Arnold Kling  

Political Morality and the SS Trust Fund

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John Holbo writes,

it's perfectly reasonable to worry about how the US is ever going to manage to pay for stuff it needs/wants. But accusing the Social Security Trust Fund of being a mere accounting fiction does not 1) do much to explain, analytically, why the budget is tight; 2) provide any justification for dealing with budget tightness by cutting Social Security, rather than some other thing, or by raising taxes. (It could well be that the optimum way of dealing with budget problems it to cut back Social Security in some way, but to talk yourself into this on the vaguely moralistic grounds that mere accounting trickery should be regarded as non-binding is quite confused.)

Pointer from Mark Thoma.

The U.S. budget is not "tight." It is unsustainable. It is a lie. Politicians have made a set of future promises that under the most commonly-believed economic scenarios cannot be kept.

Many people wrongly believe that this unsustainability is solely a matter of health care spending. That might have been true a few years ago, when it looked like the ratio of debt to GDP was not going to reach dangerous territory until at least 2040. However, now that there is a large risk of insolvency within twenty years, the demographics of the baby boom are also a significant factor.

The moral difference between accumulating real assets in a trust fund and accumulating IOU's is that real assets could be used to balance the excess of consumers relative to workers that the baby boom retirement will entail. If we had planted fruit trees, we would have more fruit to handle the increase in the dependency ratio.

Relative to a path with more fruit trees, somebody will have to consume less as the baby boomers retire. Either the younger generation will pay more in taxes, giving them less consumption opportunities. Or the older generation will have less in benefits. Or some other government service will be cut to fund the benefits, in which case the generational impact depends on what gets cut (if it's Medicare, the old folks have to pay for more of their own health care and get to consume less other stuff; if it's everything else, it's probably mostly non-elderly that get to consume less.)

Without the institution of Social Security, households would have acquired more real assets. They would have had both more means and more incentive to do so. Those who did not have the means or did not respond to the incentive would be dependent on the charitable inclinations of the rest in order to be comfortable in their old age.

To individuals, Social Security might seem like part of the solution for saving for retirement. For society as a whole, it is part of the problem. When one points this out, one is accused of wanting the elderly to suffer. On the contrary, I want to minimize suffering. To do be able to do that, we need to look at Social Security dispassionately and to assess its costs honestly. I do not think that the Trust Fund is of any use in promoting that discussion.

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CATEGORIES: Social Security

COMMENTS (22 to date)
AC writes:

Bottom line: the leftists are either confused or in denial about the Trust Fund. He and Yglesias say "it exists" and don't like all this nasty rhetoric but at the same time they seem to (?) understand that it doesn't actually consist of assets, and the government has to raise money somehow to pay for benefits.

Les writes:

Arnold's comments are fully correct, but may not be well understood by all. So here is a more basic explanation.

There are two ways to buy a home: (1) pay the entire price in cash, or (2) borrow the bulk of the price on a mortgage loan.

The same is true about social security: the government can either (1) invest its receipts of social security taxes in a trust fund that is kept segregated to avoid commingling the fund with other government cash inflows and outflows, or (2) spend its receipts of social security taxes just like other government cash inflows and outflows.

In case (1)the government can pay out social security pensions from the segregated trust fund. In case (2) there is no segregated trust fund. So the government has no way to pay social security pensions except by using current income tax collections, or by borrowing money (with no source for paying interest and principal on this borrowing).

Now here comes the quiz: has the government used alternative (1) or (2)? Hint: what was convenient at the time - doing the right thing, or kicking the can down the road?

Joey Donuts writes:

I recently re-read James Buchanan's book on public debt available

The important point he makes is that the public debt burden always falls on future generations. In addition he makes a very strong reminder to consider on what the resources used contribute and who gets the benefits of those resources.

The discussion so far has only looked at the (tax then borrow side of the equation). During the 1800's economists thought the state couldn't ever make sound investments. I have the sense looking at these arguments that many here are making the same assumption although not explicitly. If you have made that implicit assumption, please show your work at how you arrived at the conclusion that the incremental expenditures made by the state from borrowing from the SS trust fund led to (expenditures/investments) that won't yield a return sufficient to compensate the future generations and thus pay the burden.

Philo writes:

"Politicians have made a set of future promises . . . ." I wonder about this. What the politicians have made does have much of the appearance of *promises*. But a real promise is binding on the maker of the promise, whereas future politicians are not really bound by the words of present politicians, nor future Congresses and Presidents by present Congresses and Presidents. So really what we have are no more than pseudo-promises; perhaps this is fortunate since, as you say, they cannot be kept.

Dale Moses writes:

Governments are not households Arnold, stop thinking about them like they are. The only way for a government to accumulate a deficit is by doing one of two things.

1) Spend it
2) Fail to tax it.

Transfer programs, if they're funded are net neutral (except as they transfer between aggregate spending habits). If they're not funded, then the lack of funding is spent in the form of real purchases by those who receive either the extra money or the tax cuts(however you want to say it)

Social Security is a transfer program, in its absence, whether or not people have more real assets is indeterminate. It is only such that they would have less real assets if, in the absence of the receipts(not the taxes) they would have purcahsed MORE real assets. As it has been, that was not the case (after all, if people were purchasing the proper amount of investment to carry them into retirement why was Social Security necessary?). People who are receiving SS checks have the means to save just as well as the taxes that are being taken from them. If they have a higher MPC than those who are being taxed (and lets assume they do, though with our savings rate it would probably be small) we still have to figure the social costs of not doing this.

Why is this so? Because at the margin, the government is producing real goods and services(and assets). If, as you claim, we are running out of money because we have liabilities for transfer programs, that is only because we had previous windfalls which must have been given back at the time, to tax payers. This is what the "social security trust fund" is, it is taxes paid to the general fund to be paid back by income tax payers later.

And this is precisely the situation we find ourselves in. St. Reagan raised social security taxes and cut taxes on the rich. Now when the time comes to pay it back, to pay back all of the general fund spending that occurred on the dime of social security taxes no one wants to.

Lord writes:

An example of the fallacy of composition. Individuals can save, countries cannot. Whatever one saves, another borrows. Whatever assets one possesses are another's liabilities. It is a naive failure of logic to think otherwise. I would have expected better of you, Arnold.

Tracy W writes:

Joey Donuts: During the 1800's economists thought the state couldn't ever make sound investments.

A surprising assertion. Can you name some of these economists back in the 1800s who believed this? After all "couldn't ever" is a very strong statement, and it's entirely possible that you have misunderstood their actual thinking.

Jean Parmesan writes:

Lord: "An example of the fallacy of composition. Individuals can save, countries cannot. Whatever one saves, another borrows."

Fallacy of conflation....federal government does not = the country.

Also, your accounting identity is incorrect. Savings via taxes can = spending as much as much it can = investment. I think that is the point of Arnold's post....the money was not invested, it was spent on programs that did not yield a return.

It is a naive failure of logic to think otherwise. I would have expected better of you, Lord.

Steve Roth writes:

The Social Security trust fund is of course arithmetically meaningless. It, along with the IOUs, could disappear tomorrow and our fiscal situation would be unchanged. It just doesn't matter whether future revenues to pay for benefits pass through the trust fund, or go directly to recipients from the general fund.

(It has big rhetorical import, of course.)

In either case, the net 75-year projected SS deficit (payroll tax revenues minus benefit expenditures) is about 2% of future payrolls, about .6% of future GDPs. You could eradicate it instantly by removing the income cap on payroll taxes. (And in the process make our overall national [state, local, federal] tax system -- which is non-progressive above about $60K in income -- slightly more progressive hence more economically efficient.)

Or (since particular tax streams need not be dedicated to particular expense categories -- money is fungible -- and since it's kind of nutty to tax work) you could fund it from the general fund, and boost that fund by .6% of GDP annually with, say, a carbon tax or a (preferably highly progressive) consumption tax.

In any case, at .6% of GDP, SS is not the albatross, and pretending that it is is misrepresentative. Health care costs clearly are the albatross. Pretending they aren't is...

Now as to your retrospective counterfactual: "Without the institution of Social Security, households would have acquired more real assets."

Do you think people ignore SS when they're planning their futures? Do they take risks (i.e. acquire potentially productive but risky assets like fruit trees) that they wouldn't take otherwise, because they know that the cat-food worst won't happen?

IOW, do people (partially aided, psychologically, by the quasi-myth of the trust fund) view those guaranteed future revenue streams as part of their net worth?

I know I do.

Jim Glass writes:

Social Security pays Warren Buffett the maximum benefit, paid for with a 12.4% payroll tax on his employees at Dairy Queen which is collected from the first dollar of their wages.

It's remarkable how "progressives" fight tooth and nail to prevent any progressive reform of this.

Steve Roth writes:

Jim Glass: "It's remarkable how "progressives" fight tooth and nail to prevent any progressive reform of this."

Agreed. I've argued that the trust fund is, in important respects, a liberal own-goal.

Dale Moses writes:

No Jim, we understand that the social security tax is imperfect, we just believe that the overall institution is better. If we could get rid of payroll taxes and keep SS. Fund SS in better ways?

We would do that in an instant. It was Reagan who raised payroll taxes, not Clinton.

Liberal Roman writes:

The insanity continues...

If you believe that the fact that the Social Security Trust Funds is made up entirely of IOUs from the US government, then your very own trust funds are also purely fictitious. In fact, no one has any wealth in the crazy world of EconLibs.

Unless, you keep all your wealth in hard commodities stocked underneath your bed, ALL OF YOUR "ASSETS" are IOUs! To put it another way, even if you have a $1 million in your checking account, it is an IOU from the bank. Because the bank has lent it out already to second parties (often times simply buying Treasuries with it!!), so I guess you have no wealth since it's all IOUs.

This is not intuitive and as usual "conservatives" take advantage of that fact to mislead people.

Hyena writes:

I think this is confused. There is no problem with Social Security, there is a problem with government spending. Had we been using Social Security bonds to finance the government and lowered other taxes, we'd not be in the same position.

Instead, we used Social Security as an extra revenue source and increased expenditures to match.

Morally, we should cut other spending to pay Social Security, which is what we'd be forced to do if this were a private pension. Perhaps we can sell some carriers and license warplane designs. What's a nuke go for these days?

R Richard Schweitzer writes:

The so-called "Budgets" is nothing more than Spending Plans .

The spending plans are designed (by the un-elected) to allocate all available resources (ALL tax sources [including the time-deferred], borrowings, fees, etc., etc.) to purported (and sometimes actual) political objectives.

If someone knows otherwise, please describe the scenario(s).

Tom West writes:

I think that is the point of Arnold's post....the money was not invested, it was spent on programs that did not yield a return.

That's a rather ambitious claim. Maybe the money went to pay for our nuclear deterrent, without which there might not be a USA. Or went to help pay and maintain the interstate system, which is generally considered a big economic plus. Or went ...

It's a convenient fiction to think that the money only went to programs we personally feel were unsuccessful. There's no guarantee that those are the programs that would not have occurred in the absence of the extra SS money available.

Ned Baker writes:

Jim Glass,

Is Social Security progressive? CBO determined that, yes, it is. For most Americans, SS benefits=taxes. For low earners benefits=2*taxes, and for high earners benefits=0.5*taxes. See figure 1:

Is Social Security Progressive? (PDF)

Dewey Munson writes:

Why? Why do formal economists talk volumes about money without acting to strengthen its most important characteristic - STORE OF VALUE?

People can produce only half a lifetime.

To sustain themselves during non-productive years they must store the excess production from their producing years. The system exchanges this excess for "Money"

Economists support the destructive practice of printing money without regard to the excess individual production.

I am 89 yrs old and my first job was at high rates and had I banked my early Income the continual inflation would have made those savings worthless today.

On the other hand a consistent store of value would have made Social Security unnecessary.

Only a trained economist could track the influence of a consistent money value in the economy.

Dale Moses writes:


Because there are other important things than just the store of value in money. These things must be weighed against each other.

For instance, also important are real wage levels and market equilibrium. Whereby higher inflation can cause markets to return to equilibrium faster, increasing production which was hampered by real prices which were too high.

Or, very low inflation risks deflation which can lead to a deflationary spiral (I.E. people delay consumption which leads to lower prices which leads to more delays of consumption). Since inflation targeting is imprecise, having a target above 0% makes sense if you want to avoid deflation.


Also note that a consistent store of value would not have made social security unnecessary. Putting money in the bank would still lose money if inflation was 0%. Banks are not able to pay below the inflation rate because of inflation, banks are able to pay below the inflation rate because in reality they are "offering a service" of security and access to cash. An inflation rate of 0% would not mean you make money on your bank transactions, it simply means that you would receive a negative interest rate(whether that negative interest rate came from fees or a listed return of below zero doesn't much matter)

In order for social security to not be valuable (necessary is too strong a word, though valuable does imply a cost/benefit analysis) people must invest the proper amount over their lifetime into production assets. If people don't then there is a benefit for social security as it corrects that market imperfection.

Floccina writes:

I think that pay in x and earn y benefit model of SS is fraud. I think that the best thing that we could do concerning SS is to end the FICA tax. Then we can have a debate about retirement ages and benefit amounts.

Charles R. Williams writes:

The feds have made promises to seniors. The feds promised to repay people who bought bonds with interest. Do you really think the legal status of these IOUs matters at all? What bankruptcy court is going to sort this out? This is a political question, not a legal one. The feds will default on their bonds before they will default on the claims of social security recipients. And this is as it should be. Anyone who buys US treasuries is a fool to think otherwise.

Tracy W writes:

The feds will default on their bonds before they will default on the claims of social security recipients. ... Anyone who buys US treasuries is a fool to think otherwise.

Actually this is an interesting question. While I certainly don't think that US treasuries are risk-free, the typical reason that countries don't default on their debt is that they want to continue the option to keep borrowing. Consequently the time a country is most likely to default on its debt is if its primary budget is in surplus. It's an interesting question as to which way politicians would chose, and there are a number of things they could chose to cut other than social security. So I don't think someone is necessarily a fool to think otherwise.

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