Saturday, December 15, 2012

Kevin Drum on Why the Social Security Trust Fund is Real

Kevin Drum has a short and sweet analogy for the position that the assets in the Social Security Trust Fund are real:
Now, suppose this surplus had been invested in corporate bonds. What exactly would that mean? It means that workers would be giving money to corporations, who would turn around and spend it. In return, the Social Security trust fund would receive bonds that represent promises to repay the money later out of the company's cash flow. In effect, it gives workers a claim on the cash flows of the company at a later date in time. When that time comes, the company would have to pay up, which would make it less profitable. If the company was already unprofitable, it would make their deficit even worse. If that's what had happened, there would be no confusion about the trust fund. Everyone agrees that corporate bonds are real things, and that the corporations who sell them have an obligation to pay them back, even though it means less money for shareholder dividends.
He then substitutes treasury bonds for corporate bonds and draws the same conclusion. QED! While I agree, let me try to offer the rightwing rebuttal, which begins with the proposition that the general fund is essentially bankrupt. Is it and why? Well – it is true that the Reagan years cut taxes on the very rich just as it raised payroll taxes. It is also true that President Reagan increased defense spending. Although we had the peace dividend and some reversals of those tax cuts during the 1990’s, George W. Bush put us back on the path of high defense spending and low taxes on the rich in 2001. The Republican Party seems to believe that we must forever have high defense spending and low taxes on the rich. Well if that is true, it is analogous to paying high dividends to corporate shareholders even as corporate profits are well below the dividend policy. But do we really have to accept this Republican belief system? No we can honor these promises to pay Social Security benefits if we as a nation are willing to tell the rich to pay higher taxes and tell the military industrial complex that it gets less largesse. But I guess some Republicans see the promises of low tax rates for the rich and continuing largesse for the military industrial complex as sacrosanct, which of course leads them to conclude that the problem is those promises to Social Security beneficiaries.

27 comments:

Don Levit said...

The balance in the SS trust fund merely represents the amount of money that SS can withdraw without an appropriation. That is why the $2.7 trillion balance is known as intragovernmental debt, not intragovernmental equity.
If an insurance company had such a "reserve fund," it would be issued a cease and desist order and placed into receivership.
Don Levit

Jack said...

Don
You are a compulsive bullshit artist who is wearing out his welcome. Bruce Webb has tried repeatedly to point out the invalidity of your many comments on the topic of the Social Security Trust Fund, but like most trolls you ignore facts and continue to waste band width with your ignorant comments. Go away.

Ken Houghton said...

"Well if that is true, it is analogous to paying high dividends to corporate shareholders even as corporate profits are well below the dividend policy."

I point out here what I always point out on econ blogs where people cite such a reality: that is precisely what happened during The W Years, after the 2003 "let me steal from my own company" tax reform:

Reported earnings: $2.42 trillion
Stock buybacks: $1.73 trillion
Dividends: $0.91 trillion

N. Gregory Mankiw should be splayed publicly in Harvard Square.

Jesse said...

To take it one step further, the SS Trust Fund is invested in debt, backed by the full faith and credit of the US government.

To argue that this debt is no good is to place the sovereign debt and currency, which are notes of zero duration, at risk.

Even if the default on the SS Trust bonds is 'selective,' it sends an awful signal to the markets and to all holders of US debt.

Taking the benefits and subsidies for themselves and shifting the cuts to the others, particularly the politically weaker, is one thing. But to play fast and loose with the credit of the country is another.

In their greed, I am concerned that the monied interests go too far, as they are often wont to do.

Don Levit said...

The SS trust fund is owed money back from the Treasury.
The disconnect is partly between how "sacred" the government views SS, and how sacred it is viewed by the average American citizen.
In a paper entitled "Accounting for Social Insurance, Revised, Exposure Draft, Nov. 17, 2008," published by the FASAB, the federal government's accounting advisor:
Page 31 "The Alternative View (the present view of the FASAB) is that social insurance comprises two separate nonexchange transactions - the compulsory payment of taxes and the government's payment of benefits.
Page 35 "Social insurance benefits are not part of an exchange, but are a welfare program and/or an annual general fund program like Medicaid and defense."
http://www.fasab.gov/pdffiles/socialins_exposurefinal.pdf.
Don Levit

Jack said...

Don
And the President thinks he will make his name in history as the man who took control of "entitlements" and saved the.....(?). Note that your citation is dated Nov. 2008. G.W. was still the President and agencies of the government were selling bullshit, like yours, on many diverse issues. Remember weapons of mass destruction that were all over Iraq. That a government advisory group came up with an explanation that suits the Executive Office is hardly evidence of anything other than that their employees are, and have generally been, chicken shit for many years. Read the FICAct and see what the law actually says. Then go away.

ProGrowthLiberal said...

The amount of money in my savings account merely represent s what I can "withdraw without an" authorization from the bank's CEO as well. But let one of my bank's tellers try to tell me that this money does not belong to me and my lawyer will let that CEO have a piece of my mind. So Don thinks he has a clever new phrase (I see he keeps repeating it over and over again at Mark Thoma's place) but as usual - it is entirely meaningless.

Jack said...

"...but as usual - it is entirely meaningless."

Meaningless phrases and ideas come out of thoughtless minds.

Don Levit said...

PGL:
The amount of money in your savings account was money you provided to the bank for its "safekeeping."
The money provided to the SS trust fund for its safekeeping (the excess FICA taxes) was loaned to the Treasury to pay for current expenses.
In order to pay benefits out of the trust fund, the government has to borrow money.
How would you feel if the only way you could be paid your savings from the bank was for the bank to borrow money to do so, for it didn't have the liquidity available to pay you back?
Don Levit

Jack said...

Levit, you idiot, the bank that holds your money has lent it to what they hope are credit worthy borrowers. Where do you think they earn their money?

The government pays back the Trust Fund, and all other creditors in the same manner. Maybe in any given year the Trust Fund is paid paid from cash flow, taxes collected, and the private and sovereign holders of Treasuries are paid from new borrowing. Given that new Treasuries are paying near no interest at all it would be wise for the government to borrow new to payoff old.

You are a tiresome fool. Go play your stupid games elsewhere.

Don Levit said...

Jack:
Are you suggesting there is no difference between Treasuries issued as collateral with no cash upfront versus Treasuries issued as investments with cash upfront?
Are you saying the cash flow, from the government's perspective, is the same?
Don Levit

Jack said...

Don,
Just how deep is your well of ignorance? The Trust Fund's Special Treasury notes were issued as the result of incoming excess FICA deductions, though of late there seems to be little excess. You send the Treasury a check for $10,000 and they will send you a T-bill with the same face value. FICA collections go straight to the Treasury and if some is left after payment of benefits Special T-bills are posted to the Trust Fund. Is there a difference?

Cash flow, from the government's perspective, result from taxes paid from the various tax payers.

It's really not that complicated Don. That's why we all suspect that you are either a bothersome troll or an idiot. Neither is a flattering persona.

Don Levit said...

Jack:
The special Treasury notes were not issued from excess FICA taxes. The excess FICA taxes were loaned to the Treasury to pay for current expenses. The special Treasuries were issued as collateral for the loans, with no cash supporting them. The cash that could have supported them was loaned to the Treasury.
From a paper entitled "Federal Trust and Other Earmarked Funds Answers to Frequently Asked Questions:"
Page 16 "The vast majority of earmarked funds take in more than their current needs. On an annual basis, this is described as having a 'surplus.' The accumulated surpluses result in these funds having a 'balance.' The balances of earmarked funds are assets of the funds in that they provide a claim on the general fund of the Treasury for future spending. However, the balances are not cash.
Page 36 "Concerns have been raised that, because the actual earmarked cash borrowed from the funds is commingled in the Treasury with other receipts and used to pay whatever bills the government currently has on hand, the federal government has inappropriately diverted funds for purposes other than what was intended. These special securities are claims on the Treasury that can be redeemed in the future to obtain the cash needed to pay the intended benefits. However, if sufficient surpluses are not available to redeem the securities, the government would either need to increase borrowing from the public, raise future taxes, reduce future spending, retire less debt, or some combination thereof."
http://www.gao.gov/new.items/d01199sp.pdf.
Those3 4 choices of redeeming trust fund principal and interest are the same choices used to pay for all government expenses, such as Medicaid. Trust fund balances are not cash. The actual cash (excess FICA receipts) were used to pay the government bills that they had on hand.
That's why these special securities represent collateral, or claims on the Treasury, not a store of wealth.
Don Levit

Jack said...

Thanks Don for proving my thesis that you are either a troll or an idiot. In this case by not even realizing that you raise a straw man and then burn him down all in one comment.
The straw man:
"The special Treasury notes were not issued from excess FICA taxes. The excess FICA taxes were loaned to the Treasury to pay for current expenses. The special Treasuries were issued as collateral for the loans, with no cash supporting them. The cash that could have supported them was loaned to the Treasury."
Your own barn fire:
"These special securities are claims on the Treasury that can be redeemed in the future to obtain the cash needed to pay the intended benefits. However, if sufficient surpluses are not available to redeem the securities, the government would either need to increase borrowing from the public, raise future taxes, reduce future spending, retire less debt, or some combination thereof."

How then do you not understand that "claims on the Treasury" are in fact "a store of wealth", as you put it? Do you own any T-Bills? If so, are they not a claim on the Treasury.? Do banks, sovereign wealth funds and private citizens all over the country send money to the Treasury in exchange for Treasury Notes? Does the Treasury put the money received into a hole in the ground? Or, does the Treasury spend that money from the sale of T-Bills on current and past expenses of the government?

For another example of wealth in the form of a promise to have monetary value Take from your pocket any of the paper with pictures of dead Presidents. Those are Federal Reserve Notes signed by both the Treasurer of the U.S and the Secty. of the Treasury. They represent nothing more than a promise to be acceptable for the payment of "all debts, public or private."

I will not reply to any further idiotic comments that you might post here or on Angry Bear, where you are less welcome. Barkley is far too lenient with you regarding your posting trash on this cite. You are likely not an idiot, but a deceitful troll instead, and that is a far worse category of human behavior given that an idiot cannot be responsible for his ignorance.

Don Levit said...

Jack:
If you wish to look at claims on the Treasury as a store of wealth, then we simply disagree on the definition of that wealth.
When new general revenues are needed to redeem a liability, I do not consider that an intact, pre-funded imvestment. I am not saying that Treasuries would not be redeemed. I am simply saying that to do so will require the same 4 choices utilized in paying any government expense. If the excess taxes had not been loaned to the Treasury, the necessity of new general revenues to redeem liabilities wouldnbot have been an issue.
That is water over the bridge, but does or should make our policymakers pause to think how to utilize future surplus FICA taxes, if they actually do occur again.
Using them to pay for battleships, etc. is not a proper use of a reserve fund.
Don Levit

ProGrowthLiberal said...

"How would you feel if the only way you could be paid your savings from the bank was for the bank to borrow money to do so, for it didn't have the liquidity available to pay you back?" My bank does this all the time. All banks do. I guess Don never took a Money & Banking 101 course.

Jack said...

Why on Earth would the Treasury keep a store of money in a vault some place so that ignorant investors would know that there was hidden away some place a "store of wealth"? BTW, how does one define a store of wealth? Is that like tons of gold bullion stored at Ft. Knox? The government has all the cash on hand it wants via the Federal Reserve Bank. Remember those papers with pictures of dead Presidents. It's even easier than carrying so much paper of so many bars of bullion. Money today is little more than an electronic recording in one's name in what ever accounts one keeps.

Bruce Webb said...

Don in point of fact Fed member banks DO keep liquid assets on reserve to meet unexpected withdrawals. Which would be a point to you except:

One: those reserves are a small fraction of deposits. And--
Two: they are mostly held in Treasuries that despite your fantasies have the same legal claim (or lack thereof) on the Treasury as the Special Issues in the Trust Funds. And---
Three: the targeted minimum reserve for Social Security is 100% of next year cost, which by any measure you like dwarfs the requirements laid on Fed chartered banks.

One, two, three strikes and you are out. Again.

And Jack it is not true that Don is barred from Angry Bear, or even unwelcome. Because he provided unlimited amusement. He seemingly just got tired of being mocked as an innumerate imbecile and departed for EconoSpeak and Beat the Press. Where he is encountering much the same mockery by many of the same people. A very similar story arc was seen with our pal Bruce Krasting, having lost traction he just slipped out of sight. But is still to be glimpsed here and there in the blogosphere.

Don Levit said...

Bruce:
Without commenting on the government's willingness to pay off intragovernmental debt related to debt held by the public, the same financial mechanism must occur: new general revenues must be raised, the same way we pay all expenses.
Jack:
You ask a valid question. With the government operating on a cash budget basis, accruing money in reserves seems to go against the grain.
And, even if the government COULD keep a store of wealth in reserves, such that new revenues were not needed to redeem, could Congress and the Treasury keep their hands off of that tempting morsel or chunk is more like it?
Way back when SS was deliberated, Noel Sargent, representing the National Sssociation of Manufacturers stated:
"Serious consideration must be given to the fact that creation of such a huge market for Government bonds establishes an artificial situation, an artificial base for Government credit. It thus encourages further Government borrowing and opens practically unlimited possibilities of reckless public financing, since there would be enormous pressure from without, and perhaps from within, upon Congress to authorize accumulated reserves.
With billions of dollars apparently in the Treasury, how great will the pressure be for vast Government expenditures of all kinds from these funds?
If such a distribution or spending program should once be started it would grow like a snowball and would lead to practically uncontrolled Government spending and impaired Government credit."
Page 953.
http://www.ssa.gov/history/pdf/s35sargent.pdf.
Don Levit

Jack said...

I've changed my opinion Don. You cite Noel Sargent, a staff economist for NAM, as though there were some import to Mr. Sargent's opinion. First, who f___in' cares what Noel Sargent had to say either back then or now? So to even choose to cite him on the issue of the Trust Fund is like asking Hitler his opinion about Jews. You are, as Bruce ppointed out above, an imbecile.

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