"Social Security has nothing to do with the deficit"

[_just me]

Hell, I'm gonna accumulate enough wealth to hire some personal nurses to live in my house with me when I get old. Gonna install an elevator, too. Got it all planned out.

[_cinepro]

Maybe Cinepro can explain how these economists have gotten it so wrong?

And most importantly, how Lord Reagan, the God of all Conservative doctrines, managed to be so wrong as well...

First, I didn't "answer" your hypothetical question because it's just a hypothetical question. What's the point? Why not talk about reality?

But it does raise a couple of ways to look at this issue (and you really seemed to think you were on to something, so why not?)

First, taking your question at face value, and all other things being the same, if "social security never existed" and all other government spending was the same over the past few decades, then I would say that the debt would be the same because the government would have borrowed the same amount of money from other sources than the trust fund.

As for the annual deficit, the question would be whether or not payments had to be made on this alternate source of borrowing (and what the terms of the borrowing were).

Another way to look at it would be this (and perhaps slightly less hypothetical, but still crazy):

What if congress magically passed a law that next year that no money from the general budget could be transferred to social security. Zero. Nada. Meaning, for just that one year, social security could not redeem any of it's bond holdings from the trust fund. (And if Social Security's expenses exceeded its income, payments to beneficiaries would have to be reduced to compensate, and old people would have to eat cat food).

If that happened, then would the general budget deficit be less than it otherwise would? Yes.

Either by accident or design, this is obviously a complicated topic. As analytics demonstrated, different names are given to different parts of the process so even simple concepts like "debt" and "trust funds" can mean different things, and transfers of money from one account to the other can be called different things.

Honestly, I can understand why the government is trying to create a shell game where it looks like Social Security is fine and there is nothing to worry about. I'm not sure why some people are so set on pretending that a shortfall in social security taxes isn't ultimately reflected as part of the deficit of the general fund. That I don't understand.

The odd thing is that the Social Security administration itself isn't trying to hide it. On page 2 of the 2014 annual report, they clearly state the following:

Social Security’s cost exceeded its tax income in 2013, and also exceeded its non-interest income, as it has since 2010. This relationship is projected to continue throughout the short-range period (2014 through 2023) and beyond.
The 2013 deficit of tax income relative to cost was $76 billion and the deficit of non-interest income relative to cost was $71 billion. In recent years, OASDI tax income and non-interest income have differed as a result of a temporary reduction in the Social Security payroll tax for 2011 and 2012, combined with reimbursements from the General Fund of the Treasury to the Social Security trust funds that amounted to $103 billion in 2011, $114 billion in 2012, and $5 billion in 2013. Assuming there is no future legislation to transfer General Funds to the trust funds, OASDI tax income should approximately equal non-interest income this year and in future years. For 2014, the deficit of tax income (and non-interest income) is projected to be approximately $80 billion.

http://www.ssa.gov/oact/tr/2014/tr2014.pdf

Another interesting "test" on whether or not the OASDI Trust Funds are healthily solvent and independent of the general fund is what happened when the federal budget was ham-stringed by the debt-ceiling standoff in 2011. At the time, people worried that there wouldn't be money to fund social security checks if the standoff continued, but if there were a seperate fully funded trust account for social security, how could that be the case?

Why can't Congress or Mr. Obama dip into that $2.6 trillion cash hoard to pay benefits until this debt-limit business gets sorted out? After all, as White House budget director Jack Lew put it in a February USA Today op-ed, "Social Security benefits are entirely self-financing."

Not quite. As everyone in Washington knows, the trust fund contains not cash but IOUs. Payroll taxes don't go to some vault in Fort Knox, and they certainly aren't invested. When Social Security runs a surplus, Congress spends the money immediately on something else and then the government claims its owes a debt to itself. Where the money will come from to pay these IOUs is anybody's guess—though Mr. Obama is hoping it will be higher taxes.

Trust fund balances only exist in "a bookkeeping sense," as Bill Clinton's budget director put it in 1999. "They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government's ability to pay benefits."

The author of that concession to fiscal reality was none other than the same Jack Lew. Mr. Obama's contribution is his admission, however inadvertent, that the government has spent so much that even its own accounting and political fictions are collapsing.

http://www.wsj.com/articles/SB100014240 ... 0270069780

I think that quote is the clearest explanation of the situation, so I'll post it again from its original source. This is Bill Clinton's budget director in 1999:

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.


http://www.gpo.gov/fdsys/pkg/BUDGET-200 ... 00-PER.pdf

I don't know how much clearer it can get than that. The "when redeemed" part started happening in 2010. The only way to "redeem" them is by "raising taxes, borrowing from the public, or reducing benefits or other expenditures". Which is exactly the same as every other line item the federal government spends money on, from tanks to pork to subsidies to healthcare to everything else.

[_ajax18]

Either by accident or design, this is obviously a complicated topic. As analytics demonstrated, different names are given to different parts of the process so even simple concepts like "debt" and "trust funds" can mean different things, and transfers of money from one account to the other can be called different things

Definitely by design. Jonathan Gruber would be proud.

[_cinepro]

This does seem to be a key point of disagreement between the dueling idealogues. From "Dean Baker" in KG's previous post:

All funding for the program comes either from [Social Security] tax or from the bonds held by the program’s trust fund. (The Social Security system is also is credited with a portion of the income tax paid on Social Security benefits.)

Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund.

Compare to this statement in the 1999 Budget from Clinton's budget director:

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.

http://www.gpo.gov/fdsys/pkg/BUDGET-200 ... 00-PER.pdf

Personally, I think Dean Baker's statement is wrong because he fails to acknowledge what the "bonds" in the trust fund represent. They are not cash or some other kind of asset. They are a future (now current) draw on the general budget of the US Government. I don't know why he thinks SS can't "lawfully contribute" to the deficit. Once the federal government is running a deficit, then everything "contributes" to the deficit, whether it's a $5 pack of pens at the pentagon or having to transfer money back to SS because it's running short.

[Gladness]

cinepro,

I'll respond to your earlier posts later. I started to reply to this one before I read what you had written above.

This does seem to be a key point of disagreement between the dueling idealogues....

I disagree; both quotes are true and they don't contradict each other.

All funding for the program comes either from [Social Security] tax or from the bonds held by the program’s trust fund. (The Social Security system is also is credited with a portion of the income tax paid on Social Security benefits.)

Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund.

That is absolutely, factually true.

These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.

http://www.gpo.gov/fdsys/pkg/BUDGET-200 ... 00-PER.pdf

In context, what Analytical Perspectives says is correct, although the part I highlighted is misleading. The term "real assets" doesn't refer to money. You can tell the author of the document understands this by looking at the report in context. "Real Assets" means:

Real Assets: Physical or tangible assets that have value, due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land and oil.

Read more: http://www.investopedia.com/terms/r/rea ... z3XQZwqVeq
Follow us: @Investopedia on Twitter

Compare to "Financial Assets"

Financial Asset: An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets.

Read more: http://www.investopedia.com/terms/f/fin ... z3XQaplTQO
Follow us: @Investopedia on Twitter

Here is a quiz on whether you understand this concept:

Q: Which of the following are real assets?

1. Corporate bonds
2. The mutual funds in your IRA
3. The money in your checking account
4. The money in your wallet

Answer: None of them are real assets. They are ALL financial assets.

If you don't understand that, carefully read the Wikipedia article on Financial Assets. This real vs. financial asset is in fact the way your source are using the terms.

Your source's point is that while it's true that the assets held in trust funds are legitimate financial assets, the other side of them are legitimate financial liabilities of the federal government. His point was to draw attention to this second point and explain that the government had to be prepared to pay back the money it was borrowing. It would do this by investing in economic growth, maintaining the budget surplus and paying down the national debt, not making irresponsible tax cuts, and not starting pointless wars in Asia and the Middle East that are financed by borrowing.

Sigh.

Personally, I think Dean Baker's statement is wrong because he fails to acknowledge what the "bonds" in the trust fund represent. They are not cash or some other kind of asset. They are a future (now current) draw on the general budget of the US Government. I don't know why he thinks SS can't "lawfully contribute" to the deficit. Once the federal government is running a deficit, then everything "contributes" to the deficit, whether it's a $5 pack of pens at the pentagon or having to transfer money back to SS because it's running short.

The bonds in the trust fund are backed by the full faith and credit of the United States and are just as legitimate as every other security the treasury issues. These assets are just as legitimate as cash for exactly the same reason--the backing of the full faith and credit of the United States.

Regarding what contributes to the deficit, here is another example. Say I own a $1,000 T-Bill that matures tomorrow. Tomorrow, the government will give me $1,000. Does that contribute to the deficit? The correct answer is no: when it sends me the check for $1,000 in cash, its liabilities go down by exactly $1,000. Those two transactions cancel each other out on the income statement, resulting in no net deficit.

The same principle applies to the Social Security trust fund. If the SSA cashes in a $100,000 bond, the government pays that bond, but its liabilities go down by exactly $100,000 when it does so. In aggregate, no effect on the deficit.

"Social Security can't legally contribute to the deficit" means two things. First, by law, the definition of the federal deficit excludes Social Security. Second, by law, the Social Security Administration can not borrow money to pay Social Security benefits. If current projections hold true, for the next few decades, the SSA will draw down the money in the trust fund to pay benefits. This will not increase the deficit, because the federal government will simply refinance its liabilities in the trust fund with liabilities in the form of other securities. That is just a restructure of the balance sheet.

If current projections hold true, in 2033 the trust fund will run dry. At that time, the Social Security Administration will reduce all of the Social Security benefits paid in 2033 by a flat percentage so that the Social Security Taxes collect that year will cover the benefits paid that year. Then going forward, that percentage reduction will be applied each year so that the taxes collected that year will cover that year's benefits.

[_Analytics]

If you consider the "unified federal deficit" to be the sum total of all government revenue and expenses, including Social Security, then this is true.

But if you use the technical legal definition of the "unified federal deficit", what Charles Blahous (of the Hoover Institute) says here is absolutely, unequivocally false.

Where, exactly, are you getting your "technical legal definition" of "unified federal deficit", and why doesn't Charles Blahous know about this? Honestly, unless you have a better reference, I'm going to have to take the word of the executive director of the bipartisan President’s Commission to Strengthen Social Security over yours.

My source is the Social Security Amendments of 1983, (H.R. 1900/P.L. 98-21, Enacted April 20, 1983). The Social Security Administration says the following:

SUMMARY of
P.L. 98-21, (H.R. 1900)
Social Security Amendments of 1983-Signed on April 20, 1983


•Makes comprehensive changes in Social Security coverage, financing, and benefit structure. Following are major provisions of the legislation which incorporate the recommendations of the National Commission on Social Security Reform...

•Requires operations of the four Social Security trust funds to be shown as a separate function within the Federal budget for FY 1985-1992 and removes operation of the OASDI and HI trust funds from the unified budget beginning in FY 1993.

http://www.ssa.gov/history/1983amend.html

But if Charles Blahous isn't good enough, how about Andrew Biggs, who is the former principal deputy commissioner of the Social Security Administration. Does the fact that he's conservative mean we should ignore him and give precedence to such prime sources as someone with a Ph.D. in English writing at "Alternet.com"...?

From 2012:

Budget wonks use two main measures of the budget deficit: the "on-budget" balance, which includes everything except Social Security and the postal service, and the "unified budget," which merges the on- and off-budgets together. If, for example, the on-budget was running a deficit of $100 billion while the off-budget ran a surplus of $100 billion, the unified budget would be in balance.

The unified budget approach is by far the most common for both budget wonks and the media. As a 2005 AARP policy analysis stated, "The [Congressional Budget Office], the U.S. General Accounting Office, and other agencies that produce budget documents and analyses think that the unified budget concept gives the most complete picture of total federal revenues, spending, surpluses, and deficits."....

http://www.realclearmarkets.com/article ... 99912.html

The fact that they think this is a good conceptual framework doesn't change what the law actually says.

Just to be clear, I agree that it is a good because it highlights the fact that the federal government does in fact have an obligation to pay back the money it borrowed from the SSA.

[_Analytics]

No, the payment is made up by spending down the assets in the Social Security trust fund--[legitimate] assets that were created by past payroll taxes explicitly for that purpose. And reiterating what I stated above, if the Social Security Trust Fund runs out of money (and the law isn't changed first), then benefit payments will be reduced so that current Social Security benefits are low enough to be covered by current Social Security tax revenue.

The social security trust fund is a debt owed by the US Government; they took the money from social security and spent it, and gave social security a bunch of IOUs. Payment made from the "trust fund" to social security have to be paid from the general fund.

Sort of. The trust fund is composed of assets. Those assets are U.S. government securities, the safest securities on the planet. The government does in fact have to honor the securities in the trust fund and pay the money back. That is true of all U.S. government securities and doesn't make the "IOU's" the government gave the SSA in exchange for cash any less legitimate than the IOU's the government gave China in exchange for cash.

For the sake of argument, say the $2.6 trillion in the trust fund were invested in corporate securities (that's hard to imagine--does the private sector have the ability to put an additional $2.6 trillion to productive use?). If that happened, then the Federal Government would have borrowed $2.6 million more from non-SSA sources than it did in reality, and the total debt would be the same.

Of course in that alternate scenario, the SSA would have likely lost any number of billions in bond defaults, and there would be all sorts of scandals about how the SSA went about investing its money. Would that be any better?

Alternatively, say the Social Security program was ended, and the money in the trust fund was given back to workers and retirees in proportion to what they paid in. In that scenario, the people who get money back should keep it invested in U.S. bonds (where the money is now). If they all invested it in the stock market, it would drive stock prices through the roof, causing them to all pay too much for stocks. Then when they needed to cash out to pay for retirement the prices would go through the floor, leaving them with nothing.

Additionally, investment banks and stock brokers would siphons hundreds of billions out of the system in fees and commissions. Some people would die with extra savings, which they'd pass on to their kids. Free money for kids! Just what the world needs! Others would live too long and go into poverty and become wards of the state. Welfare!!!

Social Security is a damn good program that makes America a much better place. Its strain is caused by demographics--people are living too long and having too few kids. These problems are easy to fix by increasing the retirement age and loosing immigration. Tweaking the benefits and Social Security taxes on the ultra-rich wouldn't hurt either.

Yes, the government is going to have a hard time paying back the money it borrowed--equally from Social Security and from everybody else. This shouldn't have happened and could have been avoided by keeping taxes at an appropriate level and staying out of pointless wars.

Military spending is the real problem. I'll avoid that tangent...

[_Quasimodo]

Sort of. The trust fund is composed of assets. Those assets are U.S. government securities, the safest securities on the planet. The government does in fact have to honor the securities in the trust fund and pay the money back. That is true of all U.S. government securities and doesn't make the "IOU's" the government gave the SSA in exchange for cash any less legitimate than the IOU's the government gave China in exchange for cash.

For the sake of argument, say the $2.6 trillion in the trust fund were invested in corporate securities (that's hard to imagine--does the private sector have the ability to put an additional $2.6 trillion to productive use?). If that happened, then the Federal Government would have borrowed $2.6 million more from non-SSA sources than it did in reality, and the total debt would be the same.

Of course in that alternate scenario, the SSA would have likely lost any number of billions in bond defaults, and there would be all sorts of scandals about how the SSA went about investing its money. Would that be any better?

Alternatively, say the Social Security program was ended, and the money in the trust fund was given back to workers and retirees in proportion to what they paid in. In that scenario, the people who get money back should keep it invested in U.S. bonds (where the money is now). If they all invested it in the stock market, it would drive stock prices through the roof, causing them to all pay too much for stocks. Then when they needed to cash out to pay for retirement the prices would go through the floor, leaving them with nothing.

Additionally, investment banks and stock brokers would siphons hundreds of billions out of the system in fees and commissions. Some people would die with extra savings, which they'd pass on to their kids. Free money for kids! Just what the world needs! Others would live too long and go into poverty and become wards of the state. Welfare!!!

Social Security is a damn good program that makes America a much better place. Its strain is caused by demographics--people are living too long and having too few kids. These problems are easy to fix by increasing the retirement age and loosing immigration. Tweaking the benefits and Social Security taxes on the ultra-rich wouldn't hurt either.

Yes, the government is going to have a hard time paying back the money it borrowed--equally from Social Security and from everybody else. This shouldn't have happened and could have been avoided by keeping taxes at an appropriate level and staying out of pointless wars.

Military spending is the real problem. I'll avoid that tangent...

+1

You did a much better job of explaining the SSA than I did. You are a clever guy, Analytics!

[_Kevin Graham]

Analytics knows this stuff backwards and forwards and he has a great way of explaining things

[_Quasimodo]

Analytics knows this stuff backwards and forwards and he has a great way of explaining things

It's nice to have him around. You too!