The social security "crisis"

[Recursion]

The "crisis" in social security is that we normal people expect the rich to pay us back the money they borrowed from us.

The Social Security trust fund is $2.5 trillion held as Treasury bonds. That is to say, when you look at your pay check and see the withheld line marked "Social Security Tax", that money gets pooled with everybody else's and first is used to pay out the benefits for everybody that's currently on social security. The money that's left over (though for the first time this year at one point there wasn't money left over, which made everybody's head explode who was to the right of Paul Krugman) then gets sent to the Treasury to buy bonds -- that is, to buy parts of the national debt. The trust fund currently holds a little more than one seventh of the US debt (2.5 trillion out of 14 trillion).

The point is, Social Security is sitting on 2.5 trillion dollars of Treasury Debt -- you could look at it as funding the wars in Iraq and Afghanistan if you were particularly perverse. So, conservatives who say it adds to the deficit are wrong, and liberals who say it doesn't add to the deficit are right. For the most part. Even if we stopped taking levies from people's paychecks, it has enough money to pay out everything for a couple of decades, and with the levies (assuming the economy doesn't get incredibly worse) it can hold out for a very long time indeed. But, I said "for the most part" for a reason. The problem is, Congress (and by extension the rest of us) has gotten addicted to that false revenue stream that has guaranteed 200 billion dollars or so in automatic debt purchase every year.

So, I say "for the most part" because as the baby boom continues to retire, we will have more years where the payroll levies do not exceed the benefits paid out, and the SSA will have to start cashing in more of those bonds, which means the treasury will have to pay them. This bothers conservatives because it means money going to poor and middle class people rather than no-bid contracts for Halliburton.

A conservative blogger to whom I will not link because the rest of the post is pretty odious proposed an interesting thought experiment. Suppose that the trust fund were a stack of physical bonds sitting in the SSA's offices somewhere. And suppose an intern accidentally dropped them in the shredder (this is simplistic to the point of comedy, but you get the point). On the one hand, the poor guy has really screwed up because now SSA has no trust fund (bad). On the other hand, nearly 3 trillion in US debt just disappeared (good). We have used Social Security levies as a cash spigot for so long that it's going to be difficult to honestly not call social security outlays as actual outlays, even though in the magical world of accounting they won't be. And not only is the spigot going to start sputtering off, it's going to actually start sucking money from the rest of the Federal budget.

Now, Democrats will point out that we've known this all along and there's nothing new here to make this a "crisis". We chose, against Al Gore's advice, to keep pouring the money into bonds rather than gradually weaning ourself off this fake revenue stream that we know would disappear. However, that's where we are now: not only are working people about to, in net terms, stop lending money to the government, we're about to demand the government pay us back.

From a moral standpoint, the solution is obvious: continue the levies, pay out the promised benefits with the Treasury bonds, and for general Federal spending do some combination of cutting expenses and increasing revenues (getting our military out of Iraq and Afghanistan and ending the millionaires' free lunch tax breaks are two great ways to do that).

But, all of our moral and intellectual rectitude doesn't change the uncomfortable fact: even if by literal principles of accounting Social Security doesn't add to the deficit, the simple fact is we are going to have to scramble to find new sources of revenue to cover the fact that it's in the process of transferring from net yearly black to net yearly red. If I'm saving up my change in a piggy bank, and leave an IOU in it every time I take money out to buy a pack of smokes (I last smoked back when you could still buy a pack with a reasonable amount of change), the fact that the piggy bank is full of IOUs to myself doesn't help me if I'm out of money when I actually need to spend the change on whatever I was saving for.

We screwed up Social Security by letting Congress give our payroll levies to rich people, and it's going to be a hell of a time getting it back from them.

[NoNothing]

1. The problem is if not Treasury Bonds

What would you have the SSA do with the surplus cash it collected? That is why Al Gore's "lockbox" plan made no sense if you think about it. I suppose he didn't literally mean we would have a vault stuffed with dollar bills, but what then exactly did he mean to do with it?

[Recursion]

2. Gore's solution solved this problem but created other ones

His idea was to take the excess outlays and rather than buying bonds, pay off bonds. That would in theory make borrowing easier later on when we need to cover the spread between levies and outlays. But the new problem should be fairly obvious: under that scenario, Social Security doesn't even have the bonds, just a gentleman's agreement with Congress (ha!) to honor the paydown dollar-for-dollar when the time comes. So, yes, it would have saved us a decades' worth of interest payments in the 2000's (and in 2000 everyone assumed money would always keep getting cheaper, so saving interest payments "now" is a good thing, because when you make them "later" a dollar would be worth less than "now") and had some things going for it, but as he campaigned on it it really would have made this particular problem worse (I'm assuming he would have tinkered it into something workable by the time he actually implemented it).

[NoNothing]

9. Right, you see my point though

Blaming Congress for "raiding" the trust fund is silly and counterproductive, unless you agreed with Bush that they should have invested in corporate stocks and bonds or something.

[Recursion]

12. Obviously corporate bonds would have been a disaster

But if we were to grant the idea of using SS income to offset rather than directly hold debt, I could see using it for capital expenses like infrastructure.

[Statistical]

13. A well diversified pool of corporate bonds wouldn't have been a disaster.

However it would have eliminated $3.2 trillion in "free money" for Congress. It would have required spending cuts and higher taxes YEARS AGO rather than pretend that the budget was even close to balanced. Any member of Congress in 1980s got the best of both worlds. They got to cut taxes, increase spending, AND not worry about it. $3.2 trillion in free money. By the time that bill comes due they will be long since retired (with public pension).

If a % of SS was put into high yield (AA-/Aa3 or better) corporate & municipal bonds with no exotics (no CDS, MBS, etc) it would have yielded pretty well over last decade. Averaging about 1.5% higher than treasuries. Insurance companies & pensions invest in high yield bonds and have done just fine.

[Recursion]

14. And it would have created a whole new category of "too big to fail"

Anything whose bonds were held by social security would have been widely regarded as absolutely sacrosanct and capable of getting away with anything.

IIRC Greenspan's worry was from the other direction: the 2 trillion or so that would have been pumped into the corporate bond market would unavoidably have been invested with some political discretion rather than purely fiduciary discretion.

[Statistical]

15. Agreed.

Theoretically SS would operate as a blind trust. It would invest based on guidelines set by congress but they would have no insight or control beyond those guidelines.

I do agree though with level of corruption in Washington this would be difficult to achieve. Also if SS funds were well diversified it wouldn't make any company too big to fail. Say you take 1/4 of SS trust fund say roughly $800 billion. Diversified into 100 companies that would be a "mere" $8 billion bond holding company. If SS fund could yield 6% that would be $48 billion in interest. a default of a single company or even multiple companies wouldn't jeopardize the fund.

That being said Congress would need to act like grownups and I have little faith they could.

[Recursion]

17. So many of these problems are prefaced with, "If Congress were full of adults..."

Sigh

[Statistical]

3. Al Gore lockbox made no sense.

It was a political trick used to gain support among low information voters.

Had we just put SS money in a box it would have been utterly stupid. One the money would earn no interest and would be subject to the crippling power of decades of inflation. From 2000 to 2010 inflation has reduced the buying power of a dollar by 21%. So you collect $100B in 200 and it would only be worth $80B today.

As a result either the shortfall would occur much earlier OR (and more likely) SS benefits would no longer be indexed to inflation which means despite retirees getting the "same check" every year the buying power of that check would decline by ~20% per decade.

No the reality is:
a) SS surplus allowed income (and other taxes) to be lower in the past. We utterly squandered that gift because it made it SO EASY to balance the budget, and pay down national debt. However at this point that is crying over spilled milk.

b) In the future income taxes (or other taxes) will need to rise because those $3.2 trillion in SS bonds will need to be repaid.

There is no crisis* unless you are very rich and fear your taxes going up now that the SS free money train is over.


* There is a secondary issue that even w/ full repayment of SS trust fund (w/ interest) SS will fall short in 2038. This will require a change in either revenue and/or benefits but that is completely unrelated to repaying the trust fund.

[Recursion]

4. His plan had the fatal flaw of assuming Congress was not full of sociopaths

Because in practice it was less of a "lockbox" than what we have now; he just wanted to use the excess to pay down debt so that borrowing would be cheaper when it happened. At least with what we have now, the debt already exists, and we don't have to ask Congress to directly create more debt for it.

We utterly squandered that gift because it made it SO EASY to balance the budget, and pay down national debt. However at this point that is crying over spilled milk.

I'm pretty sure I wasn't alone in feeling like Clinton by touting a "surplus" from 1998 on was walking into this trap.

[Statistical]

7. Yeah I tried to explain to people that it was funny math but Clinton was well liked.

I mean the "balanced budget" under Clinton was better than any previous or later budget in recent history but it was still bogus.

It was balanced by including surplus from SS. However in accounting if you know you have cashflow that has to be allocated in future you can't consider it an asset.

The home game analogy would be like taking a $1,000 cash advance on your credit card each month and balancing your budget. Hell you might even have a surplus.... the only problem is eventually you are going to have to repay that CC and that is where the "surplus" falls apart. You are simply shifting liabilities into the future.

In a perfect world from the 1980s till today surplus would go to pay down the national debt (i.e exchange foreign bonds w/ SS bonds) however for accounting purposes wouldn't be included in the budget. Congress would have had to balance the budget ignoring surplus from SS.

However you are the first person I have encountered that even gets this concept. The topic is so esoteric that getting other people interested or getting the media to explain it in a way that makes sense has been impossible.

[doc03]

10. Al Gore wasn't literally going to put the money in a box

that was just making it simple enough so that the average American could understand. The Republicans are masters at that, a Democrat does it the MSM ridicules it.

[NoNothing]

16. A minor disagree

While it is not a crisis, this still contributes to a larger problem with federal finance. It's very easy, for any finance problem, to pass the buck and say, "no problem, the very rich will pay for it." Social Security, Medicare, universal health care, stimulus, whatever: that's the universal solution. But of course, there is only a finite amount of money to be extracted there. Consider this: EVEN IF you jacked the rates up to an oppressive 90% on every person who made more than $200,000 in 2008, and assuming, unrealistically, that those taxpayers made no effort to avoid those taxes, and that they continued earning at the exact same rate, it would not even be enough to make up this year's deficit.

So to the extent we count on soaking the rich for one thing, that means we cannot also soak them for something else. Eventually there's no more rich to soak. My point is that we cannot feasibly tax our way out of our problems, the only way out that doesn't involve painful austerity is big, big economic growth.

[doc03]

5. If anyone remembers when GWB was campaigning

he was going to give the taxpayers back their money (the surplus). As I remember for every $3 he was going to return $2 in tax cuts and the other $1 was going to go into SS to build up the trust fund for baby-boomers. Where did that dollar go?

[Recursion]

6. The problem is all $3 came from Social Security levies

He gave $1.99 to very rich people as outright tax cuts, $0.01 to the rest of us as those "rebate" checks (a rebate on the next year's tax bill, so it was really more of a payday loan), and the remaining dollar is in the form of those Treasury bonds SSA is sitting on.

[ensho]

8. Pentagon has all the money - if SS needs some - go to the Pentagon

they have so much money they keep losing some

[inna]

11. kr

"...the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund...in the next century...the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes."
--Senator Earnest Hollings (D-SC) Speech on Senate Floor, October 13, 1989


"...On that chart in emblazoned red letters is what has been taking place here, embezzlement. During the period of growth we have had during the past 10 years, the growth has been from from two sources. One, a large credit card with no limits on it, and, two, we have been stealing money from the Social Security recipients of this country."
--Senator Harry Reid (D-NV) Speech on Senate Floor, October 9, 1990