Social Security Trust fund - Smoke and mirrors?

[Meadmaker]

I heard an argument on talk radio not too long ago, and try as I might, I haven't found a hole in it. I want to present it here and see if anyone can say what's wrong with it.

Right now, the taxes collected for Social Security are greater than the benefits paid out to recipients. The difference, (or part of the difference?) is put into the "Social Security Trust Fund". Later, the amount needed to pay benefits will be greater than the amount received in revenues, so we will take money out of that saved up trust fund to make up the difference, at least as long as that lasts.

But what is the trust fund? The trust fund is money that is invested in government bonds, considered a secure, non-risky investment. Sounds pretty sensible, eh? But what is a bond? It's a note that says you have made a loan that must be paid back. In this case, that loan is made to the government. So, when we start dipping into the trust fund, we will be telling the government to pay back the loan, with interest. The money to pay back the loan will come from taxes collected from those workers who are working at the time.

So let's imagine there were no trust fund. In that case, when the revenue brought in by the system is not sufficient to cover benefits, the additional money would have to come from taxes collected on those workers who are working at that time.

In other words, with or without the "trust fund", the effects are exactly the same. It's as if there is no trust fund at all.

Can anyone spot the flaw in the argument? I can't. I see one, tiny difference, and that is that if the government chose not to pay recipients in the case where there is no trust fund, it would simply be a vote of Congress which, while unpopular would only affect the old people, whereas if they chose not to pay back the bonds, that would have broader economic impact. In other words, by putting the money in the "trust fund", you create a greater problem for the government if they choose not to pay, which in turns means they are more likely to pay. But that isn't much of a difference.

I don't like Bush's ideas about Social Security, but the argument about the trust fund makes me slightly more sympathetic toward them. I hope someone can show me why that argument is flawed.

 

[The Central Scrutinizer]

Theoretically, you are correct. The money in the trust fund is invested. The problem is, there is no money in the trust fund. The phonies that you folks elect borrow it from the trust fund, leaving behind an IOU, in order to make the annual deficit appear to be not as bad as it really is.

So all those Clinton "surpluses"? Didn't exist.

 

[Frank Newgent]

So let's imagine there were no trust fund. In that case, when the revenue brought in by the system is not sufficient to cover benefits, the additional money would have to come from taxes collected on those workers who are working at that time.

The Social Security Trust Fund was created by taxes collected on incomes below a certain amount or cap. One that's been gradually rising, this year about $89,000.

Incomes under that cap pay the full 12.4%. The employer pays half and the employee pays half. The self-employed pay the whole tamale.

Past this cap no further taxes are collected on any income. Earn $89,000 (again - approximately - this year's cap) or earn $890,000,000, you'll pay the same.

Incomes solely below $89,000 (again, this year - lower prior years) generated a huge surplus. Income tax (progressively taxing all income) is gonna have to pay the interest owed on borrowing it. What's the problem?

If there's a deficit, raise the income tax. This is basic economics, not rocket science.

 

[WildCat]

Re: Re: Social Security Trust fund - Smoke and mirrors?

If there's a deficit, raise the income tax. This is basic economics, not rocket science.

Actually, basic economics dictates a point of diminishing returns for tax revenues, such that a higher tax actually results in lower tax revenue. This can be confusing until you really think about it: If taxes were 0%, no tax would be collected. There would also be no tax collected if taxes were 100%, because who would bother working if everything was taken away? Somewhere in the middle is a tax rate that optimizes revenues.

 

[Lurker]

Re: Re: Re: Social Security Trust fund - Smoke and mirrors?

Actually, basic economics dictates a point of diminishing returns for tax revenues, such that a higher tax actually results in lower tax revenue. This can be confusing until you really think about it: If taxes were 0%, no tax would be collected. There would also be no tax collected if taxes were 100%, because who would bother working if everything was taken away? Somewhere in the middle is a tax rate that optimizes revenues.

Agreed. Do you know what the rate is? Here is what the Heritage Foundation determined from research they did:

"For specific taxes, governments collect the highest amount of revenue when tax rates equal 22.5 percent for the income tax, 12.5 percent for the sales tax and 13.2 percent for taxes on international trade."

http://www.ncpa.org/studies/s159/s159.html

Lurker

 

[sophia8]

Interesting coincidence! I've just come from reading a blog post about this: The Slacktavist

 

[Dancing David]

The problem is that the Social Trust Fund is an abused 'trust'. They just spend it as general revenue. This behavior has reduced the 'deficit' by 60 billion dollars a year.

All the more reason for the Dub to devalue the dollar.

 

[glsunder]

Because income taxes wouldn't cover the government's expenses, payroll taxes needed to bring in a surplus. The result was a flatter overall tax, but high income people could complain that they paid an unfair burden.

My prediction is that the right will twist it so that the working people will get screwed and the rich won't have to pay most of that debt back.

 

[The Central Scrutinizer]

My prediction is that the right will twist it so that the working people will get screwed and the rich won't have to pay most of that debt back.

The "rich" already pay way more than their fair share.

 

[Frank Newgent]

The "rich" already pay way more than their fair share.

Incomes only up to the ceiling on Social Security-taxed wages are the ones that paid the trust fund surplus. Folks that never hit that ceiling in their income ($89,00 this year I think) received really very little benefit from tax cuts that helped to fuel the deficits "offset" by the surplus.

The middle class which bought this surplus are due their fair share.

 

[glsunder]

"The "rich" already pay way more than their fair share."

One of two things is the case here: either the government has spends too much or taxes or too low. If we can't cut spending, then you either raise taxes, or run a debt. The US government has done both: it ran a debt and it's kept payroll taxes higher than necessary in order to keep income taxes lower. It shifted the tax burden from the rich to the poor.

You can argue about who pays what, but payroll taxes and income taxes bring in similiar amounts of money. One is regressive, the other progressive. Guess which one is subsidizing the other right now and in the past? Once it goes the other way, people really start throwing a fit.

I dont think there's some grand conspiracy to achieve all of this. I think it's been quite accidental. But the fact is, there's a lot of money that's been paid in by mostly lower income people. That money went to mostly rich people through lower taxes. My statement is that it wont be rich people who pay it back.

You could say cut spending. Well, lets see it happen. That leaves taxes, and who pays them. The rich might pay their share, but their share isn't as big as they want people to believe. Its a lot flatter than most people think when you add it all up.

 

[CBL4]

The trust fund is only as good as trustworthiness of congress. That sounds terrible but in this particular case, I think it is good enough because the elderly vote and the young do not.

It was a reasonable idea which even seemed like it was working while the deficit was under control. Unfortunately, the republican party has become the tax cut and spend more party at exactly the wrong time.

Huge deficits just before we before the baby boomers retire is the equivalent promising to pay for you childs college education and then running up your credit card debt as she enters high school.

It makes Bush's promise to save social security a joke. The only real threat to social security is the deficit he ran up.

CBL

 

[aerocontrols]

I hope someone can show me why that argument is flawed.

Won't happen, as you're exactly correct. Having a big stack of IOUs written out to yourself is equivalent to having nothing at all.

 

[Frank Newgent]

Re: Re: Social Security Trust fund - Smoke and mirrors?

Having a big stack of IOUs written out to yourself is equivalent to having nothing at all.

IOUs? Bonds are, uh, an agreement to repay interest and principal. Right? Or do only government bonds from your mutual fund count?

Stocks, however, are equity stakes in a company. Let's call stocks IRPTMMSMs for "I Really Promise To Make Money Someday Maybe".

 

[Meadmaker]

CBL4 gave me enough of a hint to see the flaw in the argument, although it isn't much of a flaw. It's very, very, close to accurate. In fact, one could argue whether or not there is any flaw at all.

Here's the difference between trust fund vs. no trust fund:

When revenues are not equal to outlays, government will have to start cashing in the bonds that make up the trust fund. When those bonds are cashed, money will automatically be budgeted to pay Social Security, without the need for a new congressional appropriation. If there were no trust fund, there would have to be a new appropriation to put the money into the Social Security account.

Of course, Congress could still cash the bonds and then choose to not make the payout, but that would require a new vote. In other words, earlier Congresses will have voted to spend the money, so the administration that cashes the bonds won't need to.


But, the most important thing to remember, is that there isn't any real money sitting there. Congress will still have to raise that money from somewhere in order to pay it out, which is exactly what would happen if there were no trust fund. There isn't any real money there. There's just a promise to pay.




So why does that make me slightly more sympathetic to Bush's plans? At least in that case, the promise to pay would be coming from some entity other than government. When I look at the stocks in my 401k plan, what they are is a promise from a company that they will pay me a fraction of their profits when the time comes. It's risky, but their interests are aligned with mine. In order for them to make money, I have to make some, too.

Furthermore, the entity promising to pay is something creating real value. As opposed to government bonds, which are a promise to tax in the future.

I'm still opposed to the plan. I, for one, do not want to be in a position to tell an elderly couple, "I feel sorry for you, but you shouldn't have invested in Ford just before they brought out the Edsel II. It's not my fault you can't pay your rent." On the other hand, the realization that there is no real trust fund does make me look around for something that would be a bit more solid.



As for deficits and Social Security, Republicans and Democrats have followed the exact same policy when it comes to using SS funds to mask the true size of the deficit, so this is not a good partisan issue for either side. If you want to see the true deficit, find the figures on the growth in the national debt. (For what it's worth, you will see that the national debt fell exactly one year during the Clinton years, and has grown every other year since at least 1969. I'm not sure about years prior to that. )

 

[RichardR]

From Paul Krugman:

… the privatizers won't take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless, because it's invested in U.S. government bonds. They aren't really saying that government bonds are worthless; their point is that the whole notion of a separate budget for Social Security is a fiction. And if that's true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

But there are two problems with their position.

The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits - which is what denying the reality of the trust fund amounts to - then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses. More broadly, we're breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security's future, declare that it was all a little joke on the public.

The bigger problem for those who want to see a crisis in Social Security's future is this:if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it's just part of the federal budget: there can't be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it's hard to make the case that it will be central.

But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that's meaningless, but when - in 2018 or later - benefits start to exceed the payroll tax, why, that's a crisis. Huh?

I don't know why this contradiction is so hard to understand, except to echo Upton Sinclair: it's hard to get a man to understand something when his salary (or, in the current situation, his membership in the political club) depends on his not understanding it. But let me try this one more time, by asking the following: What happens in 2018 or whenever, when benefits payments exceed payroll tax revenues?

The answer, very clearly, is nothing.

The Social Security system won't be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That's not going to happen. So legally, mechanically, 2018 has no meaning.

(My bold.)

 

[aerocontrols]

IOUs? Bonds are, uh, an agreement to repay interest and principal. Right? Or do only government bonds from your mutual fund count?

Stocks, however, are equity stakes in a company. Let's call stocks IRPTMMSMs for "I Really Promise To Make Money Someday Maybe".

You seem to be missing the point.

If I buy a government bond then the government has promised to repay my principle and pay me interest as well, just as you've said.

When the government buys a bond from itself it has promised to repay it's own principle and pay itself interest as well.

There is no difference between doing that with $0, $1 billion, $100 billion, or $10 trillion. None at all.


Some IOUs are worth more than others.

Person A puts $200k worth of IOUs to himself into a shoebox and calls it a college fund for his kid. When the kid goes to college, he plans on just redeeming the IOUs as necessary with whatever other funds he has available to pay tuition and housing.

Person B puts $200k worth of CDs, government bonds, and stocks into a shoebox and calls it a college fund for his kid. When the kid goes to college, he plans on redeeming the securities as necessary to pay tuition and housing.

One of these people actually has a college fund. The other is blowing smoke up his own arse. Person A may, like our government, have excellent credit and good earning's potential, but he's not actually accumulated anything at all.

MattJ

 

[Frank Newgent]

If I buy a government bond then the government has promised to repay my principle and pay me interest as well, just as you've said.

When the government buys a bond from itself it has promised to repay it's own principle and pay itself interest as well.

By law, the Social Security program is treated as an "off-budget" entity, and its financial figures are displayed separately from the rest of the budget. The Social Security Trust Fund's government bond holdings are counted in the national debt, just like your mutual fund's bond holdings are. While commitments to pay retirement benefits are not counted in the national debt, because they are "funded." Invested surpluses are real assets.

Though it's true that payroll taxes have ended up paying for a lot of government domestic and defense spending. Income taxes are what's supposed to be used for this domestic and defense spending. Right? So if payroll tax dollars need to be paid back so that they can be used for their original purpose - which is paying retirees - what's the goddamned surprise?

That income taxes - mostly on high earners and corporations - will be covering the general revenues which will repay the debt the Treasury owes to Social Security... is that what's bothering some people?

Don't know how you can deny that invested surpluses are real assets. More real than projected future deficits (which assume a lower rate of economic growth and productivity than is currently the case).

Person A puts $200k worth of IOUs to himself into a shoebox and calls it a college fund for his kid. When the kid goes to college, he plans on just redeeming the IOUs as necessary with whatever other funds he has available to pay tuition and housing.

Person B puts $200k worth of CDs, government bonds, and stocks into a shoebox and calls it a college fund for his kid. When the kid goes to college, he plans on redeeming the securities as necessary to pay tuition and housing.

Nice try. But Person A's kid doesn't really go to college at all, does he? Don't think I've ever actually said strawman here before. And I suppose that Person B's kid never has to pay back the old man for the tuition he paid because, well, the family just lent the money to itself.

Gonna let Matt, Jr, pull that kind of crap on you?

 

[a_unique_person]

We have various taxes and surcharges for specific purposes. Eg, a Medicare levy.

It all goes into one big bucket, that all the spending dips into.

In Australia, there is a privatised pension system on top of the government one. This is beyond the governments reach, except that they tax the money when it goes in, tax the profits it makes, and add on an extra tax for the wealthy.

 

[Meadmaker]

Richard,


I think Krugman is seriously wrong, or at best he has a small point about the rhetoric of the Republicans, but missing the reality. Let's take a few quotes.

The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits - which is what denying the reality of the trust fund amounts to - then Greenspan and company pulled a fast one back in the 1980s:

Looks to me like that's what they did, although, to be fair, they promise to pay back the workers using a progressive tax, instead of a regressive one, so it gets washed out in the end.

More broadly, we're breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security's future, declare that it was all a little joke on the public.

This is absolutely true. It's a promise. However, it doesn't provide a means to make the promise happen. The trust fund is aptly named. Trust us.

The bigger problem for those who want to see a crisis in Social Security's future is this:if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it's just part of the federal budget: there can't be a Social Security crisis. All you can have is a general budget crisis.

Exactly! And that is precisely what we have. When the promises need to be paid, taxes will have to be levied to pay for the bond redemptions that will fund social security. Contrast this to the situation that would occur if there were no trust fund. If there were no trust fund, taxes would have to be levied to fund the payments required for social security.

In other words, there is no trust fund. The payments and taxes that will be required if there were no trust fund are exactly the same as the payments and taxes required if there is a trust fund. And since the payments are rising, we will have a general budget crisis.