David R. Henderson  

Tom Saving on the Social Security Trust Fund

Fogel on the Two-Tier Health C... More Wisdom from CPK...

President Obama said in a recent interview with Scott Pelley of CBS News, "I cannot guarantee that those [Social Security] checks go out on August 3rd if we haven't resolved this issue [increasing the debt ceiling]. Because there may simply not be the money in the coffers to do it."

When I heard that, I took him at his word.

Silly me.

Why? Economist Tom Saving points out the following:

By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption--thus freeing up the Treasury's ability to issue new bonds equal in amount to the redeemed Trust Fund bonds.

Therefore, meeting Social Security obligations in August, September and all future months in this fashion would add nothing to the gross government debt subject to the debt limit. Not, at least, until the $2.4 trillion Trust Fund is exhausted in 2038.

I've been pointing out for years, as have many economists, that the Trust Fund is a fiction whereby one part of government owes money to another part of government. But what I had failed to do--and what Tom Saving did do--is follow the implications of that fact. Simply by a transfer within government, the Social Security Administration can come up with funds to pay benefits for a long time--without adding any new debt to the gross debt.

That doesn't solve the spending problem. But when the overall constraint--the debt ceiling--is on a number that has two components--debt owed to the public and debt owed to other parts of government--the government has a degree of freedom that Obama either ignored or doesn't know about: the ability to move debt between the two categories.

Comments and Sharing

CATEGORIES: Fiscal Policy

COMMENTS (24 to date)
Joe Cushing writes:

The gov has the cash flow to pay ss. Obama is just playing political games. He wants those checks to not go out because it will turn old people against republicans. I bet he would even stoop to not paying them just for show. People should be angry with any politition who says we will default on debt or not pay ss. There is enough tax money coming in to pay both. The question is, what else do you cut? Without any more borrowing, the spending must be cut by a third.

Bob Murphy writes:

Disclaimer: It is late and I've had a few drinks. So maybe I'm being silly here, but David I'm not seeing how this works.

Let's say the government is supposed to send out $10 billion in Social Security checks, but all the incoming tax receipts are already spoken for. If I understand what Tom Saving is saying, the SSA could give the Treasury $10 billion in bonds from the trust fund, saying, "Gives us $10 billion in cash."

Then the Treasury floats $10 billion in new loans to the private sector, cancels out the $10 billion owed to the trust fund, and gives the cash to the SSA. So the debt ceiling hasn't been breached, and the retired people get their checks.

But now the government still owes the SSA another $10 billion. I.e. the Treasury didn't actually meet its obligations, it still failed to deliver the $10 billion it owed the SSA, and instead on the side it redeemed $10 billion in assets that the SSA handed over.

Is that legal? I mean, I know that's the kind of stuff Geithner has been doing with the government employees pension fund since mid-May when they officially hit the ceiling. Can they legally do that with money owed to SSA?

Alex Godofsky writes:

I think Bob is right. Social Security has positive net cash flow, so it should be necessarily *adding* to the debt. Is there something I'm missing?

E. Barandiaran writes:

Are we talking about consolidation of government debts and the legal definition of government debt for the specific purpose of the debt ceiling?
It seems that Saving's point is similar to Paul's idea about the Fed. If you consolidate all government debts --meaning that Treasury bonds accounted as assets in the Fed and SSFund are cancelled by an equal amount of Treasury liabilities-- the final balance sheet will show the same amount of government liability but a different composition. To the extent that the new liabilities (bank reserves in the case of the Fed and benefits in the case of SSFund) are not included in the legal definition of government debt for the purpose of the debt ceiling, one can claim that there is room to increase the debt relevant to the ceiling. Then, the only issue would be how to do it and apparently in the case of the SSFund cannot be done in just one accounting operation (although I'm sure there is a lawyer that will argue that they can do it).

Chris Kerns writes:

I.e., the Treasury can just refinance those bonds. Put simply, the Treasury can replace a bond held by the SS Trust fund with a new bond held by the public. SS gets cash, net debt remains unchanged.

Randy writes:

So, the debt limit "crisis" isn't a crisis after all. They can use the trust fund to pay social security recipients, and incoming revenue to pay for everything else... without borrowing more. That is, what the trust fund represents is time... time enough to make the necessary adjustments to bring spending in line with revenue.

Another thought on the side; What the Republican House should pass (immediately) is legislation for a month by month increase to the debt limit. And every month the amount of the increase should be 10-20 billion dollars less than requested. That's what a bank does when I ask for a loan. They make me come up with a down payment.

Charles R. Williams writes:

It seems that people don't understand this. If a SS check is withheld, the trust fund goes up. The trust fund falls under the debt limit. So withholding SS checks does nothing to constrain the public debt.

Daublin writes:

The first David Henderson looks correct to me. It increases the public debt to replace the trust fund bond by a normal bond.

What Saving is pointing out is that the Trust Fund allows bypassing the debt-ceiling rules. That's news to me, though you would think the president would know.

To make it a less confusing example, suppose the left hand owed the right hand an IOU. In this state, the right hand has an asset, the left has a liability, and the entire body has a net value of zero.

Now the left hand finances its liability by taking a loan from a friend, and it pays off the right hand. The left hand still has a liability, but now it's to the public. The right hand still has an asset, but now it's real money. The net value of the body didn't change, but now it holds real money and a public debt.

postlibertarian writes:

I think I get it. Daublin's example helps. But I'm still glad I didn't go into accounting.

Patrick R. Sullivan writes:
Simply by a transfer within government, the Social Security Administration can come up with funds to pay benefits for a long time--without adding any new debt to the gross debt.

No, they can't. That's just wrong.

I'm not sure what the niceties of the bookkeeping are, but SS is expecting to receive payroll tax revenues each month to pay scheduled benefits (its liabilities). (Ignore that the amounts don't exactly balance out).

If, SS doesn't receive those tax revenues, because Treasury doesn't deliver them on time, then they'd have to receive bonds instead. Bonds which increase the liabilities of the Treasury.

So, SS takes some older bonds out of the filing cabinets and presents them to the Treasury for redemption so they can now pay SS benefits due? That gets everyone nowhere. Where would the Treasury get the money to redeem those older bonds if not from the tax revenues that should have been given to SS in the first place?

Unless the Treasury starts selling assets like the gold collecting dust at Ft Knox. But that doesn't need to involve the SS Trust Fund.

Charlie writes:

Obama could possibly use the trust fund money to fund government as well, though it may be illegal.


"The most financially promising of those options would be to "disinvest" government trust funds that hold Treasury debt, most principally the Social Security Trust Fund. Essentially, the trust funds would redeem bonds they hold ahead of schedule, in exchange for a promise to be paid back later -- and such an IOU would not count against the debt limit. Because the trust fund balances exceed $2.5 trillion, this tactic could be used to run the government for several years without hitting the debt limit.

This tactic works because the debt limit applies to gross debt, including trust fund holdings, which are debts the federal government owes to itself. The government's true indebtedness is better reflected by net debt, also called Debt Held by the Public. By reducing the amount of debt that the government owes to itself, the federal government can grow the net debt while staying within the gross debt cap.

The Reagan Administration used this tactic during a budget standoff in 1985; while the AARP sued to block the raid on the Social Security Trust Fund, their suit was dismissed. However, Reagan used the proceeds of the raid to pay current Social Security benefits, and it may not be legal to raid the funds to pay for general operations of government. A raid would also be politically fraught; while the Social Security Trust Fund is an accounting fiction, most Social Security beneficiaries don't see it that way."

Charlie writes:

You guys are making this way too complicated.

The U.S. government has a bunch of T-bills sitting in a filing cabinet somewhere. That filing cabinet is called the SS Trust fund. Those T-bills count against the debt ceiling, since the debt ceiling is on gross debt.

The U.S. government sells those bonds on the open market and gets money. Money can be exchanged for goods and services.

The U.S. gov't has $2.4 trillion it owes itself that counts against the ceiling. Whether than money can be used for general expenditure is an open legal question, but it can certainly be used for SS benefits.

Don Levit writes:

The $2.6 trillion in the trust fund is special Treasury securities, which are not funded.
The trust fund principal (excess FICA taxes) were lent to the Treasury to pay for government expenses.
The interest was credited to the fund with debt, not cash.
The entire trust fund is merely an accounting mechanism which allows the SS trust fund to withdraw from the Treasury without an appropriation.
Redeeming these special Treasury securities is the same financial process as paying any government expenditure - pay-as-you-go.
The trust fund makes it no easier to pay beneficiaries than if the trust fund did not exist.
When those special Trasuries are redeemed (and the interest has been redeemed since last year), it reduces intragovernmental debt and increases debt held by the public, by a like amount.
So, the total debt stays the same, but more of the debt is debt held by the public as opposed to intragovernmental debt.
I can provide reputable government links to back up these statements for anyone who is interested.
Don Levit

Patrick R. Sullivan writes:
The U.S. government sells those bonds on the open market and gets money.

No, they are specifically not marketable, by law. The SS bonds in the filing cabinet are owned by the SS Trust Fund and can only be presented to the Treasury for redemption.

Charlie writes:

"No, they are specifically not marketable, by law. The SS bonds in the filing cabinet are owned by the SS Trust Fund and can only be presented to the Treasury for redemption."

It doesn't matter. The net effect is the same. The Treasury takes some of their monthly revenues, redeems a security for say $1,000,000, then gov't debt outstanding is $1,000,000 lower, so it issues more T-bills. Then it has $1,000,000 in cash. The net effect is total gov't debt unchanged and U.S. debt held by gov't down $1,000,000.

Since the "special treasury" has not effect, I offered the stylized version for those having trouble wrapping their head around it.

Don said,

"When those special Trasuries are redeemed (and the interest has been redeemed since last year), it reduces intragovernmental debt and increases debt held by the public, by a like amount."

So, the total debt stays the same, but more of the debt is debt held by the public as opposed to intragovernmental debt."

These statements are both correct. What's incorrect is your assumption that the debt ceiling is on debt held by the public. It's not. It's on gross debt. Both public and intragovernmental debt counts against it.

Randy writes:

Speaking of fictional debt instruments...

Isn't it also a fiction to borrow against future tax revenue while the proposed population to be taxed is making it clear that it will refuse to pay the higher taxes?

So, the question is not whether or not to default, but who to default on. So why not use the method of spending down the trust fund to essentially default on future beneficiaries of Social Security? It spreads the pain broadly, gives people time to adjust, and doesn't cause a credit shock.

Kevin writes:

I have never had much patience for the people claiming the SS trust fund is a farce. No matter what the thing is, if there's a bid for it, there's real value. And there's a bid for the contents of the SS trust fund. SS wouldn't even have to redeem the holdings; it could just liquidate them and distribute the proceeds to the SS beneficiaries. Obama's either ignorant or lying. Maybe both.

Tom Dougherty writes:

Current SS benefits are paid out of current revenue that is received from payroll taxes. If SS benefits are $100 and payroll revenues are $150 then $100 is used for SS benefits, the additional $50 is spent on other current expenditures, and the treasury writes an IOU to SS administration for the $50 it took from the payroll revenue and spent.

When payroll revenues exceed expenditures this excess money is spent on general expenditures and the SS admin receives an IOU from the treasury. However, since 2010, SS expenditures have exceeded revenues. For example, SS benefits were $100, but payroll revenues were only $75. So to make up the shortfall, the SS admin says to the treasury, “I have collected all of these IOUs over the years when revenues had exceeded benefits and now I will now need to redeem some of the IOUs to make up the $25 shortfall in order to pay all of the obligations”. So, now the $25 comes from other current tax revenues to pay the current SS benefits.

What I see happening if all of this is correct is that by retiring the $25 IOU the government owes to itself it is reducing the national debt by $25. This is because the money that the government owes to itself is considered part of the national debt and part of the debt limit. If at that moment the government was exactly at that limit and it retired $25 of the national debt through current revenue paid for the SS admin IOUs, it could then issue $25 of additional debt to bring itself back to the limit and use those additional funds for current spending.

But what I see as the restrictions with Thomas Saving's argument is that the Treasury could only redeem those bonds 1)where IOUs were used to cover a shortfall in payroll revenues to pay SS benefits and 2)where there was sufficient general revenues to meet the shortfall in payroll revenues. So, it seems SS would have a claim on general revenues as long as they existed. An added benefit of paying SS revenues would be that any redeemed SS IOU would free up debt room to sell Treasury bonds to the public to increase income to pay current expenditures.

All this doesn’t seem to contradict what Obama says, however. If general revenue is used on other programs such as military pay, then there simply isn’t any revenue to purchase SS IOUs. The law may say the treasury must redeem the SS IOUs if presented but if there is no money left then there is simply no way to redeem them. This argument seems to suggest by paying SS benefits you get more bang for your buck, because as SS IOU are paid off they can be replaced by Treasury bonds for increased revenue. If, however, SS expenditures only exceeded payroll revenues for the first time last year, the shortfall probably isn’t that much and, therefore, the debt freed up by retiring SS IOUs will not be that great either.

Jeff writes:

If the Social Security Administration (SSA) had Treasury bonds in the vault, it could just sell them on the open market. That wouldn't change outstanding gross debt at all, and so the SSA would be able to send Grandma her check.

But Sullivan says the Treasury debt held by the SSA is not marketable. But it does count against the debt limit. So the SSA goes to the Treasury and says: Redeem these IOU's, please. The Treasury can do so by issuing and selling regular Treasury bonds on the open market. This doesn't bump up against the debt ceiling because the proceeds are used to extinguish equal amounts of the debt that the SSA had been holding. The effect is the same as the first case in which the SSA had held marketable Treasury debt to begin with and just sold it.

The more interesting question is whether or not incoming Social Security withholding taxes can be confiscated by Treasury rather than turned over to the SSA. If they did that, they would have to give the SSA some kind of IOU's. Those IOU's would presumably count as Treasury debt subject to the debt ceiling. If not, the Treasury can force the SSA to make all Social Security payments by selling off its Trust Fund holdings as outlined in the previous paragraph, whilst the Treasury spends incoming SS withholding taxes on other things. There will be hell to pay politically once the Trust Fund is completely looted, but that might be the next guy's problem.

Joe T. writes:

The explanations above about trading obligation for obligation are correct. The $2.5T SS surplus is included in the commonly quoted $14.5T national debt, which we see on the debt clock. Redeeming, say, $1B of SS bonds reduces the debt by that $1B. But since we don't have $1B lying around, a $1B bond is sold on the open market to pay for the SS bond redemption. Trade obligation for obligation. No increase of debt.

We regular folks should be making the point that the SS surplus is real. It's accounted for in most govt. accounting. It was paid for by real money, by real people, us.

The primary reason that they don't want to redeem SS trust fund obligations is because it's getting more and more difficult to replace them by selling open market bonds.

There's an implication of all these pundits saying that the SS trust fund is a fiction or is broke. Some do it from muddled "flow of funds" thinking that accounting lines can be breached (they surely don't shift capital to expense in their own businesses). The more they say it, the more it becomes possible, because the government representatives can rewrite laws under the cover of enough punditry like this. Others do it because they want to, or see the need to, essentially default on those obligations (~17% of the national debt), which is essentially taking the money from regular working people to pay off a nice chunk of the national debt.

If you have the "flow of funds" belief, go back in time and ask yourself where you would prescribe that SS should invest its surplus. Gold? The stock market? Oil reserves? Those would instantly become distorted markets.

SS is run similarly to an insurance company that sells an annuity.
- both pay claims from current receipts.
- both invest surpluses.
- both dip into surpluses when needed.
- both adjust rates when needed.
The latter point is where we were at in 1983, when the Greenspan Commission tweaked SS so it would be solvent forever. But within a year or two, it became clear that it wouldn't last (later studies showed that over 60% of the blame was because of the unanticipated shift of wealth from the middle class to the rich). That is also the point where we should be now. Tweaking is needed. But beware of any dismantling of SS that results in essentially another class shift of wealth.

I also contend that dismantling SS is socialistic, for those who are concerned about individual self-sufficiency. With SS we're forced to pay for our own retirements (do the calculations from your SS statement, the payout is just about the same as what you'd have gotten from an insurance company annuity, individualized for your particular payments). Without SS, there will be an increase of seniors living in poverty (e.g., the complete Ryan plan was estimated to result in 40% of seniors living below the poverty line in the 2030s). The U.S. always seems to come to the rescue of people in poverty with welfare and subsistence programs and payments.

But hey, SS is an easy, understandable target, when most all of our fiscal drains are health care costs.

Tom Dougherty writes:

A problem I see in some of the above analysis is some are saying that if the SSA tries to redeem an IOU the Treasury can simply sell a Treasury note on the open market of equal to the value of the SSA IOU to pay it off. The problem is that if you are at the debt ceiling, the Treasury cannot issue further debt on the open market to pay the SSA IOU. This is a matter of timing. The Treasury issue of debt would exceed the limit before the SSA IOU was paid. What I see must happen is the SSA IOU must be paid first, which would then create additional room under the debt limit for the Treasury issue further debt. If you are at the debt ceiling limit, then SSA IOU would have to first be paid from tax revenue and extinguished before additional debt is issued. If the Obama administration decides to use tax revenue for other purposes before paying the SSA shortfall of revenue and there is no additional revenue left to extinguish the SSA IOU, then further debt cannot be issued.

Don Levit writes:

You have an excellent understanding of the trust fund mechanics.
The SS trust fund is not like an insurance company.
It does not invest its surplus in assets that can be liquidated without raising new monies.
An insurer's reserve is liquidated without raising new monies.
Dipping into the trust fund (principal and interest) requires new monies, as if the trust fund did not exist.
From a paper entitled "Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2009:"
Page 183 "Why are Social Security and Medicare not shown as Government liabilities in Table 13-1?
There is no bright line dividing Social Security and Medicare from other programs that promise benefits to people, and all the Government programs that do so should be accounted foor simlarly.
Furthermore, treating taxes for Social Security or Medicare differently from other taxes would be highly questionable."
Page 195 "The trust fund surpluses could have added to national saving if overall government borrowing from the public had actually been reduced because of the trust fund accumulations.
At the time Social Security or Medicare redeems the debt instrumenrts in the trust funds to pay benefits not covered by income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits, JUST AS IF THE TRUST FUNDS HAD NEVER EXISTED."
Don Levit

Joe T. writes:


Thanks much for providing that information, and so clearly quoting the pertinent parts. I need to digest this, in light of the $14.5T national debt number that is most often quoted, which includes the SS surplus. Wish I had an accounting background just now.

Ryan Vann writes:

Shell games are awfully difficult to follow.

Comments for this entry have been closed
Return to top