David R. Henderson  

The Social Security "Trust Fund"

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The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in.
This is from "Social Security to Start Cashing Uncle Sam's IOUs," by the Associated Press today.

In 2005, my co-author Charley Hooper and I wrote the following:

And that's why the Trust Fund is irrelevant. To buy the bonds in the Trust Fund from itself, the government must get the money from somewhere. It has four options. It can reduce other government spending. It can sell assets. It can increase taxes. Or, it can sell bonds. In other words, the Trust Fund has no effect -- zero -- on the government's financial situation.

Let's make it more concrete with a personal situation that many people can relate to. Say you're planning to send your kid to college. You have ten years and think you need $100,000. In Scenario A, each year you put an IOU for $10,000 in a jar. At the end of ten years, you pour out the jar, swear a bit more than is proper, and then scramble to come up with $100,000, either through borrowing, selling assets, earning more, or spending less. In Scenario B, you skip the jar and IOU charade and advance to the final step: you swear and scramble. The IOU charade was irrelevant.


We also added, in one of the few positive things I ever wrote about Al Gore:
Interestingly, 2000 presidential candidate Al Gore recognized the irrelevance of the Trust Fund. For all the ridicule he received for his concept of the "lock box," what he was getting at was that he wanted to reduce the federal debt in order to make room for the new debt that he knew was coming with the retirement of the baby boomers.


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CATEGORIES: Social Security



COMMENTS (18 to date)
Les writes:

It was interesting to read a defense of Al Gore's "lock box" comment on social security. This is the one and only attempt to defend his comment that I have ever seen. But how does reducing the federal debt to make room for new debt to pay social security create a "lock box?"

The only way I see to create a "lock box" is to switch from a pay-as-you-go social security system to a fully funded retirement plan, where the individual retirement savings accounts are under the control of each individual, rather than being available to politicians to raid and spend in whatever manner they might decide.

Patrick R. Sullivan writes:

Why not relive one of Paul Krugman's Greatest Hits:

I had been trying to come up with a reductio ad absurdum, something that would demonstrate how nonsensical the commission's analysis is. But I needn't have bothered; a commission member, Thomas Saving, did the job for me, in a presentation he gave at Cato. He repeated the report's claim that the trust fund accumulated through decades of Social Security surpluses is no help when it comes to paying future benefits. But he was more specific: The trust fund is worthless, he said, because it is invested in U.S. government bonds. If it were invested in German bonds the trust fund could indeed be used to pay benefits.

Let's see: Last year the Social Security system collected about $90 billion more in payroll taxes than it paid in benefits. Mr. Saving says that if that money had been invested in German bonds it would have made a real contribution to the system's future; but because it was used to buy U.S. bonds it somehow disappeared into a black hole.

And, he went on to win the Nobel Prize!

Curt writes:

It's my understanding that all excess funds collected for Social Security since 1983 have basically been used to supplement the official budget. One can argue whether the country 'got anything' for these expenditures, but it seems fairly clear now that collecting 'extra' for 25 years has done nothing to shore up the future of the program, which will presumably be cut back in some way and/or funded at the expense of other things.

I think this makes the legacy of Alan Greenspan even more dubious...

Yancey Ward writes:

It will be interesting to see if the payroll tax revenue, at its present rates, is ever greater than payouts again. This deficit wasn't predicted to occur for another 5 years, at the earliest.

Aaron writes:

Is it really an IOU? It seems to me like earlier generations wrote Gen X a "you owe me".

The IOU is a helpful analogy though.

English Professor writes:

What has always annoyed me most about the SocSec trust fund is the way in which it is a stealth form of paying for SocSec out of general revenues. As the surpluses accumulated, the collected revenues went to fund current spending in exchange for government bonds. Once it becomes necessary to start redeeming the bonds, general tax revenues will end up funding SocSec in a pay-through scheme by which those general revenues are laundered through the bond redemption process. This is a scandal.

Marcus writes:

"Is it really an IOU? It seems to me like earlier generations wrote Gen X a "you owe me"."

Then, with all due respect, you don't understand what has happened.

The SSTF was designed to con older generations into OVER PAYING their taxes. Every dollar of the SSTF represents a dollar older generation over paid. That the SSTF is trillions of dollars means that older generations over paid their taxes by that much.

The obligations SS has to retirees is not connected in any way to the SSTF and the amount gen x'ers would have to pay retired baby boomers would not change by even a single penny if there was no SSTF. It would just come from your SS withholdings rather than from the general fund.

The obligations you have to retired baby boomers is a result of the con called social security. The SSTF was a con on baby boomers so the government could spend more money.

But let's not get into generational conflict here. That only plays into the hands of the political class. Turning us against one another is what the political class does. Fact is, one way or another conning all generations.

Xiaohua Song writes:

I've read somewhere that each American's share of the federal debt (not just the deficit, but the entire debt) is $46,000. Also, the payroll tax on workers is currently 6.2% (plus another 6.2% paid by the employer). How about an financial transaction? I pay $46,000 for my share of the federal debt and I forfeit my right to receive Social Security retirement benefits, if my employer and I do not have to pay the 12.4% in taxes?

From a strict numbers standpoint, its a win-win scenario. Government gets its debt paid off (at least this citizen's portion). I get an immediate 12.4% pay raise (at least 6.2%, maybe more, if I can convince my employer to keep contributing the same amount). At $100K a year, I would have recouped my initial $46K cost in about 4 years, and at the end of 30 years with a 5% annual yield, I would have $634K for retirement, without having need of social security.

Of course, if the goal is to keep citizens dependent on government, my plan is a total failure.

allen stuart writes:

SS covered Reagans' and Bush's tax cuts for the high incomes. Borrowed from them.

So, have them pay it back. Millionaire surtaxes, estate taxes for banker bonuses...

Nope, way too fair...

Doc Merlin writes:

@allen stuart
Why would they pay when they can just leave the country cheaply and take all their money with them, allen stuart. Leftists often talk about soaking the rich, but how do you actually go about doing this without screwing over your own country.

Jeremy, Alabama writes:

The difference between buying your own (US) bonds vs buying someone else's (German) bonds is, "buying" your own paper is just a money laundering operation.

You start with revenue (cash), buy bonds with the cash, and the recipient of the cash is (ta-da) yourself.

And it is therefore laundered into general revenues. And from there, it gets worked into the "mandatory" spending along with the "mandatory" benefits. Unfortunately, the surplus was temporary.

Both sides of the laundry are now dirty.

Brian writes:

Nice explanation on the concept of the fungibilty of money. I think I will use that when explaining why taxes for specific purposes are really just general tax increases.

AC writes:

I remember the Krugman articles cited above. Can anyone defend Krugman's statements? It seems like he is completely wrong.

rhhardin writes:

A trust fund isn't even possible.

The government must instantly spend or otherwise return to the economy every dollar it takes in, lest the money supply fall.

Every tax automatically goes into general revenue.

jimhum writes:

I can't really believe some of these comments. I wish I had the time to carefully explain the problems with each.

If you had the choice, what would you do with the excess billions of dollars that have been collected in the past years? Whether you should collect it in the first place, is not the question. It's been collected for many years.

How about storing a billion $100 bills in Ft. Knox. Do you know how much interest that would earn each year.

The Bonds in the Trust Fund earn $85,billion each year. Of course the Bonds must be paid with tax money. Do you know any method a Govt gets money to spend, except by taxes?

I know there is no room to write it all here, and I don't claim to know all the answers, but please, please learn more before you show your ignorance again.

Just think about it. In all these years, the Congress did not cancel the whole Soc Sec idea, nor did they collect the proper amount of money to do what they said they were doing.

It's like the housewife who makes out a grocery list, determines it will cost $20, but she only takes $10 with her to the store.

Congress knew what it would cost, they just didn't collect enough money to pay for it.

Sam writes:

There's nothing wrong with "buying your own paper." That is how money works. Fiat money isn't backed or pegged to a commodity or other asset. It is backed by the government, which is the institution that creates and prints money to begin with. The currency it prints is backed by the government's ability to spend and recollect that money. The government's need to spend money is what drives demand for money in the first place. The levying of taxes payable only in the form of state currency is essential to value of money. If the government isn't able to reclaim the money it issues, the currency is worthless. It must be able to reclaim enough money to payoff its debt. It can either sell bonds in exchange for legal tender or increase taxes. It's actually good for the economy if the government spends money, increases taxes and redistributes wealth. Less taxes and smaller government isn't a cure for debt in the long term. It's a curse. It will limit the circulation of currency and create less demand for money and wealth. A smaller government will also be less efficient at collecting revenue and stabilizing markets.

Mark Bahner writes:

Patrick,

Do you think my pointing out Paul Krugman's dishonesty/ignorance on the Social Security "Trust Fund" might have been a part of why I was banned from Brad DeLong's website?

Mark

Mark Bahner writes:

"I know there is no room to write it all here, and I don't claim to know all the answers, but please, please learn more before you show your ignorance again."

While were on the subject of learning and interest, you might learn the difference between a special issue government bond (which can't be sold to the public) and a bond that can be sold to the public.

Why Social Security is a Ponzi scheme

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