Jane Galt questions the value of the Social Security trust fund.
Upon even a moment's reflection, it's obvious that the trust fund does not exist in the way that its proponents are claiming -- as a guarantee of benefits -- because the bonds are not obligations to Social Security beneficiaries. They are obligations to the Social Security Administration. (emphasis in original)
She continues:
Let's say it's 2018, and Congress is running out of money, as the Social Security system stops paying money into the government coffers, and starts taking it out. Congress cuts benefits to the point where Social Security taxes are once again a net contributor to federal revenue. Have we violated the trust fund? Nope. Congress is still paying the interest on those bonds; it's just that the interest they pay is immediately lent back to the federal government. Congress could knock benefits to zero, and keep recording interest payments into the trust fund for all eternity, without violating anything except its constituents expectations.
Now, is this likely? Probably not, because the political cost would be high. But the point is that the continuation of benefits depends on the political cost of offending a highly motivated interest group, not the existance of this trust fund. And the effect on the government of continuing those benefits--forcing it to raise taxes, cut other spending, or borrow money to pay for them--is exactly the same whether or not the payments are recorded on the books as "interest on bonds" or "contribution from general revenue". (emphasis mine)
That last part is what tells me that she understands the concept of the trust fund. I gather, however, that she is just a little less optimistic than I am about the government's willingness and/or ability to make good on their past promises.
But that's ok. That's where the discussion should be focused. In order for any progress to be made on this issue, we all must agree that the generational contract is what is important and that contract has nothing to do with how many bonds are in the SSA's file cabinet. If you happen to interpret the part of my sentence in italics as meaning that the trust fund consists of "worthless IOUs," that is your interpretation. I would, however, say that they are no more or less valuable than the IOUs (T-bills) that the government issues to the public. They are not worthless in that sense. They will be paid to the SSA and not repudiated. But their connection to actual benefits paid is a political, not an accounting, relationship.
To put it another way, those who will retire between 2018 and 2042 should consider this question. How do you think of the government's promise to pay you Social Security benefits?
a) a promise of a stream of income related by a formula taking into account the earnings over my lifetime, indexed by the growth of wages, and once I start earning it, adjusted for increases in the cost of living.
b) a claim to a share of the bonds in the trust fund.
Just because the answer is (a) that doesn't mean that the trust fund is worthless. If we can't agree on that, I don't think we're going to get very far. This sort of thing doesn't help.
Unfortunately, it is easier (for both sides) to politicize the trust fund than it is to discuss the generational contract. It's inevitable (for reasons that economists on both sides understand quite well, I think), but it's very unfortunate just the same.
William,
"If you happen to interpret the part of my sentence in italics as meaning that the trust fund consists of "worthless IOUs," that is your interpretation. I would, however, say that they are no more or less valuable than the IOUs (T-bills) that the government issues to the public. They are not worthless in that sense. They will be paid to the SSA and not repudiated. But their connection to actual benefits paid is a political, not an accounting, relationship."
Comparing the Trust Fund holdings to the public holdings of Treasury bonds is not a useful comparison except for deceptive political purposes. The Trust Fund holdings are effectively different in the sense that they have no real maturity date, but are just extended in time as needed. If Congress somehow manages to match SS taxes exactly to required payments after some future point in time, then any existing Trust Fund holdings will just gradually decay away into dust in their file cabinents, never to be seen again, or to have any effect on anyone, either plus or minus.
Regards, Don
Trust fund securities do have maturity dates. See here: http://www.ssa.gov/OACT/TR/TR05/VI_cyoper_history.html#wp127040. Of course, they can be rolled over by issuing new bonds with maturity dates in the future. So the bonds won't really decay into dust in their file cabinet. Old ones will come out and new ones go in, but the value would remain the same in nominal terms (vanishing in real terms).
But then, we do the same thing with the debt held by the public (rolling it over when various issues mature).
If by some chance Congress balanced general revenues against general expenditures, those bonds would simply be rolled over, becoming ever smaller in real terms and as a fraction of GDP.
William,
I used the word 'effectively.'
With a Treasury security held by the public, maturity is a real economic event in time. It must either be redeemed or else replaced with a new issue to the same lender.
In the case of the Trust Fund contents, any nominal maturity date is overridden by the state of the current shortfall in payroll taxes. If there is no current shortfall, then there can be no redemption, but as I believe that you are aware, the contents of the Trust Fund are never able to provide an economic impact.
"...
…However, issuing debt to Government accounts does
not have any of the economic effects of borrowing from the public. It is an internal transaction of the Government, made between two accounts that are both within the Government itself. It is not a current transaction of the Government with the public; it is not financed by private saving and does not compete with the private sector for available funds in the credit market; it does not provide the account with resources other than a
legal claim on the U.S. Treasury, which itself obtains real resources by taxation and borrowing; and its current interest does not have to be financed by taxes or other means…."
http://www.whitehouse.gov/omb/budget/fy2006/pdf/spec.pdf
Page 260 of 442
Regards, Don
Whether it is 2005 or 2025, the issue is still the same. Should blue collars workers born in 1950 or later bear the brunt of those huge General Fund deficits racked up by the tax cuts from Reagan & Bush43 or should we impose deferred taxes on those that saw their current taxes lowered. The moment a conservative frames this debate in this fashion, I'll applaud the post. Alas, Jane did not frame it this way at all.
Don,
I really don't think we're as far apart is it might seem. I do, however, want to address your points as precisely as I can.
You write, "In the case of the Trust Fund contents, any nominal maturity date is overridden by the state of the current shortfall in payroll taxes. If there is no current shortfall, then there can be no redemption"
Let's stop there. I take it that you mean that rolling over the bonds in the trust fund isn't really redemption in a meaningful sense. They essentially tear up the old ones and print off a new one with a new maturity date and perhaps even a new interest rate... without there being any sort of market transaction. No argument there. I'm with you so far. If that's what you meant by "effectively" (i.e. different in that there is no market transaction) that's ok. I'll go along with that up to this point.
You write, "but as I believe that you are aware, the contents of the Trust Fund are never able to provide an economic impact."
I think it's a little more nuanced than that. True, the borrowing from the trust fund isn't what has the impact, it's what you do with general fund taxes, spending, and borrowing during and after that time that matters more. What you do to Social Security matters too. For example, you say, "If Congress somehow manages to match SS taxes exactly to required payments after some future point in time, then any existing Trust Fund holdings will just gradually decay away into dust in their file cabinents, never to be seen again, or to have any effect on anyone, either plus or minus." But you have to admit that Congress' actions here to match taxes and benefit spending would not be without (generational) impact.
Borrowing from the trust fund may not show up as a market transaction now, but it will someday. What really matters most are expectations about how changes today imply changes in the future (on the scale of generations).
I don't think our positions are that far apart.
My real point in the post was this: In order for any progress to be made on this issue, we all must agree that the generational contract is what is important and that contract has nothing to do with how many bonds are in the SSA's file cabinet.
I'm interested in what you have to say about that.
PGL,
I also want to hear what you have to say about this:
My real point in the post was this: In order for any progress to be made on this issue, we all must agree that the generational contract is what is important and that contract has nothing to do with how many bonds are in the SSA's file cabinet.
Agree?
You are right, of course, that Jane didn't frame the issue the way that you want it framed. Her point was simply about the value of the trust fund. Her concept of the trust fund is, mechanically at least, the same as what I've been talking about.
She does not speak to the moral/political obligation that the trust fund entails. But of course, you know that that moral/political obligation is at the core of the way that I think about the trust fund. I am comfortable separating the morality and politics from the mechanics (i.e. the accounting). I am becoming more convinced that in order to have a meaningful debate, that separation must be maintained.
But I'm losing hope.
In your comment, you ask a generational question. I want to frame the problem as a generational one. I'm ready to take on your implied challenge--after dinner.
The number of bonds in the file cabinet is the shining symbol of the contract made in 1983 by President Reagan. He told voters/workers then that the increase in the payroll "contribution" was a prefunding of their Soc. Sec. retirement benefits. He did not tell them that it was an employment tax increase to offset the reductions in taxes on capital income. As you and Jane prefer to suggest Reagan was being less than honest, I prefer to suggest he was being quite sincere. This is more than intergenerational distribution as it also impacts the distribution of the tax burden between employment income v. capital income, which is much more than an esoteric debate as many lower income folks get most of their income from the former. Frame it any way you want - this is a very important distributional issue. Which is why the GOP leaders refuse to frame it honestly. OK, you and Jane may be honest but then I doubt the GOP politicians will form their '06 campaign on such honesty.