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Location: San Diego, California, United States

Thursday, March 31, 2005

Social Security Facts - #8:

TRUST FUND!

It has become clear to me that until you understand clearly that there is no money and there is no trust fund, it is going to be very difficult to understand Social Security or any proposals that are brought to our attention, including mine!

I suggest that people analyze the Social Security from the outside, instead of getting into the inside detail. "China buys Treasury Bonds, therefore, the Social Security Trust Fund buying Treasury Bonds is the same - an investment with a return." "Corporate Bonds are sold every day to people who want an investment with a return." Why is the Social Security Trust Fund different?

Let's get inside the system to understand the truth:

1. When China buys Treasury Bonds they buy them with excess funds they have and feel because our country is a solid investment, know that they will be able to redeem them with a reasonable return. The Government takes this money and spends it, reflecting a debt on the books which will be paid out of future income (taxes).

2. When Social Security buys Treasury Bonds NO MONEY CHANGES HANDS. We are Social Security! We are the Government! Our taxes are simply called a "Treasury Bond" to mislead us into thinking it is an asset. (We do not show them as a debt because of this!).

A look at Corporate Bonds is also instructive:

1. Corporate Bonds are sold to Investors when corportions require extra cash and are redeemable over a period of time at an attractive rate from the profits of the company. Very similar situation to China buying Treasury Bonds.

2. Would it make sense for the Corporation who periodically issues Corporate Bonds to set up an office - "Corporate Security" - take the profits through this office as they come in - issue itself a Corporate Bond with a return - to be paid out of future Corporate profits? And refer to it as an asset?

Please think about it and comment. It is important to "follow the money!"

6 Comments:

Anonymous Anonymous said...

Good post! I am actually not so far away from you in my thinking. But I do interpret it a bit differently.

The scenario of selling Treasury Bonds to China is of course right on.

In the second scenario, as you say, it is all under the umbrella of our government. In accounting terms the Social Security Fund gets an asset, and the overall federal debt increases (a liability). So as with all double entry accounting, the entries balance out. To redeem the bonds held by social security, the certain portion of the federal budget will have to be spent there.

I found this Congressional Budget Office website where the social security debt is shown in the budget projections:
CBO's Current Budget Projections. There is 'Federal Debt held by the public', and Federal Debt held by 'Government Accounts' and other items, totalling to the full federal debt.

I understand your interpretation that simply states that there is no trust fund. That interpretation implies to me that there's no obligation to do any extra federal spending on social security when the time comes, and therefore we stop paying out full benefits at that time.

I interpret the situation slightly differently: I feel there is an obligation to do Federal spending starting in 2018. To cover the social security payments, either #1 the economy is booming and it's not a big problem, #2 we can spend less on other things, #3 we can do more deficit spending and hope for a later boom, or #4 we can raise taxes to cover it as we go.

Of course even with the current excess social security money coming in, today we're doing plenty of deficit spending (with hopes for a future boom, essentially situation #3 above).

Whether there is an obligation to do the spending or not (I think Bush has already promised it by pledging no changes for those over 55), it's clear that it would be best to consider how to end up in the optimistic scenario above if at all possible.

Note: One could consider doing something else with the current excess payroll taxes, such as buying high grade corporate or foreign bonds. This would put the liability to pay on some outside entity, and would also subject the holdings to the vagaries of the market (if interest rates rise, as they seem likely to do, then the value of the bonds would drop).

12:27 AM  
Anonymous Anonymous said...

Here's a simpler statement on my feelings about it.

In the case of Treasury Bonds sold to China:
- China has an asset
- There is no 'trust fund' to repay the bonds
- The bonds will be paid because there is a legal obligation to pay them out of future federal budgets, one way or another.

In the case of Treasury Notes given to Social Security:
- Social Security has an asset
- There is no 'trust fund' to repay the notes
- The notes will be paid because there is a legal obligation to pay them out of future federal budgets, one way or another.

10:30 AM  
Anonymous Anonymous said...

I thought I'd try to summarize my thoughts a bit better...

When China holds US Treasury Bonds, they consider it to be an asset, not because there is some 'trust fund' (pot of gold) behind it, but because there's a legal commitment for the US to commit future income (taxes) to repay those bonds.

Likewise, when the Social Security Fund holds their Treasury Notes, it can be considered an asset, again not because there is a 'trust fund' hidden away somewhere, but because there's a legal commitment for the US to allocate future income (taxes) to repay those notes.

In sense it is from one pocket to another, but I don't believe that's unimportant. Either we honor a past commitment to direct money toward Social Security recipients, or we will spend the money somewhere else. That decision matters (particularly to those who end up getting these payments!).

5:02 PM  
Blogger Jim said...

Haven't had a chance today to review in detail your comments.

But I do have one response to the last paragraph of your first comment:

Sounds like PERSONAL ACCOUNTS to me! I like the idea!

8:18 PM  
Blogger Jim said...

I have now had a chance to digest your comments and have the following response:

The mistake we all make is to assume external transactions are the same as internal transactions -this difficulty is what the Government has counted on for seven decades to keep older people very happy (they are the voters!) and to keep a "slush fund" each year for which they are not accountable (note the discussion of cutting payouts, raising age, means testing, etc). If the excess monies were in fact in a "trust fund" this discussion would not be happening - $1.5 trillion (see "Social Security Facts - #6) would be in an investment earning interest!

It is as if I buy a television for $1000 - issue a bond to myself for $1000 - and commit to pay that bond back from my salary (This is Social Security)

vs.

I borrow $1000 from the bank to buy the television - where I am legally bound to pay the bank or go to jail.

Are these really the same?

I think your are trying hard to justify the current accounting system when it is not worth the effort. It will be much easier if we understand the real situation.

I will repeat myself, Social Security is simply a Welfare system where current taxes are used to aid the retired and disadvantaged. The idea is great -the way it is done is leading us to disaster!

9:53 AM  
Anonymous Anonymous said...

On the idea of investing the excess payroll taxes: you mention that this sounds like personal accounts...

I agree with you that it would be better to invest these funds rather than sliding them into the current budget and acting as it its not deficit spending.

I think it's worth looking at the pros and cons of making the investments 'personal'; on the plus side it's a very concrete accounting of what's being held. On the negative side there are administrative costs to personal accounts (a nice revenue stream for whatever organization gets a piece of the action).

If there weren't personal accounts, and the money were invested in aggregate, there is worry that the government is getting too involved in markets.

However if there are rules on the investments of personal accounts, the total investment patterns could end up very similar to what would be done if there weren't personal accounts (but with the administrative costs).

11:45 AM  

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