for the M), then you will have N*(survival rate) future retirees, at which point you will have to import on the order of N-square, unless the N have enough children, and/or productivity grows accordingly. But the productivity impact is tied to how much of the services has to be provided in person (e.g. personal care) versus how much can be automated (production of goods). And we are not even talking about energy consumption of that many people (oil depletion, anybody?).

The bottom line is, aside from all monetary and financial concerns, only strong productivity growth and strong investment into industries needed by future retirees can save us. Finance and money can and will adjust to these fundamentals.

I'd like to endorse Teddy's point here, as a ceteris not included in the paribus, besides which, pace Samuel Huntington, many such are already here, legally or illegally. The population of Mexico is projected to reach stabilization at 250 million. What are they all to do- drink cactus juice? In Europe, the demographic problem is much more severe. I've read a projection at the "Bonoboland" website that, within a generation, 40% of the active work force in Spain, Italy and France will be of North African Muslim origin. (So why do you think the European reaction to Islamic terrorism is rather different than our own, though what exactly the French are up to, I don't know? At any rate, if anyone thinks that modernizing Islam will occur because we send National Guardsmen to Iraq, perhaps they should think again.) The alternative solution to the basic demographic problem would be to invest retirement funds abroad and live off the proceeds. But, of course, the reverse is happenning, as we continue to export our claims on capital income. And it is hard to imagine that such a program would be politically feasible, (though, of course, investing in multinationals already amounts to investing abroad), and just think how many Smedley Butler brigades we would have to send abroad to enforce our claims to returns on investment, which brings up the manpower problem again. Perhaps we should start to think about the required investment in human, social and "cultural" capital for bringing about a suitable work-force.

Adam Smith is with R.C. on this, it seems...

"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment. The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment."

"If so, what was the great virtue (explain slowly for the non-economist) of piling up with huge SS surplus."

Well in real world terms it's called a "bridge loan". Social Security is, always was, and pretty much always will be a pay as you go system. The overwhelming majority of benefits have, are, and will be funded by payroll taxes. But between 1946 and 1964 we had something known as the "Baby Boom", hence "Boomers" which created a huge demographic bulge. Which in turn created the classic "pig in the python" problem, what happens during the thirty/forty year period that these people (including me) are collecting benefits from Social Security during a time when they represent an outsize portion of the population.

Well the solution arrived at was to charge these folks more while they were still working and give them a credit. In macroeconomic terms the form of this credit does not really matter, benefits flowing out of the Treasury Department have to be funded by taxes flowing in. The point was to create an enforceable claim when budget decisions were made in the future: "hey we paid for these benefits, and these bonds are the proof".

The real question is how do you use these excess funds in the meantime. Equity suggests that you use them in a way that minimizes the strain of moving the pig through the python, which in turn suggests paying down long term debt, basically the same principle as making advance payments on your mortgage. How do you survive a 30-40% income hit? eliminate the expense that has taken 30-40% of your check all along. Result - same amount of expendable income.

That was the Clinton model "Save Social Security First" by paying down the accumulated National Debt. And it was working so well that Greenspan publicly warned that we would run so short of long term debt instruments that the traditional "Run to Safety" tactic (buying Treasuries) in times of economic turmoil would no longer be available: no Treasuries, no place to run.

If nothing else Bush solved that problem. We have plenty of long-term bonds now.

Sorry, a few words were missing from that passage:

"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment. The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment."

Sam Taylor writes:

"So many discussions of Social Security seem to become scholastic dialogues in a search of some theoretical certainty. ... [I]s it not reasonable to assume for purposes of day to day life that the US government will pay its legislatively contracted debts?"

I would put this a different way: It is fundamentally absurd to believe that we could ever design a pension insurance system that would survive the financial collapse of the federal government. Anyone who tries to sell you on an alternative system on the theory that his proposed system would survive that event is deluded or intentionally lying to you.

Larry wrote, "If so, what was the great virtue (explain slowly for the non-economist) of piling up with huge SS surplus."

I believe the claim is that it represents increasing government (and hence national) savings. More savings means more investment (ceteris parabis, which isn't so clear in this case).

Thus, when people say the T-notes held by SS have no value because they're not backed by real assets, they're not telling the whole story. The first answer is that they're backed by the governments ability to tax. One could reasonably reply, "So what? That doesn't create any wealth." But ostensibly, by increasing national savings *when the taxes were originally levied*, the taxes led to increased future GDP.

Not saying I actually believe this, but I think that's what the claim is.

tbrosz wrote, "How about a #5? Set an eventual goal of letting the citizen plan and pay for his own retirement, maybe supplemented in great need by welfare safety nets, and then begin a long-term plan to phase this in?"

And you propose to pay for this...how?

The government issues debt. If SS does not buy it someone else will need to. So the argument that "when these bonds are redeemed, the money will have to come out of the general fund" doesn't mean much; part of the general fund is devoted to debt service regardless of who holds the debt. If there is no demand for bonds from SS the debt may well become more expensive; whether this is a good or bad thing is open to debate.

It amazes me how little faith some people have in their government. As if America was not a democracy but some kind of conspiracy designed to screw everyone.

To call the SS bonds worthless is like saying the check I just wrote you is worthless. You are questioning the US Federal Governemnts promise to pay. I thought that Alexander Hamilton resolved that for the US in the 1790s. The United States pays - period. Were the Civil war debts defaulted on? Were the WWII debts defaulted on? Have the Feds EVER run away from their debts? Would the public ever allow it?

Actually this gets down to the heart of the matter. The only way SS is in "trouble" is if one of America's political parties and its supporters decides that it is OK to default. The argument of INEVITABLE SS disaster is actually a plea for support from the american public to let the system go down.

So do you want the system to go down? It is your opinion that will determine the outcome.

To recreate a world without a SS system is to increase the reverse lottery nature of the economy with the vast majority of Americans doing quite fine thank you and an underclass of the unfortunate becoming more unfortunate. My guess would be the percentage of abjectly poor would increase from the current 10% of pop to 20%.

Hey, maybe it is worth it. Maybe for higher growth rates and the cure for Cancer it is worth it to increase the risk of abject poverty in an American's life time. All SS does is to reduce the risk and sets a floor on destitution in old age.

It's a political choice not a confrontation with INEVITABLE forces.

Long & short, the effect of the trust fund is to either reduce borrowing or reduce debt today (depending upon whether the entire budget is in surplus or deficit). If you cut gov't borrowing by $100 today then gov't should be able to borrow $100 in 2020 (or whenever it has to in the future) with no ill effect on the economy. In fact, by cutting borrowing today by $100, you should be able to borrow even more in 2020.

This is like a person who knows he will have to buy a new car in 3 years but also knows he won't have the cash for the $500 down payment. If pays off a $500 credit card balance today he will be able to put that down payment on his credit card in 3 years. Of course, if he needs $5000 in 3 years paying off $500 today won't solve the problem...but it will make it better by at least $500.

Now this is perfect execept for the following possibility: Over the next 3 years the person charges up his credit card by $500 with crap he wouldn't have otherwise brought. In that case paying off the $500 accomplished nothing as far as getting his new car.

If the SSI surplus causes the gov't to spend more than it otherwise would, then it isn't helping fix the problem. But what evidence is there that this is happening? Unlike an individual the gov't doesn't go to a MAC machine and say 'Hey, I have a $500 balance...I'm going out and party!'. Gov't spending is something like 80% on auto pilot and the remaining 20% seems to be driven by the economy (bad economy increases spending, good economy decreases it).

I think the Professor is trolling. ;-)
=========

" **I have a simple question. If the money piling up in the SS trust fund is used to buy government bonds, this implies that when these bonds are redeemed that this money must come out of the general fund, possibly raising taxes. Is this correct?**"

It is exactly correct, except for the 'possibly'. Congress will certainly have to raise income taxes (or take equivalent steps) to fund promised SS benefits through payments on the T bonds just exactly as it would have if the T-bonds didn't exist, to the penny.

"If so, what was the great virtue (explain slowly for the non-economist) of piling up with huge SS surplus."

It let's some people say SS is "fully financed to 2042" in a manner that is politically useful for them.

It also has for 20 years let Congress happily take 2 points of tax collected as "FICA" on paychecks and spend it for general revenue purposes, which is more convenient to it than increasing income taxes do to the same thing.

"I believe the claim is that it represents increasing government (and hence national) savings. More savings means more investment..."

and

"The government issues debt. If SS does not buy it someone else will need to."

Imagine the SS trust had invested the SS surplus in real economic savings to finance future SS benefits and insulate them from future fiscal and political pressures. This is an increase in national savings.

Accept the (dubious) argument that absent the spending money obtained from the SS surplus in our world, Congress then would have spent every bit as much as it has, with no other change in the tax structure. This would have required the govt to borrow more to finance such spending, so an offsetting increase in borrowing would occur elsewhere. The net change in the fiscal position of the gov't is exactly zero.

The *one* real difference is that in the former case ** future SS benefits are fully funded and safely insulated from future fiscal and political pressures**, while in our real-world latter case they are not.

This is what is ducked when people make arguments along the lines of "Securing future SS benefits with real investments would have cost a 1% management fee .... so it's really better to leave future SS benefits at perpetually increasing political and fiscal risk, and save the 1%."

Accept the (dubious) argument that absent the spending money obtained from the SS surplus in our world, Congress then would have spent every bit as much as it has, with no other change in the tax structure. This would have required the govt to borrow more to finance such spending, so an offsetting increase in borrowing would occur elsewhere. The net change in the fiscal position of the gov't is exactly zero.

This isn't a dubious question. Gov't spending is certainly not easily modeled by the money coming into the Treasury dept. If it was the Clinton years would have seen massive spending increases while the Bush years would see massive cuts as revenue fell short. In reality most of the budget is on autotmatic pilot & the 'trust fund' is probably an efficient accounting tool to segregate the funds.

BTW, its an accounting tool, not a gimmick! Every large corporation uses this type of tool. For example, Pepsi-Co owns both Taco Bell & Pizza Hut. Even though they are really the same company their accounts are kept seperate so if Taco Bell 'loses' $1B and Pizza Hut profits by $2B those in charge of Taco Bell are in trouble...even though the company as a whole was really ahead by $1B.

"can I just point out how laughable it is to think that the Social Security program will be completely eliminated?"

Nobody thinks that, so there's little point in pointing it out.

"Maybe some tax and retirement age tweaks, but the political likelihood of anything else is zero."

Those'll be 25%-of-promised benefit, $7 trillion current value "tweaks", and the likelihood of that is certain.
----------

"...is it not reasonable to assume for purposes of day to day life that the US government will pay its legislatively contracted debts?"

Promised SS benefits are not a "debt" of the government but only an unenforceable promise.

After all, benefits have been cut in the past as the result of a fiscal crunch -- so is it not reasonable to think they will be again in the face of a much worse fiscal crunch?
--------

"Cash flow problems that might emerge in 40 or so years"

Cash flow problems arise in 14 or so years when *taxes must start being raised* to pay off the bonds. How does one propose to pay off the bonds without raising cash?
-----

" ... the idea that the government could default on those bonds and have no effect on the credit rating is insane ..."

That misses the point entirely. When Congress to pay off the bonds must *start raising taxes*, while it is also raising even more taxes for Medicare, tremendous political pressure will arise on it to adjust -- that is default on -- promised benefits.

Remember, it did this already once when the fiscal position wasn't nearly so dire. So why wouldn't it do so again?

Also remember, while the last cuts pushed returns on contributions down from happily positive to minimal-to-negative (i.e., lousy) any more benefit cuts will push returns to really negative for all. Which will make for much political unhappiness with SS, which will accelerate the change in its nature away from how we know it today, one way or another.

"Cash flow problems arise in 14 or so years when *taxes must start being raised* to pay off the bonds. How does one propose to pay off the bonds without raising cash?"

The bonds can simply be rolled over into regular gov't debt. At least part of them can be without any ill effects on the economy.

So the consensus is that piling up money in the social security trust fund (in the form of treasury bonds) does absolutely nothing to address the future health of social security?

The consensus is also that this piling up of money in the SS trust fund does address political problems of (1) assuring people that SS will be "saved" and (2) increasing taxes for spending today without people being aware of this.

The bottom line is that with--or even without--this piling up of money in the SS trust fund (in the form of bonds) tax revenue in the future will have go to "save" the SS program.

We did default in 1933!!! Nobody reads their history anymore. Suspension of the Gold convertability, contracts, etc. So what, now we have a continual default through the fed.

"To call the SS bonds worthless is like saying the check I just wrote you is worthless."

They are worthless as a *savings device* that will enable the gov't to avoid raising taxes to finance retirement benefits in the future.

The proper analogy is to a check that you write to *yourself* that you treat as savings, believing it will enable you to retire early by freeing you from the need to work to get the money it represents.

" You are questioning the US Federal Governemnts promise to pay. I thought that Alexander Hamilton resolved that for the US in the 1790s. The United States pays - period. Were the Civil war debts defaulted on? Were the WWII debts defaulted on? Have the Feds EVER run away from their debts? Would the public ever allow it?"

~sigh~ The public allowed it when SS retirement benefits were reduced when SS went broke last time, in 1980.

Social Security benefits are *not* a debt of the government. US Bonds are a debt of the goverment and must be paid as per the Constitution. Contracts are liabilities of the government and are enforceable in court.

Social Security benefits are just unenforceable political promises. There are even court cases saying so, shooting down claims filed by persons who sued when benefits were cut last time.

There's not a thing in the world to keep the politicians of the future from voting to reduce SS benefits if it's the thing that's politically expedient for them in a big fiscal crunch. After all, they've done it in the past in a smaller one.

A couple thoughts.

The SS system works the way it does because it supports a fiction or interpretation that workers pay in and then are repaid in return. Thus this is not a "welfare system" put rather one where current workers have "legitimate claims" on their benefits. You kind of have to take that at face value because when you dig deeper you immediately run in to fairly deep questions about the meaning of private ownership in a constitutional democracy.

However disregarding the fiction, for practical purposes SS is just another gov't statutory program which authorizes revenue collection through a regressive payroll tax and disbursments according to a formula which reflects the history of those receipts and the age of the recipient.

The decision to use a payroll tax to finance SS was primarily political (to support the fiction of individually funded pensions). It became clear in the late seventies and early eighties that demographic changes might make it difficult to continue to meet the programs promises with only payroll taxes. The 1984 reform promised to provide a general revenue stream to support SS starting sometime around 2020. The price for that promise was that SS revenues would subsidize general accounts for the intervening 40 years.

Note: there is no particular reason why the tax basis for SS benefits must be payroll taxes, or why it is more fair to switch to a system of mixed payroll taxes and general revenues in 20 years but have payroll taxes much higher than required now, except to maintain the idea that the system is independent and self financing. The portion of future general rev obligations is essentially arbitrary, set by the statutory retrun on SS trust fund bonds and decisions made in the future about how quickly to redeem them. Note, it is not necessary to technically default to fail to meet the obligation to provide general fund support for SS. If future projection are always sufficiently dire it is possible that the trust funds must continue to grow indefinitely to provide for the huge unfunded liability lurking 40 years in the future.

The practical value of running SS surpluses now is that it allows the govt to reduce its publicly held debt. Theoretically the dead loss burden caused by tax distortions is smaller if tax burdens are fairly constant over time rather than sometimes rising to high and costly levels. The higher SS tax levels now were supposed to increase gov't revenues overall to a level that would support the increased expenditures promised to baby boom retirees.

OF course by giving all that increase and more to Income tax payers, Bush has created a situation in which taxes must be much higher in the future to cover not just the SS obligations but also service the public held debt. That is why Brad and others are beating their heads against hard objects over this administration's economic policy (well one reason among many)...

Anyway back to the problem of social security. Once we accept that SS will be financed partly out of general revenue (something opponents seem to refuse to concede) then the question becomes somewhat simpler. Can we support the anticipated level of expenditure based on the expected size of the revenue base (ie the US economy)? If not then benefits will have to be cut. Shifting to some private investments is unlikely to change this and may likely make the problem worse, the government can certainly command a higher share of national output through higher taxes (Laffer notwithstanding) but basic supply and demand arguments suggest that seniors acting independently through capital markets are likely to get a SMALLER share of the national pie as a result of their demographic disproportion.

Finally a note about the alternatives of having the government participate as an owner in private enterprise. The premise of our capitalist system is that the economy functions most efficiently when free of government entaglements. We expect the government to set ground rules for private activity and leave private enterprise alone to make the best of things under those rules. The govt is financed by receiving a share of the returns through taxes on income and payrolls. Instead of collecting 20% of the income of a corporation through the tax code, we could simply declare that the gov't owns 20% of everything and let them get their share the same way others due. For various reasons we don't do that and probably shouldn't. Most of these arguements about whether to take some portion of trust fund money and "invest" it actually come down to arguments that income taxation is not the most efficient method for the government to collect the share of national ouput it needs to fulfill its functions.

"When payouts from Social Security exceed contributions, the Treasury must do one or more of three things1) the official debt of the U.S. must be raised, 2) taxes must be raised, or 3) spending must be cut."

Why not (4) sell off federal assets?

The right-of-way beside, over, under, or near interstate highway property ought to be worth something.

Auction off parts of the RF spectrum currently reserved for military or federal agnecy use only.

Sell used military bases to golf-course developers.

Sell federal parks to Disneyland-like corporations.

Might not even have to SELL the asset. Lease it out, hire it out, license use ...

"'How does one propose to pay off the bonds without raising cash?'"

"The bonds can simply be rolled over into regular gov't debt"

Bonds are paid off by rolling them over? Cool.

Can I do that with my mortgage too? Pay it off by rolling it over?

"The bottom line is that with--or even without--this piling up of money in the SS trust fund (in the form of bonds) tax revenue in the future will have go to "save" the SS program."

This is saying something a lot less insightful than it first appears on the surface. Of course the goods and services provided to retirees in the future will have to be produced in the future. This is true no matter what type of system we have.

I challenge you to analzye this scenero:

1. Gov't taxing and spending remains constant, however SSI taxes are cut so that no money 'piles up' in the trust account.

2. What are the long run implications of this? If the theory being presented here is true, this scenero should be no different than our present scenero.

"Bonds are paid off by rolling them over? Cool. "

"Can I do that with my mortgage too? Pay it off by rolling it over? "

Errrr, actually you certainly can do that. Debt is rolled over all the time. Also it's quite sane to reduce debt today if you know you have to borrow in the future. This is no different than the 20 year old who starts paying off his credit cards because he wants to buy a house at 25.

"It amazes me how little faith some people have in their government. As if America was not a democracy but some kind of conspiracy designed to screw everyone."

What the hell do you call when politicians grab money they will not be held accountable for and promise future politicians will pay it back(through higher income taxes).

If I thought they were that visionary then I would say its an attempt to make people more dependant on gov't. They have been successful in making SS an ever increasing part of retirees income. When the taxation increase kicks in to generate revenue for the trust fund, people will be less able to save for their retirement. Thus, increasing their reliance on gov't provided SS. Why is there such a visceral reaction from the left to individual accounts when they have unlimited faith to just magically fund the Trust Fund.

In reality, I just call it an unethical money grab that happens to play into the hands of a few truly leftists.

Just look at Brad's description of the 4 ways to look at the Trust Fund while he fawns over Quiggan's article advocating Socialism.

Yea Brian, there was a grand conspiracy by the left in the 1950's to increase people's lifespans so they could be more dependent on the gov't! How does the fact that more and more people are building up large reserves in their 401K factor into the grand conspiracy?

"Bonds are paid off by rolling them over? Cool. "

"Can I do that with my mortgage too? Pay it off by rolling it over? "

Yeah, I just did it. It's called a refinance. Wells-Fargo cut a huge check to Chase Manhatten. And every longterm bond that came due in the Reagan/Bush era was paid off the same way - they sold new bonds.

You sign up for Econ 101 thataway.

Boonton

First, brush up on your reading skills. I did not give them credit for a conspiracy, they are not that smart. 401k's are good. I wonder what Kerry thinks about uping the income limits for 401k contributions and creating new tax free savings accounts. Do you deny higher taxes would lessen peoples ability to save for retirement on their own. How about the black man who lives and works to his life expectancy of 65? Do you think he might see conspiracy. Jesse Jackson, Al Sharpton, Maxine Waters, Chuck Rangel and John Conyers see conspiracy whenever blacks get the short end of the stick. Where are they now? Licking the boots of white liberals who tell them Republicans would slap individual accounts and survivor benifits on them. Now who in their right mind would take that deal.

ME!

Boonton
"I challenge you to analzye this scenero:
1. Gov't taxing and spending remains constant, however SSI taxes are cut so that no money 'piles up' in the trust account.
2. What are the long run implications of this? If the theory being presented here is true, this scenero should be no different than our present scenero."

Boonton you have me pegged, kinda. I am suggesting that the situation would be more-or-less equal. Let's say that the SS tax wasn't increased but, rather, general tax revenues were increased to finance the deficit.

How would this situation differ from, say, piling up the SS surplus? I really don't know but I, with my small brain, can't really tell the difference.

What an unappetizing set of alternatives!

Ah well.

I finally decided that the Baen board needed some "stand up for Brad de Long" words, so I posted some in Politics.

Professor DeLong seems to feel his four arguments leave the matter a close thing, tied 2-2.

I'm surprised -- especially considering the way this blog castigates "Liars!" in government -- that he doesn't see a clear tiebreaker.

R.C. and millions of other workers have been long been told, and believed and trusted, that taxes taken from their paychecks labeled "FICA" were deposited as economically meaningful savings in a "trust fund" as segregated financing for their future benefits -- keeping them "out of the Treasury forever" as FDR put it, and secured from any future political fight for general revenue -- insuring there was no chance that any future fight over tax revenue would someday make their benefits diminish or disappear.

The breadth and strength of this belief is well expressed in letters such as R.C.'s -- and in the shock and disbelief expressed by countless like R.C. when they learn it is *not* so, and that in fact, in the Professor's own words "we have lost this insurance -- politics may someday make the SSTF disappear, and no court or lawsuit will ever be able to stop it."!

Yet R.C. and the others did not gain their belief by *accident*. They were lead to it by the government and politicians of past years, over and over. Otherwise, clearly, they would know otherwise.

So I would think that as a matter of *honesty* to its citizens, the fact that citizens have been lead to *believe* by the government that the trust fund was administered "to assure politics will not make their benefits someday disappear" should have required government to *in fact* administer the trust fund in that manner. Instead of as it has. Which opens it to the charge of "Liar! Liar".

Fundamental honesty in government seems a persuasive tiebreaker to me.

Contrary arguments such as his #1 and #4: "Yes, we made you think your benefits would be funded and secure, but it's *really* better to expose them to ever-growing political risk in intensifying fights over tax dollars in coming years so that we can save 1% on administration costs and not worry about our own incompetence in managing real savings, trust us on this...."

... for some reason just do not carry the same weight in my mind.

Larry,

"How would this situation differ from, say, piling up the SS surplus? I really don't know but I, with my small brain, can't really tell the difference."

Let's say you need $500 10 years from now. What is the difference between reducing your credit card balance by $500 today & waiting 10 years versus doing basically nothing. Clearly it is better to go into your cash crunch 10 years from now $500 lighter in debt.

Jim,
"Contrary arguments such as his #1 and #4: "Yes, we made you think your benefits would be funded and secure, but it's *really* better to expose them to ever-growing political risk in intensifying fights over tax dollars in coming years so that we can save 1% on administration costs and not worry about our own incompetence in managing real savings, trust us on this....""

My above response to Larry indicates why your logic here is flawed. The SSI trust fund is not an example of incompetence in managing real savings. It is, actually, quite effective at real savings. It isn't SSI's fault that it is impossible to fully save for a period where nearly half the population will be retired.

"Do you deny higher taxes would lessen peoples ability to save for retirement on their own. How about the black man who lives and works to his life expectancy of 65?"

Brian, a life expectancy of 65 is not as good as a life expectancy of 75. That's a fact regardless of whether your retirement is coming out of a 401K account or from SSI. This isn't evidence that blacks got the short end of the stick with SSI unless you want to claim black males were on a parity with white males *before* SSI and somehow SSI made black males live shorter lives.

You are also overlooking the spousal benefit with SSI. While I'm sure the black man who dies at 65 would rather live to 75, it is of some value to him that his wife will be able to collect benefits for her retired years....unless he really hates his wife....

Boonton writes,
"Let's say you need $500 10 years from now. What is the difference between reducing your credit card balance by $500 today & waiting 10 years versus doing basically nothing."

But this is not really about social security per se but about reducing the debt today. How is paying off this debt with a social security tax different from paying off this debt with general tax revenues? And, if SS payroll tax is used to pay off this debt does this reduce the need to raise taxes in the future to "save" social security.

Forgive my small brain.

""Bonds are paid off by rolling them over? Cool. Can I do that with my mortgage too? Pay it off by rolling it over? '"

"Errrr, actually you certainly can do that. Debt is rolled over all the time"

Cooler and cooler. So when you roll over a debt your debt is paid off and you don't owe a debt any more. Which is the English language meaning of "paid off" (as opposed to, say "replaced" or "refinanced").

I've got to try this some time, credit cards first!
----
"Yeah, I just did it. It's called a refinance.".

You paid off your debt *too* by refinancing it! I must be going to the wrong bank, mine only offers me a lower interest rate. I still come out of it owing the same amount of debt! I refinance $100k and still owe $100k. It's not paid off. What's wrong?

"And every longterm bond that came due in the Reagan/Bush era was paid off the same way - they sold new bonds. You sign up for Econ 101 thataway."

Ah, well *after* you sign up for Econ 101 you might learn this: The original question was "How do you pay off a bond without raising cash?" because payment of SS benefits in excess of payroll taxes collected is going to need the govt to come up with *net cash flow* from somewhere.

The insightful answer: "You replace a debt with another debt of equal amount" hardly raises *net cash flow* eh? That's a wash. Not a dollar of cash flow was raised during the Reagan era by rolling over bonds -- only by issuing new ones.

Be warned, you aren't going to get finish Econ 101 putting answers like that on your quizzes!

What Booton seems to be imagining is that to get the cash flow needed to pay off SS bonds and pay SS benefits, the Treasury can borrow the money without having to increase its borrowing! In lieu of the unpleasantness of collecting more taxes.

That's a nifty trick -- get cash flow by borrowing the cash without increasing borrowing! Can I do *that* on my credit card? ;-)

Or maybe he's thinking: what the heck, just increase borrowing by as much as it takes, and you still don't have to collect taxes. Neglecting the cost of compounding interest on compounding borrowing that must be paid in cash obtained by taxes -- or by increasing borrowing exponentially.

In which case I remind him of the GAO projection of this scenario and the year in which they have government ending because interest expense alone becomes larger than the entire gov't today and is rocketing straight upward. http://www.gao.gov/new.items/d01385t.pdf

"But this is not really about social security per se but about reducing the debt today. How is paying off this debt with a social security tax different from paying off this debt with general tax revenues? And, if SS payroll tax is used to pay off this debt does this reduce the need to raise taxes in the future to "save" social security."

It's significant in the sense that reducing debt today enhances your ability to borrow tomorrow (if you have to). Your question would be analogous to how that $500 credit card balance would get paid off (do I get a 2nd job or work overtime at my current job or cut my spending).

To the degree that the Trust fund reduces what would have otherwise been gov't borrowing/debt today it makes SSI's future easier to deal with because it expands the number of possible solutions that can be employed. Also, since reducing debt is thought to increase long run economic growth the economy of the future should be larger than it otherwise would have been. A larger economy would make SSI's costs smaller.

"What Booton seems to be imagining is that to get the cash flow needed to pay off SS bonds and pay SS benefits, the Treasury can borrow the money without having to increase its borrowing! In lieu of the unpleasantness of collecting more taxes."

No, my point is that the cost of the baby boomers can be financed thru borrowing tomorrow if debt is reduced today. This is sensible since the debt reduction of today would primarily hit the baby boomers.

"Or maybe he's thinking: what the heck, just increase borrowing by as much as it takes, and you still don't have to collect taxes. Neglecting the cost of compounding interest on compounding borrowing that must be paid in cash obtained by taxes -- or by increasing borrowing exponentially."

The compounding works in your favor. Again, if I need to $500 ten years from now & I pay off $500 from my credit card today...ten years from now I should be able to borrow that $500 on my credit card again. An added bonus will be the interested I've saved myself over the last ten years!

BTW, SSI's bonds don't have to be paid. Only its benefits do. Increasing the SSI surplus today will increase the bonds being held in the trust fund but that doesn't increase the future benefits that have to be paid.

I think we should be reminded of our original issue. Social Security's 'Lockbox' system where its surplus is 'invested' in gov't bonds. This system works as well as any other system, it is not government 'raiding' the retirement fund.

Whether you have a private pension, SSI or other system, if your promised retirement benefits are allowed to grow faster than your ability to finance them you will run into a crunch. SSI's benefits are being implicitly raised each year by improved longetivity. Why should anyone be shocked that when gov't increases benefits the tax burden of those benefits also increases?

SSI's 'trust fund' approach is not the problem. The problem is that we are trying to create a society where half the labor force is 'retired' and that is simply not viable under any retirement system barring some massive increase in productivity.

"Jim: ...The SSI trust fund is not an example of incompetence in managing real savings."

I didn't say it was -- clearly, as it doesn't even try! I just noted that our host said an argument against having any real savings in the trust fund -- as we don't -- is that it would be hard to manage them.

"It is, actually, quite effective at real savings."

There are zero real economic savings in the trust fund: $0. Real economic savings are an economic asset one can liquidate in the future to obtain cash needed for spending, *without* relying on income or borrowing. They save you from the need to either earn income of $x (in the case of government to impose taxes of $x) or to borrow $x in order to have useable cash of $x

Now look at the effect of the SS trust fund (as we have so many times). In any year after 2018 there will be a SS deficit of benefits promised in excess of payroll tax financing of $X.

[] Without the SS trust fund, the govt would have to close this deficit of $X using general revenue (income taxes) or borrowings of $X.

[] With the SS trust fund, the govt will close this deficit by making payment on the bonds in the trust fund in amount of $X, which will have to be financed using general revenue (income taxes) or borrowings of $X.

Now as $X=$X the situations are identical. Ergo the trust fund saves not one penny of future general revenue or borrowing needs compared to the situation where it did not exist. The real economic savings represented by the entire trust fund = $0, zip, nada, naught.

"It isn't SSI's fault that it is impossible to fully save for a period where nearly half the population will be retired."

Bah, c'mon. We are talking about just $1 trillion in the trust fund over the last 20 years. Over the same period $11 trillion has gone into real economic savings in private retirement accounts like IRAs and 401(k). The SS trust couldn't have saved 1/11th, 9%, of that? Who are you kidding?

An interesting side note to the SSTF argument is that there never was a surplus, much less a surplus for as far as the eye could see. There were just a few years where some of the SSTF cash was used to pay down the debt instead of fund current spending in other areas of government. While the SSTF is the largest of the non-existent trust funds it certainly is not the only one. Orwell would be proud of us.

"There are zero real economic savings in the trust fund: $0. Real economic savings are an economic asset one can liquidate in the future to obtain cash needed for spending, *without* relying on income or borrowing. They save you from the need to either earn income of $x (in the case of government to impose taxes of $x) or to borrow $x in order to have useable cash of $x"

This was the purpose of analyzing a true 'pay as you go policy' where the SSI trust fund accumulates no surplus or deficit. Clearly reducing debt today improves your prospects tomorrow. Savings is defined as Income - Consumption...or in the case of SSI Revenue-Benefits.

"[] Without the SS trust fund, the govt would have to close this deficit of $X using general revenue (income taxes) or borrowings of $X.

[] With the SS trust fund, the govt will close this deficit by making payment on the bonds in the trust fund in amount of $X, which will have to be financed using general revenue (income taxes) or borrowings of $X."

Assume that the SSI trust fund's surplus was $Y in 2004.

In 2018 without the trust fund, the gov't would have to close a deficit of $X+$Y thru borrowing, taxes or benefit cuts.

In 2018 with the trust fund the gov't would have to close a deficit of $X.

Disturbing & amazing that the Professor and so many posters on this site think that the gov't bonds in the SSTF are an asset.

The SSTF is an entity of the Federal Government. You can write IOUs to yourself, but that does not create an asset. You are on both sides of the ledger; no bank will consider that an asset.

How would the situation change if the gov't distributed the SSTF Tsy's to Plan Beneficiaries? They would have exchanged one form of IOU for another -- an annuity-like contract swapped for a bond with defined terms. But both IOUs of the same entity.

SSTF liabilities can be "funded" only by ...

1. dedicating an adequate income stream (as with muni revenue bonds),
2. attaching an owned asset (like the Federal Parks) as collateral,
3. or buying a asset and dedicating it to the Plan Beneficiaries. Examples of such are a liability of a 2nd party (e.g. corp bond), an equity interest in a business, or ownership of a real asset).

" my point is that the cost of the baby boomers can be financed thru borrowing tomorrow if debt is reduced today. "

You are in complete denial.

Look at those GAO projections again. That *is* with 'debt reduced today' -- those numbers were based on the assumption of surpluses continuing for years to reduce the debt, they were projected during the boom before the recession. The goverment ends in what year? why?

Time to get in touch with reality.

"BTW, SSI's bonds don't have to be paid. Only its benefits do. "

;-)

"Increasing the SSI surplus today will increase the bonds being held in the trust fund but that doesn't increase the future benefits that have to be paid."

Of course, it doesn't increase the funds available to pay benefits either, as the bonds have a net savings value to the Treasury of exactly $0.00. ;-)

The solution is incredibly stone simple, Brad.

Borrowing from the extremely successful (India)n micro-loan bank concept, the Fed would continue to deduct SS/MediCare funds from your paycheck.
However, everyone would have electronic access to those funds, and be able to "borrow" or in this example, "micro-loan" them back, up to the limit of the accumulated SS deductions accrued.

Those "micro-loans" could be invested in stocks, put into CD's, T-bills, or building an addition on your house, it would be up to the "borrower".
After all, it's their money!

Fed would automatically deduct an *additional* repayment installment for each micro-loan made. Since Fed controls huge sums of money, both in SS funds and Treasuries, those installment costs would be far, far lower than a second mortgage.
Again, it's *your* money, and no need for pre-qualifying the loans, appraisals, inspections or any of the huge overhead on equity loans.

BOOM! The US economy would take off like a sky-rocket!!! At the same time, our SS Trust Fund would continue to *grow* at the same pace as it does today, since micro-loan borrowers would be paying back interest, the same as Fed collects on Treasuries. Only now that repayment is secure
domestically, instead of hinging on Japanese and Saudis who may decide someday to bail out.

I'd much rather pay back 3% to the Fed SSTF, than 6%, plus fees and points, to some mortgage finance company getting their hooks on my house, especially since I can beat 3% by investing.

The nice thing about this SS MicroLoan program is that the amount of loanability grows with age, so that when you're in your school-child years, you can borrow when you need it most, and still have time to pay it back before retiring,
(and be able to retire knowing you have the SS!)

The (India)n micro-loan bank program suggests that repayments run 98%(+) on average. And after all, it's *your* money, so if you lose your job and never work another (reported) day in your life, the Fed SSTF hasn't lost a penny. You have.
A bad micro-loan default, you don't get your SS!

And here's a thought. If we applied $145B from DoD Star Wars and Brain Fart programs, and set up micro-loan banks in Islamic countries, that assure starving, disenfranchised folks can pull themselves up by their sandal straps (again, with 98%(+) repayment historically), then the terroristas and CIA agents-provocateur would lose their fresh recruits. Peace would blossom.
Who is going to blow themselves up if they can get a micro-loan, build a little grocery stall, or buy a little motocart taxi and make a living?

Maybe I'm just a simple fool. Peace is so easy.

But, of course, peace, a booming US economy and Social Security isn't what the Neo-Lib's want! They *want our SS Trust Fund*! Call it a little MacroLoan to pay down the huge deficit spending on DoD, and the grotesquely illegal transfer of public treasure into profiteers' bank accounts,
added and abetted by the Royals and Big Banks.

Is this a great country, or what?!?

Decide now.
A. SS micro-loans, and world peace?
B. Theft of your SS, and world war?
Duh-h.

Vote the thieving wack bastards out in November!

"Assume that the SSI trust fund's surplus was $Y in 2004.

"In 2018 without the trust fund, the gov't would have to close a deficit of $X+$Y thru borrowing, taxes or benefit cuts.

"In 2018 with the trust fund the gov't would have to close a deficit of $X."
~~~~~

Gotta change the subject, eh? I'm talking about financing *Social Security benefits* and you want to talking about financing the general govt budget.

And you are following exactly the tact I described above, saying it is good to sacrifice the promised security of SS benefits in order to add a little more financing to the general gov't.

But a whole lot of SS participants who want the security for their benefits that was promised to them wouldn't agree with you making this choice for them. ;-)

And in any event you are wrong, as I spelled out just above but you have already forgotten.
Social Security and the rest of the government are all part of the same total government. If more savings were put into SS -- real economic savings in the trust fund -- an offsetting lesser amount of savings would result in the rest of the government's ledger (assuming no change in spending, as you insisted above) and the net result is a wash -- the government's net borrowing and debt position is totally unchanged.

The only resulting difference is that SS's benefits would be actually *really secured* in a *trust fund* as so long promised and advertised!

Whereas in our world they aren't and will be at deep political risk when the tax & borrowing cost of paying benefits to seniors skyrockets.

"If the Treasury wanted (and if Congress allowed) it could transform the SSTF into bearer Treasury bonds tomorrow. "

I'm all for it! And while we're issuing that trillion in the market we might as well issue the other $7 trillion needed to make SS's financing whole.

Let's get the "transition cost" of staying with the status quo on the record!

"What Booton seems to be imagining is that to get the cash flow needed to pay off SS bonds and pay SS benefits, the Treasury can borrow the money without having to increase its borrowing! "

Well, he's not imagining anything, since the SS bonds are already part of the national debt. What will change in 2018 is that there will be a very slow increase in the amount of that debt that is publicly held. The government will still be paying interest on the same total amount of bonds after they start rolling over the SS bonds as before. There might be a small fiscal and macroeconomic impact if the additional bond sales to the public lead to increased interest rates, but if fiscal policy between now and then is sound, there is no reason to think that such an impact would be unmanageable.

I'm trying to find "Jim Glass's" blog. And failing. Help?

"Gotta change the subject, eh? I'm talking about financing *Social Security benefits* and you want to talking about financing the general govt budget."

"And you are following exactly the tact I described above, saying it is good to sacrifice the promised security of SS benefits in order to add a little more financing to the general gov't."

Benefits have to be paid tomorrow. If the gov't is burdened with lower debt tomorrow that opens up a wider array of options to deal with the problem than if the gov't was burdened with higher debt. This is self explanatory. Using my analogy of the person who knows he will have a $500 expense in the future so makes an extra payment against his credit card balance of $500 today...you would be similar to the unhelpful frat buddy who tells him his credit card is a seperate pool of money therefore he should party with the money today because he is doomed tomorrow.

"But a whole lot of SS participants who want the security for their benefits that was promised to them wouldn't agree with you making this choice for them. ;-)"

The SSI trust fund is helpful today for providing for SSI benefits tomorrow. I fail to see why you are in denial about this. But since you've raised the subject several times, didn't Nixon raise the SSI benefits far above what the 'promise' was? Even with Reagan's cuts, SSI benefits are higher than they were originally supposed to be.

"And in any event you are wrong, as I spelled out just above but you have already forgotten.Social Security and the rest of the government are all part of the same total government. If more savings were put into SS -- real economic savings in the trust fund -- an offsetting lesser amount of savings would result in the rest of the government's ledger (assuming no change in spending, as you insisted above) and the net result is a wash -- the government's net borrowing and debt position is totally unchanged."

False. What you are missing is that gov't's debt to SSI is only an accounting device that facilitates the gov't in reducing its borrowing from the public in light of higher expenses expected for the future. Watch:

1. SSI runs a surplus of $100. Gov't borrowing from the private sector falls by $100 BUT as you point out Gov't borrowing from the trust fund raises by $100. Net debt change accounting wise is $0.

2. Suppose SSI never needs that $100? Imagine that some horrible virus wipes out everyone older than 66 or something like that. Since SSI doesn't need that $100 to pay benefits, does the gov't ever have to pay it off? No it doesn't! What has happened? While the surplus in 2004 resulted in no accounting change in the gov'ts debt position it did effectively reduce gov'ts economic debt by $100. The Trust fund served its purpose of facilitating gov't saving in light of *expected* future costs (whether that savings is sufficient is another debate).

To better observe this, imagine the gov't ran SSI on a true 'pay as you go' basis. No trust fund surplus, current taxes are no higher than current benefits.

1. SSI runs no surplus in 2004. Accounting wise the gov'ts debt does not change.

2. In the future period, the virus results in no need for the $100 payment. Hence taxes are not raised. Yet in this scenero yet the gov't is undeniably worse off since it will be in debt by that $100 plus all the accumulated interest plus all the foregone economic growth as a result of crowding out private capital.

Long and short, in a perfect world the gov't would say something like "We are looking large spending increases in the future, therefore it is prudent to reduce our debt now as much as possible". In reality this is nearly impossible politically. Hence the trust fund system produces a very useful fiction where the gov't forces itself into savings by reducing debt today. Believe it or not, accounting is full of fiction. Some of it, like Enron, is bad but some of it is necessary. In the corporate world such things as depreciation, amortization of 'good will', book value and so on are fictions but they make the system work.

Jim your "gotchas" on paying off debt would be on point if we were not talking time-deliminated Treasury bonds. They mature and have to be paid off on a set date. Yes "paid off". And the way this payoff is financed is through selling new bonds.

This thread, like many, reminds me of the Monty Python bit about the penguin on top of the TV where the capper is "I'm running rings about you linquistically!"

Brad,

You write "Well, first of all these "bunches of IOUs" are called U.S. Treasury bonds. They are regarded by everyone else the world who trades in financial markets as the safest, most reliable, most secure investments you can possibly make--much safer and more secure than, for example, gold."

In about 1973 I lay on the grass in the Emperor's front yard with my friend Higuchi Kokei, a bright young man who had just pissed away something like .5% of Japan's GDP that year by sticking his company's reserves in US Treasuries. I asked him why the hell he had done it when it was such an obvious loser, and he said "Where the hell else could I have stuck the stuff?"

Today he is President of the company, (Tokio [sic] Fire and Marine) and he will likely be named Chairman as well in the near future. This makes him, so to speak, the designated investor of Japan's foreign reserves.

Back in 1973 I taught him the English word "basket," and by now I think he can also spell "Euro."

Dave Richardson: "The practical value of running SS surpluses now is that it allows the govt to reduce its publicly held debt."

You mean "reduce its rate of new debt creation", right? Good summary though.

We should look to Australia. There they've successfully implemented a retirement system that is pretty much like force 401(k)s. The employer contributes a certain percent of the employee's income to this account, and then there is also matching for employee contributions. It's working fabulously for them. I'd be curious to find out how they tranisitioned to this.

Australia also has a nationalized healthcare system that avoids the problems of the systems in places like Britain, and keeps costs pretty low. We here in the US never really think about Australia too much, being in the middle of nowhere, but they've already solved a lot of the problems we're still grappling with.

"Jim your 'gotchas' on paying off debt would be on point if we were not talking time-deliminated Treasury bonds. They mature and have to be paid off on a set date. Yes 'paid off'. And the way this payoff is financed is through selling new bonds."

Bruce: to obtain *additional cash flow* to pay *cash* benefits the SS trust fund bonds must *paid off* -- note well, NOT rolled over -- by the Tre