Indeed, on today's Washington Post editorial page, Michael Gerson advises Obama to do exactly this, even as he recognizes that there is little political support for it, particularly among Democrats. But repeating the long buzz in certain circles that it should be done because it is easier to do than dealing with rising medical care costs or raising taxes or cutting defense spending, he should do it, with the aid of supposedly willing Republicans, and even though the system is the least contributor to the deficit of any major part of the federal budget, although neither he nor anybody else notes that this does a big fat zero about the near term deficit. My my. Unfortunately, I fear that those around Obama may be getting to him, as there is this well-known group of Democrats tied to Wall Street that likes this sort of argument. Rumors keep surfacing that he will put some sort of variation of what came out of his Deficit Commission on this matter into his State of the Union speech next month.
Over a week ago on Angry Bear the estimable Bruce Webb argued that the 2% cut in payroll taxes was picked by insider Dems as part of an old plan to be offered to be put into private accounts, long the goal of the Wall Street gang. I fear he may be right on this, see http://www.angrybearblog.com/2010/12/2-non-solution-part-two.html. Bah, humbug!
31 comments:
Barkley:
If the trust fund was left intact, and not loaned to the Treasury to pay current expenses and (artificially) lower the deficit, you would be correct.
However, because of the way the trust fund is utilized, it will affect our deficit, eventually.
Technically, when the Treasuries are redeemed, intragovernmental debt (unless we have a surplus that year), is converted to debt held by the public, keeping the total debt the same.
But debt held by the public is considered superior debt, for 2 reasons. First, interest on debt held by the public is paid in cash, immediately impacting the budget.
Interest on intragovernmental holdings debt is paid by issuing additional Treasuries, with no immediate impact on the budget.
Second, intragovenmental holdings debt is level 4, considered the weakest obligation by the federal government.
Debt held by the public is level 1, the federal government's strongest obligation to fulfill.
I can provide governmental links and excerpts to all those who are interested to support my statements.
Don Levit
Bob Somerby's take:
http://www.dailyhowler.com/dh123110.shtml
"But debt held by the public is considered superior debt, for 2 reasons. First, interest on debt held by the public is paid in cash, immediately impacting the budget."
Don you are confusing cash flow requirements with seniority of debt, 'immediacy' not equating to 'seniority'.
Plus interest on the DI Trust Fund IS CURRENTLY BEING PAID IN CASH. Does this make DI superior to OAS in your view?
And I don't know where you are coming up with this 'Level 4' stuff. The closest thing I can find is to Maslow's hierarchy of debt (http://caps.fool.com/blogs/maslows-hierarchy-of-debt/286825) but that is pop psychology and not some official view of OMB or anyone else. Got a real cite? Because you seem to have picked up this concept on the fly and not from any official source.
(And Barkley thanks for reading AB)
Bruce:
Interest on the DI trust fund is being paid in cash - only on that part of the trust fund in which outgo exceeds income (excluding interest).
This is the portion of intragovernmental holdings debt that is converted to debt held by the public, thus the cash payment for the interest due.
Up to that point, for many years, while the DI "surplus" was accruing all that interest was paid in Treasury securities.
Do you agree?
If not, I can support my statements through a reputable government web site.
The link for the 4 levels of debt can be found in a paper entitled "Federal Debt, Answers to Frequently Asked Questions, An Update," published by the GAO.
The 4 type of commitments, from strongest to weakest, are labeled Explicit Liabilities, Explicit Financial Commitments, Financial Contingencies, and Exposures implied by current policies or the public's expectations about the role of government.
Look on pages 65 and 66.
http://www.gao.gov/new.items/d04485sp.pdf.
Don Levit
hardindr:
Thanks for providing that article.
Here's an excerpt:
"The surpluses of the trust fund are in fact liabilities for the government as a whole. And these illusory surpluses are regularly used to subsidize the rest of the budget."
"One such change (to improve the trust fund's "solvency") could involve modest increases in the payroll tax. But this projected problem has nothing to do with the demagogioc claim that the trust fund is built on an 'accounting trick,' resulting in 'illusory surpluses;' that future shortfall is projected by those who treat the surpluses (and the trust fund) as what they are - as a wholly valid entity."
Granted, this is simply the opinion of the author.
But I can back this opinion with reputable government excerpts and links.
Don Levit
Bruce:
Interest on the trust fund is currently being paid in cash on that part of the fund in which outgo exceeds income (excluding interest).
This is when a portion of intragovernmental holdings debt is converted to debt held by the public, thus the cash payment of interest.
Up until that point when outgo exceeded income, for many years, the interest accrued in the fund by issuing additiopnal Treasury securities debt, thus having no immediate impact on the budget, for it was all intragovernmental holdings debt.
Do you agree?
If not, I can provide a governmental excerpt and link.
As far as the levels of debt, it is explained in a paper entitled "Federal Debt, Answers to Frequently Asked Questions, An Update," published by the GAO.
The 4 levels of debt are Explicit Liabilities, Explicit Financial Commitments, Financial Contingencies, and Exposures implied by current policies or the public's expectations about the role of government.
Look on pages 65 and 66.
http://www.gao.gov/new.items/d04485sp.pdf.
Don Levit
Bruce:
Interest on the DI trust fund is currently being paid in cash on that part of the fund in which outgo exceeds income (excluding interest).
This is when a portion of intragovernmental holdings debt is converted to debt held by the public, thus the cash payment of interest.
Up until that point when income exceeded outgo, for many years, the "interest accrued" in the fund by issssuing aditional Treasury securities debt, thus having no immediate impact on the budget, for it was all intragovernmental holdings debt.
Do you agree?
If not, I can provide a governmental excerpt and link to support my points.
As far as the levels of debt, it is explained in a paper entitled "Federal Debt, Answers to Frequently Asked Questions, An Update," published by the GAO.
The 4 levels of debt of the federal government, from strongest to weakest are Explicit Liabilities, Explicit Financial Commitments, Financial Contingencies, and Exposures implied by current policies or the public's expectations about the role of government.
Look on pages 65 and 66.
http://www.gao.gov/new.items/d04485sp.pdf.
Don Levit
Don Levit has been trying to float this specious argument concerning levels of subordinated debt repeatedly on this site and at Angry Bear. I have asked him to provide some official, i.e. legal, basis for his argument. He repeatedly makes reference only to opinion pieces appearing on government web sites or written by current or former agency administrators. He has not yet provided any legal citation for his subordinated debt scenario. It is a canard. He has been repeatedly challenged on the fact, but rather than answer the criticism he continuously reports this deception as though it were a fact.
"The closest thing I can find is to Maslow's hierarchy of debt,.."
Bruce, Maslow was a reasonably well regarded psychologist who described a hierarchical concept of needs, not debts. So even that reference would be specious in any effort to support Don's concept of subordinated debt owed by the Treasury. Maslow's concept of a hierarchy of needs, which was a subordinate concept within his general theory of human motivation, might help in our understanding of Don's need to obfuscate all discussions of the Social Security Trust Fund. He has some kind of subordinated need the motivation of which is not yet fully understood.
Jack:
The table listing the hierarchy of federal government commitments, as it says under the table, comes from data from The Treasury, Office of the Chief Actuary, Social Security Administration, and the Office of the Chief Actuary, Centers for Medicaid and Medicare Services.
What can you cite other than your opinions, feelings, and wishes?
Don Levit
Jack the reference to Maslow came from this cite:
http://caps.fool.com/blogs/maslows-hierarchy-of-debt/286825
Don you are hopeless. Reliable raw and finished data on government operations are obviously going to come from government sources, they are the ones charged to collect and analyze it. This doesn't mean that data can't be misused via minunderstanding or malice.
And I have been sourcing my own claims from the beginning, something you would know if you had actually cared to learn something about this topic.
Don the people who comment on this blog have been reading my stuff for years, in many cases right back to comments I was posting at Economist's View when it started and more particularly at MaxSpeak, the predessessor of this blog. And I still get the occassional e-mail from Max. Frankly if my work is good enough for Sawicky and Rosser and Baker it should be good enough for you. Because they actually know stuff and are in a postion to judge my work over time.
You? Neither as producer or critic of work product does your opinion seem to matter to anyone, mainly because you are more stubborn than a Missouri mule AND DONT WANT TO LEARN.
And Don I finally got around to reading that GAO document and found, not to my surprise that you both misread it and mischaracterized it. First of all there is no reference to 'Level 4'. And while Trust Fund assets would seem to be included in that level under 'Debt held by Government Accounts' the category labeled 'Future Social Security Benefits' at $3.699 is explicitly net of the Trust Fund per footnote c:.
"c Figures for Social Security and Medicare are net of debt held by the trust funds ($1,531 billion for Social Security, $256 billion for Medicare Part A, and
$24 billion for Medicare Part B)"
and are by calculation equally net of projected FICA income, after all program cost is running at $750 billion or so this year and projected to be $27 TRILLION in 2085, there being no way to get 75 years of those costs wedged into a $4 trillion bag. Instead that figure is referencing what SSA calls 'unfunded liability', a topic explained at length at AB, and which is truly not under law a liability at all.
And Don the worst thing of all is that you are clearly not doing your own work. Your best pieces of evidence so far are excerpts from a 1937 retrospective Report of the 1934-35 CES (which dates you seemed unaware of when citing the docs) plus this Report which uses year end 2003 numbers even as you seem to have no awareness at all of current year reporting. Which suggests you are just being fed this from a third party source who probably does understand these numbers and is just counting on you to pass them on undigested.
And then have the balls to get on your high horse and accuse me of just stating my own opinion.
Last word from me. As far as I can see neither the word 'hierarchy' or 'Level 4' appears in that GAO document or any sense that the relation between 'explicit' and 'implicit' is vertical.
Instead the word used is 'spectrum' from 'explicit' and 'implicit' and the argument is that policy makers should take MORE cognizance of the implicit ones:
"Fiscal exposures represent significant commitments that ultimately have to be addressed. The burden of paying for these exposures may encumber future budgets and constrain fiscal flexibility. Not capturing the long-term costs of current decisions limits policymakers’ ability to control the government’s fiscal exposures at the time decisions are made.
In addition, the lack of recognition of long-term fiscal exposures may make it difficult for policy makers and the public to adequately understand the government’s overall performance and true financial condition. Determining how to improve budgeting for fiscal exposures is complicated by difficulties in (1) determining the scope of items to be considered exposures and (2) estimating their costs. GAO has recommended annual reporting on fiscal exposures and, where possible, reporting the estimated costs for fiscal exposures in the budget."
If anything GAO's argument is exactly opposite of what Don suggests, rather than suggesting that these obligations are really subordinate, instead they argue for making them as explicit as possible and reporting them in the budget.
"I think of fiscal wellness in a similar way." Anand Chokkavelu (TMFBomb)
Just to clarify. Anand, whomever he may be, was only analogizing from Maslow to his own description of a hierarchy of debt. I don't readily see the rationale for the analogy, but it is clear that the web site, Motley Fool, is selling financial advice.
Don, here's some good financial advice. Save for a rainy day and don't let the bankers and their sycophants steal your social security with lies and misconceptions. Congress could conceivably pass legislation subordinating any Treasury security. Bank held T-Bills, Treasuries held in 401k plans, or even foreign sovereignty T-Bills could be legislated to any fraction of their face value. Call your local congress person and ask for such legislation. Why assume that FICA excess payments are first in line for default? Unless of course you are personally invested and have some personal gain agenda.
Bruce:
You like to add in extra details that have nothing to do with my statements.
For example, footnote c talks about the liabilities over a 75-year period, which I did not even talk about.
It is not relevant to the hierarchy of government commitments.
You conveniently left off some of the statements on page 65:
"Debt held by the public is the largest explicit liability of the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending. These fiscal exposures vary widely as to source, extent of the government's legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrtum extending from explicit liabilities to the implicit promises. Within this spectrum (which suggests there are distinct levels), is included the extent of the government's legal obligation.
Actually, future payments for Social Security and Medicare are not even considered as liabilities.
Explicit liabilities are much stronger conmmitments than implicit promises, in the spectrum of things.
From a paper entitled SSA's FY 2010 Performance and Accontability Project," published by the Social Security Administration itself says:
Page 136 "No liabillity has been recognized on the balance sheet for future payments to be made to current and future program participants beyond the unpaid amounts as of Sept. 30, 2010. This is because OASDI is accounted for as a social insuramce program rather than as a pension program. Accounting for a social insurance program recognizes the expense of benefits when they are actually paid, because benefit payments are nonexchange transactions and are not considered deferred compensation, as would be employer-sponsored pension benefits for employees."
http://www.ssa.gov/finance/2010/Complete%20Financial%20Section.pdf.
Don Levit
Don you don't even attempt to grasp you MiGHT be wrong.
Those liabilities are not counted as such because all but $3.5 trillion of the hundreds of trillions implied by q program currently cost $715 a year and $27 trillion a year in 2085 are projected to be covered by existing cost rates.
Try totaling total projected cost over the 75 year period after Sept 2010 and explain why the unfunded liability only adds up to less than $4 trillion? Because the several hundred trillion difference is considered PAID for this calculation.
I'll check out this newly semi cited paper like I did the last but suspect it is a product of the SSAB and not SSA OACT.
I'll admit the language is confusing but the math is not: multiply $715 billion per year x 75 years and then compound all of that by inflation and you get a number much larger than the gap suggested in your GAO. Rather than assign me a new paper to review maybe you could justify the deployment by you of the first one.
You introduced technical terms like 'Level 4' and 'hierarchy' that did not exist in your GAO source. I have no reason to believe you are not once again imposing your own reading on this new one and every reason to suspect it.
Don I read the passage you cited. Rather than "ignore" it I "understood" it and tried to communicate that to you.
You are reading in a stronger/weaker relation that does not exist into a explicit/implicit one that does. Moreover the GAO is actually making the opposite argument in suggesting that obligations that are wrongly dismissed as just implicit should instead be seen as more explicit and reported as such.
Okay it does not sem to be SSAB. Instead on the snippet you supply trying to explain the difference between a private corporate sponsor of pension plan, which in principal can go out of business at any moment and q government insurance program backed by the power to tax AND the ability to change 'contract terms' at will.
Which is just to say that the protection for Social Security does not rest in contract law.
Bruce:
I agree with you and the GAO that implicit promises should be reported as explicit liabilities.
Maybe by doing so, the government will take more seriously the funding of Social Security benefits.
The reason why the future liabilities are not cited as such is not because they are funded to a great extent.
In fact, they are not funded at all, as long as the Treasury continues to borrow from the trust fund.
The FICA surplus dollars can't be in two places at the same time.
Rather, they are not liabilities due to their very nature as a nonexchange transaction (exchange transactions are liabilities, such as federal employees' retirement plans, which are listed in Explicit Liabilities, the strongest federal commitment).
The FASAB, which is the accounting advisor for the federal government defines a non exchange trasaction
in a paper entitled "Accounting for Social Insurance, Revised:" Oct. 23, 2006
Page 87 A nonexchange transaction arises when one party receives value without directly giving or promising value in return. In regards to social insurance benefits the federal government gives value to beneficiaries without receiving value in return. The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance.
This seems to suggest that the federal government is doing beneficiaries a favor by paying out benefits!
www.fasab.gov
Click on Exposure Drafts and Documents for Comment
Don Levit
Don you don't get it.
It was always the case that cash surpluses would disappear and that so would borrowing. After that projected benefits could only be paid by ongoing income. Which makes them funded and explains why the GAO Table doesn't reflect the several hundred trillion of benefits actually payable but instead only the trillion currently not projected to be so paid.
You are still stuck with the model that would have the Trust Fund serve as a pension fund rather than what it is which is a reserve fund designed to buffer short to medium term gaps between income and cost of an overall Pay/Go. Under current law 12.4% of all payroll dollars under the adjusted cap will be devoted to paying Social Security benefits. Yet somehow your formulation would have ALL of those benefits being unfunded just because there were no surpluses.
And you still have no official source for that 'strongest committment' language. It is not even implied in the GAO text you cite, it is a reading you have brought to that text. Explicit/implicit DOES NOT mean strong/weak. At least on evidence you have forth to date. Your source does not support your claim. Period.
Bruce:
You are certainly entitled to your opinions.
I am not sure that Roosevelt envisioned the trust fund to work as it actually operates.
He wanted the fund to be self supporting with no use of general revenues.
When the trust fund securities are redeemed, it is done, financially, in the same way as battleships are paid for - out of current (general)revenues and debt.
The trust fund is not a store of wealth.
It makes it no easier to pay benefits than if the trust fund didn't exist.
It is an unfunded implicit promise, far from the vision that Roosevelt had.
So, for the umpteenth time, just answer yes or no:
Does the trust fund make it easier, financially, to pay beneficiaries than it does to pay for battleships?
If your answer is yes, please provide an objective citation, rather than having us rely on your reputation, for us to simply trust you and your expertise.
Don Levit
Don Levit: "So, for the umpteenth time, just answer yes or no:
Does the trust fund make it easier, financially, to pay beneficiaries than it does to pay for battleships?"
I'll answer that question Dom. The TRust Fund assets are not available to pay for battleships? You question is a lawyer's trick along the lines of "when did you stop beating your wife?" It makes an invalid assumption, that the Trust Fund assets can be used for other than supplementing the FICA contributions in regards to the payment of benefits. Money for battleships, or any other form of general budget expense, cannot be traced directly to the Trust Fund any more than such expenses are paid for by the holders of any Treasury securities. Citibank and China hold Treasury notes as assets, but neither entity can be said to be paying for any specific government expenditure.
As noted several time previously, you are making comments repeatedly that are confused or deliberately misleading. Regardless of the corrective responses that others like Bruce provide you insist on persisting with your misunderstanding of the issue. That is either ignorance multiplied by stupidity, or troll action. Stop it already.
Jack:
I agree with you!
The trust fund assets can be used only for paying trust fund beneficiaroes.
Now, the question becomes what are these assets? They are Treasury securities, which are the same securities used to pay for battleships, etc.
However, redeeming these Treasury securities is the same financial process the government uses to pay for all its expenses - out of current revenues and debt.
This excerpt from the Social Security Administration provides the answer you and Bruce are unwilling or unable to make.
From a paper entitled SSA's FY 2010 Performance and Accountability Report," published by the Social Security Administration:
Page 111 "The U.S. Treasury does not set aside financial assets to cover its liabilities associated with the OASI and DI Trust Funds. The cash received from the OASI and DI Trust Fuunds for investment in these securities is used by the U.S. Treasury for general Government purposes. Treasury special securities provide the OASI and DI Trust Funds with authority to draw upon the U.S. Treasury to make future benefit payments or other expenditures. When the OASI and DI Trust Funds require redemption of these securities to make expenditures, the Government finances those expenditures out of accumulated cash balances, by raising taxes, or other receipts, by borrowing from the public or repaying less debt, or by curtailing other expenditures. THIS IS THE SAME WAY THAT THE GOVERNMENT FINANCES ALL OTHER EXPENDITURES ( I assume battleships would be included in all other expenditures).
http://www.ssa.gov/finance/2010/Complete%20Financial%20Section.pdf.
Don Levit
Don,
You've just proved my points about the Trust Fund assets and your lack of understanding of the entire issue. Read your own last comment and keep in mind that the Treasury Dept pays all the government's debts in the same manner. That includes interest on all forms of Treasury notes as well as redemptions of those notes. And yes, the government uses the funds from both the sale of those securities and tax receipts to buy battleships. No, the Trust Fund assets, the Special Treasuries, are not used to buy the battleships. One does not sell a note and then ask the note holder to pay for yet other expenses incurred by the issuer of the note. That's what the procedes from the first sale were for. And that cycle of borrow, and repayment via additional borrowing will go on infinitum as it has been going on all along. It's a great process, but it's open only to governments and very big corporations.
Jack:
The Treasury Department pays all the government's debts and all other expenditures in the same manner, including battleships.
Therefore, the trust fund, in and of itself, has very little meaning, certainly no hard financial meaning, in and of itself.
Its only significance is it gives the trust funds the authorization to redeem Treasuries, and increase the debt held by the public, without an official authorization.
the Treasury could pay the Social Security beneficiaries without the trust fund, and raise the debt held by the public in the same manner.
It would merely have to authorize the expenditures.
The government doesn't redeem the Treasury notes; it rolls them over.
It only redeems the principal if the budget runs a surplus.
It's a very risky process, in my opinion.
As I've stated before, the CBO, The GAO, the Treasury, etc. all say this accumulation of debt is unsustainable.
And, you think it's a great process?
An atheist would have more faith in God than in the credit of the federal government!
Don Levit
"I am not sure that Roosevelt envisioned the trust fund to work as it actually operates.
He wanted the fund to be self supporting with no use of general revenues."
Don the problem is not the things you are "not sure" of, it is the things you are sure of that are all wrong.
The Trust Funds as we know them and the obligation to invest them only in Treasuries, and so to redeem those out of General Funds, were established in 1939. When yes Roosevelt was President.
I am not going to say that your grasp of Social Security is as shaky as your grasp of Social Security only because you don't have any grasp on either to start with.
Bruce:
How did the idea of loaning the surplus FICA dollars to the Treasury to pay for current government expendses and (artificially) lower the deficit get started?
Was that an Act of Congress, or did the Treasury and the trust funds come to an agreement, outside of Congressional oversight?
If you can provide a governmental link, that would be helpful.
Thanks,
Don Levit
http://en.wikipedia.org/wiki/Social_Security_(United_States)#1939_Amendments
Don they call it 'The Google'. For a guy that managed to ferret out the 1937 10 volume report on the actions of the 1934-35 CES you seem oddly inept at this research thing. Mean spirited people might conclude you working off of someone else's script.
http://www.ssa.gov/history/reports/trust/1942/1942.pdf
The first paragraph of the 1942 Report references the legislative authority for establishment of the Trust Fund, namely Sec 201 of the Social Security Act Amendments of 1939. The fourth paragraph explains that "Funds not required to meet current disbursements in accordance with the Social Security Act, as amended, are invested by the managing trustee. Securities eligible as investments for the fund are interest bearing obligations of the United States and obligations guaranteed as to both principal and interest by the United States."
Which in practice means Treasuries redeemable out of the General Fund. Though I suppose it could extend to some categories of federal agency debt.
Don trust me, I am not just making this shit up on the fly.
Bruce:
There you go again!
You provided an explanation that did not answer my question.
I agree with you that the surplus funds were to be invested in special Treasuru securities, which bear interest.
This seems ro sugest these special investments were to be set aside, earning interest, and cashed in to pay beneficiaries when needed.
Instead, these special securities were loaned to the Treasury, the principal and interest, to pay for current government expenses and (artificially) lower the deficits.
When it came time to redeem these securities, their redemption was no different than using general revenues (and debt) to pay for battleships.
If these securities were truly to be used only for Social Security beneficiaries, why were they used over the years to pay for other government expenses?
Can you google your sources to find the source of this ability to decimate the trust fund by using it as collateral for current expenses?
Don Levit
Don I don't think you are a moron. Which makes responding to your moronic comments a pure waste of time on a thread that nobody but you and me and maybe Jack are monitoring.
You can't loan out a bond, once issued they are a liability to the issuer even as they are an asset to the buyer. People might accept a bond as anexchange value but this has nothing to do with the cash balance of the issuer.
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