"Lock Box" works if Gov will repay bonds owned by SS via FIT Tax Increase

[papau]

"Lock Box" works if Gov will repay bonds owned by SS via FIT Tax increase


The Money being taken from the payroll tax to pay for current expenses is indeed gone. But the SS Trust fund is given as a substitute US gov Bonds that earned about 6% (it changes for each borrowing) until they are paid off by means of the Federal Government raising funds – most likely via a FIT tax increase – so as to redeem those bonds.

Indeed the SS system is solid until 2043 ONLY IF those SS Trust fund bonds have real value and we intend to raise FIT in 2018 and later as the stolen money is repaid to the Trust fund and the Trust fund uses the cash to pay benefits.

Indeed this is the crisis that Bush faces under Social Security – the need to pay back those trust funds – which means a need to raise FIT rates beginning in 2018. Indeed this is the ONLY crisis that faces Social Security.

Now the Lock Box was a term coined to explain NOT USING SS PAYROLL TAXES FOR GENERAL EXPENSE! Since the SS Trust fund does not hold cash, the fund in effect buys National Debt bonds from the private hands that now hold it. Since the National Debt consists of the bonds in the Trust fund plus the bonds in private hands, the cash in effect reduces the National Debt – a situation Clinton achieved for the period 1/1/2000 to 12/31/200. Keeping the excess payroll taxes from being used on general expenses also can be accomplished if the Trust funds uses the money to buy non-government bond assets. The effect is the same.

But buying non-gov assets may be safer than expecting the GOP to honor the bonds by raising FIT tax rates to raise the money to redeem those gov bonds owned by the Trust. Indeed the budget would not then have the subsidy of the SS excess payroll tax – and all the world could see how in the red we are. By buying gov bonds, SS allows the financial press to ignore the fact of a future FIT tax increase being needed.

The idea that non-government assets in the SS Trust fund that can be easily converted to cash is solid, while excess payroll taxes into the promise of a FIT tax increase in the future – as represented by a government bond – made be a pretend, is a real problem only if you assume the GOP are all a bunch of thieves and that the SS Trust fund bonds have no value as they have no claim on the taxing power of the government.

I do not expect the GOP to admit that, and if the press has any ethics – another if – the GOP will not be allowed to pretend there is a need to “fix” Social Security without also making the confession about their theft of the SS payroll tax – the working man’s retirement funds - so as to fund a tax cut for the rich.

[rapier]

1. notes

Whew! That's hard to follow and I think I understand this stuff.

Let me take a stab at it. All SS funds in excess of what is needed any year are given (paid) to the Treasury which then issues the SS Administration a bond. Thus the cash goes into the Treasury for spending now, and SS gets the bond, a peice of paper.

These bonds are unusual as they are an intergovernmental transaction. All other bonds are auctioned. The fact is however that the SS Trust Fund bonds carry the same explicit guarantee as all other Tresury Bonds, which is the full faith and credit of the US Government.

Former Treasury Secretary O'Neil stated that the trust fund bonds were not real bonds and would not have to be paid, nor were they likely to be. Several days later he corrected that. I'm sure the Treasury lawyers told him that those bond have to be paid off. (I'm sure the political people told him to shut up about it as well)

It should be noted that O'Neil, the head of the Treasury, with this statement, was explicitly saying that the US Government was going to default. The markets didn't care. For all my talk above about the legal obligation to pay off the bonds the markets assume, even hope, that Uncle Sam will default on it obligations to it citizens. No problem, as long as they don't default on the trillion owned by Japans Central bank or the soon to be trillion owned by Chinas central bank nor any other bond owned by the myriad banks and financial institutions, etc. etc.


The table is set. The moment that the SS taxes are not enough to meet SS obligations is the moment when it will be decided we can't afford to pay off the bonds. This moment will mean that instead of a surplus to be spent by congress, that congress will have to budget money from current spending to pay that portion of SS. You see the Treasury is just the governments bank account. They borrow money, and issue bonds to the lenders in order to pay the bills.

I hope this makes some sense.

The 83 'rescue' of SS it is now clear was a cynical ploy. AL Greenpan and most of the rest knew that the huge payroll tax increase would hide the then exploding deficits. They also knew it would never be repaid. The entire thing was a con.

[papau]

2. I think you are on target, but

but there is no way to not pay off SS Bonds. Except one cam set up the economics so that there is never a need for real cash from those bonds - so the payoff can be more bonds.

The way to avoid the conversion to cash is to cut benefits before 2043, or to raise payroll taxes when the conversion to cash is needed - or the Bush way - to hide doing both under a smokescreen of "new" benefit tables, contribution rates, and separate accounts.

But you are correct "The table is set. The moment that the SS taxes are not enough to meet SS obligations is the moment when it will be decided we can't afford to pay off the bonds. This moment will mean that instead of a surplus to be spent by congress, that congress will have to budget money from current spending to pay that portion of SS. You see the Treasury is just the governments bank account. They borrow money, and issue bonds to the lenders in order to pay the bills."

I agree the 83 'rescue' of SS was a bit cynical in that taxes were raised well before they were needed - but in a pay as you go intergenerational transfer system the idea is to raise the tax level as needed to pay the benefits.

I also agree that the GOP and most of the rest knew that the huge payroll tax increase would hide the then exploding deficits. They did not admit to themselves - and I do not admit to myself - that the bonds would never be repaid - but you are correct - if true - the entire thing was a con.

I prefer to think that the stolen funds will be repaid via an increase in FIT rates on the rich beginging around 2018. But then I am a liberal dreamer! The GOP is trying to hold the increase in the wage base solution - which is an increase in tax on the rich - in reserve for that 2018 moment - and to make the monies needed smaller by cutting benefits sooner via the individual account scam.

[rapier]

4. notes

The 2043 date refers to the date that all the 'savings' in the form of those bonds is used up. Much much before then we will have to start drawing upon those 'savings'. That is when the crunch starts because that is the year congress will have to pay right out of the 'real' budget. It is the obverse of the current situation where they take the 'surplus' and spend it. That is easy, the other is almost impossible.

I'll paint a broader picture of Uncle Sams books. Most years since 1930 Uncle Sam has run a defict. So he has had to borrow money in the marekts and that is thru bond sales. Since he runs a budget deficit most years he rarely pays down the total defict, now over $6 trillion I think. That means he (we) are having to roll over all the old bonds as they expire and borrow more. When the total defict grows, of necessity, we are borrowing to pay off the old lenders, ie. the bond holders.

This is the thing Republican used to rail at for the last 70 years. In fact, except for WWII the deficits were not that big compared to total GNP and were quite manageable. That is until Reagan. We had a breif respite in the late 90's but now the problem is exploding. Unless the economy starts growing at way above the trend for the last 70 years the annual deficts will be bad to disasterous. I lean towards the latter. A certain percentage of Republicans and various conservatives know this and love it. The other portion just have a childlike faith in tax cuts.

Anyway even without the SS issue the deficits look to grow in future. No way will we be able to pay SS when that happens. At least not at the rate we do now. Benefits will be cut to match annual contributions.

We cannot just 'print' money to fix the problem. 'Printing' money in this context has only one mechanism and that is thru the Federal Reserves open market operations. This 'printing' however does not flow into the Treasury. It flows into the financial system thru banks and most importantly thru the Feds real partners, its Wall St. agents, the primary dealers. If this injection of liquidity (money) into the system delivers economic growth then tax receipts will rise and then the Treasury will be happy. Obviously however that 'printing' has done squat for the real economy. It has however boosted stocks prices.

[papau]

6. I agree

You state the 2043 date correctly and the earlier date (2018 under the "middle" projection - there are 3 projections) where we must cash in bonds for cash also correctly.

It is interesting that the total national debt accumulated from 1776 to 1980 was about $1 trillion - and now Bush has a shot at a one year defict of $1 trillion to add to the current $ 6.8 trillion.
http://www.publicdebt.treas.gov/opd/opd.htm

I agree that without reversing the tax cuts - and cutting back on the defense industry welfare additions to Bush's Defense budget - the deficit grows. The payroll tax surplus hides only $150 to 200 billion - and that will decrease in a few years to zero.

And you are correct that pay as you go design means benefits will be then cut - or taxes raised - or we find forieners that want to fund our retires monthly checks in return for paper - a bond - from the US.

Only in the money flow from printing money do I disagree. The printed money is listed as an asset on the Fed books. While it does indeed flow into the system via Federal Reserves open market operations - the Fed trades the cash for bonds purchased in the capital markets - the Fed has other ways to increase M1 and M3 (the easiest is to just deposit the printed money in a bank so that the bank can make loans against their new asset). But this board is not the place to write my first draft of a book on Fed. financial operations! :-)

In any case you are correct - 'printing' above current economic activity needs does little for the economy beyond giving us inflation (although printing below current needs can be a disaster - but with a 12 month to 18 month lag).

[German-Lefty]

3. If Uncle Sam cann't pay the bills he just has to print more money.

Sure the currency's value would go to hell, but if BUSH 2016 can't pay the bonds anymore he can just print some extra cash. This is simular to defaulting on the bonds since investors would no longer trust the US. I guess it's worse because it also destroys the currency.

I'm not sure some "lock box" is going to help since if those assets belong to the government they can just balance them out with debt. I suppose it just makes it seem a bit harder politically to justify screwing old people out of their money.

The big question is when the US goes bust, are they going to keep handing out social securty checks or pay the military? My feeling is that there will be enough public outcry that they at least get some good fraction payed out.

It's imporatant that the public knows the real vastness of the national debt including the money borrowed from SS and spent elsewhere.

[papau]

5. The total National Debt - including the SS "assets" are at

http://www.publicdebt.treas.gov/opd/opd.htm

The key is the conversion to cash - if "interest" and current excess payroll tax just result in printing up more bonds for the SS Trust Fund Asset Account - we are really just using the excess payroll taxes to pay general expense and give a tax break to the rich that we never intend to pay back to the SS retires.

So in 2018, which is when the current Social Security Administration Actuaries say in there projection that some of the money for SS benefit checks will come from cashing in those US Gov Bonds in the Trust, we are either cutting benefits, or the FIT is increased to raise cash to pay back those bonds. Of course the Wall Street Journal would have you believe that in 2018 the folks overseas will be hot for our bonds and will send cash to the US for Gov Bonds - albeit thereby increasing the National Debt and most likely raising interest rates in the US market - but that way the US gets foriegn cash to help pay for our SS retires benefits checks. So no need to ever raise those FIT rates on the rich!

Ofd course the econ projections of the result of this approach is disaster - but that was the OLD ECONOMICS - you must have SUPPLY SIDE FAITH!

Indeed the ABCNote takes one to task if you say Bush is a con artist or that he is stealing the payroll tax money or that high deficits forever will kill the economy - you must note Bush's sincere conviction that the SUPPLY SIDE - no tax, just deficits - approach will work forever - and please do not mention the 14 month recession Reagan's tax cuts for the rich caused in 82-83 - that recession had other causes - have you not heard of cycles? - it just LOOKS like it was caused by the Reagan tax cut.

[German-Lefty]

7. My stupid gut feeling of which way the money should be flowing.

If the US has this big block of baby boomers that need retiring the money should be flowing out of our country while they're working. We should be investing overseas and perhaps buying bonds from other people's governments. Then when the money is needed it can flow back in.

Otherwise the kids are going to have to take care of thier stupid parents and grandparents by themselves. Expecting the US to just be able to borrow later is a bad idea.

Such giant long term lones are hard to believe in somehow. If we all had private penchant plans, we'd be just as worried about them screwing us by making risky investments. Trusting the government to hold your money isn't any smarter. It works in a steady state, but if a big block of people expect to pay in for 40 years and cash out, they have to put a bunch of faith into Uncle Sam.

These are just stupid gut feelings -- it's Friday and I wana go home.