Why the Social Security Trust Fund Needs to be Supplemented by Personal Retirement Accounts

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SOCIAL SECURITY BONDS

It is often alleged that the bonds that are held by the Social Security Trust Fund are really just "worthless pieces of paper," that they are "merely IOUs."  Starting from this position results in a faulty analysis of the Social Security problem and its solutions.

The bonds are not worthless. They are as worthy as the Treasury Notes, Bonds and T-bills that any private citizen can buy.  They're backed by the full faith and credit of the United States of America, and there is no safer investment available.  Bonds are essentially IOUs, but that doesn't make them worthless.  The problem isn't that they're "worthless," it's that they don't pay enough interest to be the sole class of security supporting ANY trust fund.

THE TRUST FUND

This state of affairs came about because the legislation that created the "Trust Fund" mandated that all excess receipts (taxes) be used to purchase only Government Retirement Securities (I'll call them Bonds), and nothing else.  

This results in the cash being transferred to the general fund, leaving the Trust Fund holding the Government Bonds.  Safe.  But any financial analyst will tell you that if you want to properly fund a trust, it should be invested in a diversified portfolio of different classes of securities--not just Bonds, but Stocks as well; for private individuals there would be other securities that are appropriate, too.  A balance of stocks and bonds actually provides more safety and greater income than do bonds alone.  Believe it or not, but it's true.

So, to rail against the "looting of the Trust Fund" as many people do is to tilt at windmills.  The true problem is that the Trust Fund doesn't earn enough income from its Bond investments to fulfill its long-term obligation to future SS recipients.  And that's what the Personal Retirement Accounts (PRA) are intended to correct.  

WHY PERSONAL RETIREMENT ACCOUNTS ARE NEEDED

It would be illegal and inappropriate for the Government to invest directly in stocks for the Trust Fund, but the PRAs will let individuals do just that, and in the process they will actually REDUCE their risk (remember, right now we're all guaranteed that somewhere around 2045, our benefits under the current system will have to be cut to 70% of the promised payments) while earning considerably more than the Government Bond rate on the money in the Personal Account.  They may also choose some other investments, similar to current government employee retirement plans.  (I read several years ago that the average SS recipient receives a return of about 1% on his SS tax payments.  I suspect that it's less, now that workers who've paid a lot more into the system are retiring.)

WHY THERE REALLY IS A PROBLEM

There are three essential facts about the existing SS System.

One.   We are paying current benefits out of current SS tax receipts, and the excess receipts are being used to buy Government Bonds in the Trust Fund.  Those bonds earn interest at bond rates, which is regularly reinvested in more bonds in the Trust Fund.  The excess receipts and their interest can't legally be invested anywhere else.

Two.  About 2018, there will no longer be any excess tax receipts to buy bonds with, and thereafter some of the old bonds will have to be redeemed to help pay benefits.  (Side note:  The money will come from bond sales to the public that the Treasury will hold.  This will NOT increase the public debt, because it will be a case of selling a new bond to pay off the old one.)

Three.  About 2045 or so, all the bonds in the Trust Funds will have been redeemed.  Whether the year is 2042, 2045, or 2052 is irrelevant.  It will happen, and at that point benefits will have to be cut to equal what is being received in taxes, or taxes will have to be increased to keep benefits level.  This is the problem that Bush is trying to solve.

These are facts based on demographic trends, not just guesses, and even Democrats agree that they're true.   So the question is "What to do about it?"

THE SOLUTIONS

There are three, and only three, solutions to the problem.  (1) Raise taxes, now or later; (2) Cut benefits, now or later; (3) Invest some of the money that would otherwise go to the Trust Fund in securities that can provide higher rates of return than Government Bonds.  This is the Personal Retirement Account solution.

Because of the aforementioned demographic trends, Solutions 1 and 2 only delay the day of reckoning.  In fact, the plan to raise tax receipts by raising the SS tax ceiling doesn't even help in the long run, because it would also increase the future liabilities of the system.

Solution 3 is the only one with a chance to actually solve the problem.  PRAs for voluntary participants (starting under age 55) would more than make up for the reduced benefits that the New Plan participants would expect from the Trust Fund.  They would have an overall bigger retirement income, and there would be less required from the Trust Fund.  True, the Fund would have less in it, but it wouldn't be any worse off relatively than it is now, because its liabilities would be reduced.  

In fact, I think the Government could stipulate a Guarantee, that New Plan participants would never receive less than they would have under the old system.  And of course nobody would be forced to participate.  The old plan would always be there for workers who want to stay in it and risk receiving reduced benefits around 2042, without the PRA to help soften the blow.

WHY NOW?

The longer we wait to solve it, the harder it is to manage the solution.  Benefit reductions become more certain, tax increases become more onerous, and the PRAs have less time to apply the magic of compunding.  If PRAs had been implemented even 10 years ago, we'd be much better off today.

WHAT I LEFT OUT

I didn't mention the benefits that accrue to families whose primary bread-winner dies just before or soon after retirement.  With PRAs, the family would at least receive the money that had been put into their Personal Account.

The PRAs will only help with the RETIREMENT part of Social Security.  They will have no effect on the INSURANCE part.

I also didn't mention the costs of implementing a PRA option into the Social Security System.  Right now, that cost is at best a guess.  Furthermore, the cost of doing nothing is something over $11 trillion, because the present system is underfunded by at least that amount.  The cost of ANY solution has to be compared to THAT bogey, rather than being compared to zero cost.

To be perfectly clear, I must point out that Personal Retirement Accounts appear to be only part of the solution, but I contend that they are an essential part.  Without them, changes only serve to prop up a failing Ponzi scheme for a few more years.

CREDIT WHERE IT IS DUE--TO A POINT

I first attacked this subject several months ago.  At that time, I postulated the "three and only three solutions" rule described above.  Since then, I have found that I wasn't the first person to make this statement.  Before the turn of the 21st century, none other than President William Jefferson Clinton made the same claim in a speech favoring the creation of Personal Accounts for Social Security.  He may not have been the first, either, but he said it before I did--I just wasn't aware of it.

I believe it tells us something about President Clinton's character that he has been completely silent recently on the matter of Personal Retirement Accounts, when his support could possibly turn the debate around in the best interests of the American people.

And especially don't be both on the same transaction!

By this logic, I could issue a million dollar bond to myself and call myself a millionaire.  The government borrowing from itself does not create a pool of resources that can be drawn on in the future.  The existence of the trust fund makes no difference when it comes to providing the real resources to pay for the retirement of baby boomers.  Congress will face a need to raise taxes, cut benefits, or divert spending from other programs to cover the cost of trust fund bond redemptions.  These are precisely the same options Congress would face to pay for benefits if the trust fund had never been created.

To see what's actually happening, you need to watch the real resources, not the paper assets.  The money that comes in is being spent on other programs, understating the real budget deficit by about $85 billion this year.  The fraud of trust fund accounting should be ended and the surplus Social Security revenue should instead be devoted to starting personal accounts, which would accumulate real resources that Congress couldn't touch.  For more info, see our fact sheet and watch for our memo that will be posted later this week.

I don't have anything to add.

This is the only correct way to think of the trust fund bonds. There is no other correct understanding.

The bonds in the trust fund are not like what a private citizen holds so stop comparing them, since a private citizen holds a bond from somebody else, while in the trust fund, the government holds a bond from itself.

Asking if the bonds are worthless or not is incorrect. They are real in that they are printed and sitting in a file folder, but they don't change the finances of the trust fund in any way since the trust fund is still part of the government.

The correct question is what do they mean and what are their implications? And the correct answer is that in an economic sense, they mean nothing and do not change a thing. They could be some stange bond that only pays back on the flip of a coin, being one of the least reliable bonds you could buy, but it wouldn't matter economically. The government would just put more in face value in the folder.

It basically comes down to the idea that you cannot lend money to yourself.

Imagine you have two accounts: a checking and savings. You are short on money in your checking account for bills, but your savings account that has money you have been putting away for retirement or a house or something has a chuck of change in it. Here are two possiblities:

(1) You borrow money from somebody else. This is a real bond. You sign some papers and the person who loaned you the money has an enforceable legal document to compel you to pay. This is just like when the government borrows moeny from somebody in the public market, called, surprisingly enough, public debt. This will impact your credit situation as you now have a liability in your ledger. You owe somebody else money, and if you don't pay good luck getting another loan for a while.

(2) You "borrow" money from your savings account. This is a transfer from one account to another and does not have any real bond behind it. You can sign your signature on some papers, but you will laughed out of any court room if you tried to sue yourself for the money (and likely sent to county psych). This is what the government calls intragovernmental debt, and it makes up about 40% of all debt in the US. This has no effect on your credit situation since no liability has been created. You can loan myself $1 bn, but it doesn't mean a thing.

Think of it this way. In (1), if you don't pay, will your creditor loan you money again? Probably not. In (2), if you don't pay, will your creditor loan you money again? Since you are your own creditor, why don't you call yourself and ask, but watch out for the racoon. And anybody else will too since you have yet to default on anybody. That should be a mental indication that situation (2) doesn't change your credit standing.

Or go the other way around and pretend you are on the site of the bond holder...

(1) You hold a bond from me. You loaned me $100 and it comes due. You get that $100 from me and are now have $100 more dollars in your pocket.

(2) You hold a bond from yourself. You "loaned" yourself $100 and it comes due. You get that $100 from yourself out of your checking account and deposit it in your savings accout. You have not changed youe financial situation one cent.

I don't know how to be any clearer. The bonds in any of the government trust funds are not like holding a bond from somebody else.

If the govt wanted to make the bonds worth something, they should be buying them from another country that has a good credit rating, like the UK. Then the bonds would mean something.

It isn't that they bonds are "worthless", but that they are meaningless.

A side warning: Don't confuse the bonds with the social security obligation. They are different things. The social security obligation is an effect of social security legislation, and the trust fund could be eliminated tommorow and you could still get paid though the general fund. The trust fund and all its bonds are just an implementation quirk.

Is like the Unions who oppose any changes that would affect employees not yet hired?

The Los Angeles docks want to bar code the containers to speed up processing.  Currently the number is written down by hand and the paper is passed to another employee that enters it in a computer. This is slow and subject to errors.

Management wanted to use the bar code system and said that any current employee would not be laid off due to automation but the Union opposed the change because their total ranks could be diminished at sometime in the future.

If Social Security was augmented by Retirement Accounts then AARP would have one less point to lobby congress.

He seems to have come to an agreeable conclusion, but for the wrong reasons. This sentence is entirely incorrect:

The true problem is that the Trust Fund doesn't earn enough income from its Bond investments to fulfill its long-term obligation to future SS recipients.

The government doesn't really get any income from the bonds.

He seems to have got himself all tied up in the wrong discussion, the same wrong discussion that Bush and Grassley are tied up in and why social security reform is failing miserably.

At my office, as is no doubt true at offices around the country, each department has its own budget, its own resources, and in some cases, its own sources of funding.

If the government through one branch issues bonds to another branch, it is true to say that the debt has remained with the government. But is it equally true to say the bonds have no value or that they are meaningless? Or rather, if you say it is the same, why?

I'm actually asking, that's not rhetorical. It seems to me that for someone with only limited knowledge of how this works could justifiably assume that me borrowing money from myself is not the same thing as one part of government borrowing from another.

Enron is an example of better accounting practices than the Federal Government. They set up divisions, and subcompanies, and then borrowed money from one to the next and called it revenue. This isn't much different than what the government does.

That example still doesn't seem to explain it. Counting something as revenue twice isn't exactly the same thing as the bonds is it?

I don't know, I'm asking.

When you pay your SS taxes, the government records the revenue, but then doesn't recognize that it has just made an obligation to pay you SS, even though it tells you (in those wonderful little statements we get each year) how much you are going to receive at some point in the future. So instead of double counting revenue (as Enron did), the government is counting revenue and not counting the liability associated with it. It's hiding something, not the exact situation that went on at Enron, but fudging the accounting is fudging the accounting.

And that liability being the liability to repay the bond, yes?

the liability is the promise to make SS payments (to individuals). The repayment of the bonds is the flow of funds from the general fund back into the SS 'trust fund', but where do they get that money? The will probably repay the bond by issuing general debt bonds, shuffling the debt around, much like paying off a credit card with another credit card. On one card there is no more debt, but it has just shifted to the other card, overall, you are in no better shape.

I'm back to my original question.

Let's say we have two credit cards, and one is used to pay off the other. Do they not have two different interest rates?

Let me start with fresh question. If money for Social Security comes from Social Security tax, where does the bond money to pay back the trust fund come from?

"Let's say we have two credit cards, and one is used to pay off the other. Do they not have two different interest rates?"

Just trying to give you a real world example, it doesn't fit exactly, of course (if you want to, just assume the interest rate is the same). The problem with 'investing' the SS 'trust fund' in government bonds, is that when it 'earns' interest, the one paying the interest is the government (the "loan yourself" example given above with added interest).

"If money for Social Security comes from Social Security tax, where does the bond money to pay back the trust fund come from? "

repaying bonds with more bonds (which is what is likely to happen), or paying it out of the general fund (higher taxes wrecking the economy won't work)

(1) Regardless of how money is budgeted, it is still part of the same cash flow. A $100 loan from the marketing department to the R&D deparment doesn't net anything. A $100 inflow will appear for the R&D deparment, and a $100 outflow will appear for the marketing department. On payback, there will be a $100 outflow from the R&D department, and a $100 inflow to the marketing department. That means right now there is a $0 change and on loan payback there will also be a $0 change., so the transaction has no meaningful cash flow.

(2) They are treated as a single entity b/c they lack any sort of independance or rights separate from the corporation they belong to. If the R&D department doesn't pay back the marketing department, nobody can really sue anybody to recover that money.

Let's say you find some insane judge out there who does take the case though makes R&D payback marketing. It still isn't meaingful since the company would just give R&D a extra $100 in their budget and take it out of marketing, effectively nullifying the loan payback.

No matter what situation you have, the is never any meaninful change of money, and the corporation is always in control.

Just like the government is always in control of the trust funds. Congress would put $1,000,000,000,000 is face value of bonds in there tomorrow paying 50% interest a day, and it wouldn't change anything economically.

The will probably repay the bond by issuing general debt bonds, shuffling the debt around, much like paying off a credit card with another credit card.

That's a bad example. In that case, both credit card companies are actual debts. In the SS trust fund case, the first debt -- the intragovernmental bonds -- isn't at all like the debt from the public markets that would replace it.

as your lending yourself money.

If you have $50 in debt on one card and $150 on another card, you pay off one card with the other and you would have $200 in debt on one card and $0 on the other, your situation hasn't improved. (you basically lend yourself $50 to repay-that's the intra debt)

Let's say we have two credit cards, and one is used to pay off the other. Do they not have two different interest rates?

This why this strange idea of trust fund bonds being the same as regular bonds in the public market is so bad. It leads people way off track. Pres Bush and Sen Grassley are both lost on the issue to, b/c they don't understand the issue either.

While I'm sure ConservativeD understands the issue well, his credit card example was very bad.

Paying from one credit card off with another is an example of paying off a third-party debt, that is a real obligation to somebody who can take you to court.

This is the example opposite of the trust fund debt or the example of loaning yourself money from your savings account to your checking account. In those two cases, there is no meaningful debt since you are both the creditor and the debtor. In the credit card example, MBNA might be the creditor, but you are the debtor.

If money for Social Security comes from Social Security tax, where does the bond money to pay back the trust fund come from?

This is the perfect question, b/c it cuts though all the trust fund nonsense.

The money to pay back the bonds comes from you the taxpayer though the general fund.

The government taxes you once with the payroll tax. That money then goes into the trust fund. From there it is used to pay current retirees their benefits, and any extra gets set off to the general fund and is replaces by special issue bonds. From the general fund it is spent just like any other tax dollars.

This can obviously only happen while the payroll tax takes in more than gets paid out in benefits. Once it needs to pay more in benefits, those bonds are supposed to be collected on. Either three things can happen:

(1) Public bonds will be floated to the public. These meaninful bonds (since they are between two different parties) effectively replaces the meaningless bonds from the trust fund. This is obviously only a temporary measure, since these bonds still have to be paid off somehow. Either of the next two options has to still be done.

(2) Other services will need to be cut to free up money. (not likely)

(2) Taxes will be raised to pay for the bonds. This means you will be taxed twice for those benefits: once by the initialy payroll tax and once to actually provide the benefits.

Obviously it will be a combination of the three to try and spread the pain out a little, but I don't see option 2 being used much.

In a practical sense, it is in a way, but I think the example carries with it some very undersirable baggage. It equates that first credit card debt -- a meaninful debt between two independant parties -- with the trust fund intragovernmental debt -- an economically meaninless debt with only one party.

And absentee gets caught up in it when he asks about how there two interest payments differ. Interest is economically irrelevant on the trust fund bonds since it is money the government pays to itself. The bonds could have 0% or 200% and it wouldn't matter.

Bill Clinton's support was for add-on accounts to supplement Social Security, not PRA's which are carved out of Social Security.  Especially considering that he made a priority of paying back the trust fund what was owed to it ("Save Social Security First"), he couldn't possibly advocate for carve-out accounts like those proposed.  So no, it has nothing to do with his character...

The PRA's proposed by Bush are carved out of Social Security funding.  You can't blame AARP for guarding those funds like a mama bear.  If it was added on (funded outside of current S.S. funds), that might make it a completely different story.

Thanks for your Comments.  We are in complete agreement that Personal Retirement Accounts are an essential component of any solution of the Social Security problem.

I do disagree with your observation regarding the Trust Fund and how it fits into the big picture.  You can "issue a million dollar bond to [yourself] and call [yourself] a millionaire," only if you have the million dollars in the first place to deliver in return for the bond.  If you do have it, you're already a millionaire.  If you don't, you're just having fun with yourself.

The fact is, the Social Security Trust Fund HAS the million dollars.  It got it by collecting SocSec taxes and paying out only part for SocSec benefits.  Now, what is it to do with the extra money?  It could put it in its own vaults, protecting it against mildew, but not against inflation, and not allowing growth, which is the lifeblood of any retirement plan.  Of course it can't spend it.  So it's left with how to invest the money.  The legislation requires that it be invested in Government Bonds specially created for this purpose.  

You may not agree that this is the best use.  I don't either, because it is an unbalanced investment.  But in the absence of Personal Accounts, the only other "acceptable" alternative would be to invest in Foreign Securities; stocks and/or bonds.  Arguments can be made pro and con, but it is basically an aside in this discussion.  On the other hand, to invest in US stocks would give the Federal Government far too much power to affect the fortunes of the companies whose stock it owns.  Thus the Congress created the Social Security Bonds at the same time it created the Trust Fund--to enable the fund to loan money to other parts of the Government (let's just call it the Treasury for simplicity); to make use of the money rather than let it languish in a vault.  And of course this need for protecting the market from government's heavy hand, while providing a means of improving SocSec recipients' returns vs. the Trust Fund, is why Personal Accounts are essential.

Now, you argue that the Treasury is "raiding" the Trust Fund by borrowing that money from it.  You say the result is to understate "the real budget deficit by about $85 billion this year."  I defer to your expertise on this point.  If the Government is recognizing the tax income, but then either not recognizing the SocSec liability being incurred, or not recognizing the issuance of Social Security Bonds as additional debt, this is in fact an accounting sleight-of-hand.  It makes the deficit look smaller than it really is.  

But it doesn't affect the reality of Social Security.  The Fund does indeed hold valuable bonds, issued by the Treasury; bonds that the Treasury must repay on schedule.  Given the existing reality, that Personal Accounts don't yet exist, whom else would you rather have your Trust Fund money loaned out to?  And that is why I said that railing against "looting the Trust Fund" is to tilt at windmills.  Given all the possible alternatives, lending the money to the Treasury is the least of the available evils.

I'd like to respond to this statement:  "The government borrowing from itself does not create a pool of resources that can be drawn on in the future.  The existence of the trust fund makes no difference when it comes to providing the real resources to pay for the retirement of baby boomers."

Of course, borrowing doesn't create any resources.  It makes resources that already exist available to the borrower, in return for which the lender is promised his principal and more back at a later date.  But in the SocSec transaction, the Trust Fund is the lender, not the borrower.  The "pool of resources that can be drawn on in the future" are the Social Security Bonds.  Those bonds will be repaid, so they can be considered the same as cash.  It is the Treasury that has the problem, not the Trust Fund.  The Trust Fund serves the purpose of any investment or savings account--it hold the real resources or the claim checks to retrieve them (bonds) until the resources themselves are needed.

You point out that "Congress will face a need to raise taxes, cut benefits, or divert spending from other programs to cover the cost of trust fund bond redemptions.  These are precisely the same options Congress would face to pay for benefits if the trust fund had never been created."  I don't disagree, except you left out the option that will most likely be exercised--Congress will borrow to pay off  the Social Security Bonds as they come due.  If the SocSec excess taxes had been stored in a vault, the Treasury would still be borrowing, but it would be to pay off the other bonds they issued instead of Social Security Bonds.  (More on this in the final paragraph).

I went to your web site via your link, and tried to get an idea of your perspective on these matters.  I believe you will not agree with me when I say that the situation described above--borrowing to payoff the Trust Fund's bonds--is no big deal.  But it is exactly what happens every day with all the other debt instruments the government issues.  So while it might increase the NOMINAL National Debt, because the debt has been understated by the non-recognition of the Social Security Bonds on the government's books, it will not increase the REAL National Debt one iota.

So let's get to the final point of agreement and disagreement.  You write, "The money that comes in is being spent on other programs."   On this we agree.  However; you think that's bad, and I'm non-committal on the matter.  Some of those programs are definitely wasteful, but consider that if the money weren't borrowed from the Trust Fund, it would be borrowed instead on the open market.  That would result in generally higher interest rates, and the Trust Fund would still be faced with the problem of what to do (productively) with the money.  The REAL National Debt wouldn't be any different than it is today, except the interest on the debt would be somewhat higher.  And the other bonds issued instead of the Social Security Bonds would also have to be paid off or rolled over someday.  (I grant that Congress may be somewhat more likely to spend a given dollar if it doesn't look like they've had to borrow it, but that's an accounting problem, not a problem with the concept of the Trust Fund.  And Congress was overspending long before the Trust Fund was created.)

THE SOLUTIONS

There are three, and only three, solutions to the problem.  (1) Raise taxes, now or later; (2) Cut benefits, now or later...

Can't you say this of all government expenditures? We are funding our military on borrowing right now. We'll either have to raise taxes eventually to pay for this or we'll have to scale back the military.

Or whatever government program you'd choose as an example.

Why is it ok to finance the military with borrowing but its not ok to do so for SS?

My statement that you quote is not ENTIRELY incorrect.  But your point is well taken in one respect.  The nominal interest on the Social Security Bonds could be set higher, and on paper it would look as if the Trust Fund were in good shape.  And as long as the Treasury could pay the higher interest, it would be in good shape.  And if that were true, we wouldn't be having this discussion now.

The problem with that is that the Treasury is having too much trouble paying the current low interest, so higher interest is out of the question.

Now, as to your statement, "The government doesn't really get any income from the bonds."  Although it is technically true, it's irrelevant to the discussion of Social Security.  It's a faulty premise.  The Government doesn't gain anything by paying itself interest, the Trust Fund does.  The Treasury then has to come up with the money to pay the interest.  Yes, it's like taking money out of pocket A and putting it into pocket B, but so what, as long as pocket A has an infusion of cash (taxes) that can pay back more than was borrowed?

The Trust Fund is like a non-governmental agency doing business with the Government.  It loans money to the Treasury, and the Treasury pays it back later, with interest.  For practical reasons, that interest is too little to sustain the SocSec System.

So I stand by my earlier statement, with the modification that the low interest rate is only part of the problem.

As for Grassley and Bush, I'm not familiar with their discussions, so I don't know if your characterization is accurate or not.  I do know that they need to implement Personal Accounts, because that is what will work.

I think you hit that nail very squarely on its head.

Since AARP targets us elderly folks, the added security of Personal Accounts for us would make their target consumers less likely to buy AARP funds.  As you say, if the PRAs were external, and therefore available to be invested with AARP, it would be a different ball game.

I wasn't that well informed on Clinton's details, but that could account for something.  I have to observe that if the accounts are external to SocSec, it just means they are another kind of IRA.  We already have IRAs, and they have to be funded by money that's additional to SocSec taxes.  The beauty of funding the PRA with SocSec tax money is that it wouldn't cost taxpayers additional money to start the repair of SocSec, and to improve their own retirements.

End the fraud of this employee/employer contribution division. It only serves to mask how high the tax rate really is and how much you have really paid into the ss system.

That would be one of the biggest way to get more support for SS reform.

You have the same problem that many SS reform supporters do. You just can't seem to untangle yourself from the veil of the trust fund, and this leads you in the wrong direction.

You can see it in the President right now and in Sen Grassley. Bush just can't seem to pierece through those bonds. This leads him to make terrible arguments about when the trust fund runs dry and other irrelevant numbers. Worse, is that it leads him and Grassley down the path to tax increases now as a method to fix the problem. No wonder the public doesn't want to follow them.

The trust fund and the bonds are economically irrelevant. This isn't something up for discussion. You cannot have a different view than this and still be reasonable. This the only correct view, and everything else is wrong.

My statement that you quote is not ENTIRELY incorrect.

Pretty much it is. It isn't entirely incorrect in an overly literal reading of it where "not enough" can mean zero. Even in that case, it conveys an improper understand b/c ppl will think that the interest on the bonds is meaningful.

The nominal interest on the Social Security Bonds could be set higher, and on paper it would look as if the Trust Fund were in good shape.  And as long as the Treasury could pay the higher interest, it would be in good shape.

This is where your understanding clouded by the trust fund bonds gets you in trouble. It is meaningless to talk about the Treasury being able to pay off those bonds, since the bonds are from the government to itself. They don't represent an actual legal debt between two parties, but are an accounting mechanism of just a single party. If the bonds have no economic meaning, then obviously their coupons have no meaning either.

Their could be $10 tn in bonds in the trust fund at 80% a year, and it wouldn't mean anything. The trust fund would merely take the extra income from those bonds and turn around and "give" it back to the Treasury in return for more bonds. At the end of the year the Treasury would "give" $8 tn to the trust fund. The trust fund would flip that around, reinvest it in more bonds and now have $18 tn in bonds. Notice it didn't make a shred of difference to the Treasury. Pressure on the Tresury is entirely a product of the social security formula from the legislation, and the bonds don't matter.

Although it is technically true, it's irrelevant to the discussion of Social Security.

But is is tne central issue. You cannot compare the trust fund to an NGO b/c the trust fund is part of the government. And NGO is separate and has autonomy.

The trust fund is like my savings account, and the general fund is like my checking account. They are both part of my balance sheet. If I write myself a bond and transfer money from my savings to my checking. That bond has no economic meaning, b/c both accounts are part of me.

I think this diary does more harm than good for social security reform b/c it forwards a number of misunderstandings.

Especially considering that he made a priority of paying back the trust fund what was owed to it

No, he didn't. You cannot pay back the trust fund b/c of the way it works. There is no such thing. It is impossible give the way the fund works.

If somebody were to try and pay back the trust fund, the fund would be required, according to the FDR law, to turn around and buy special issue Treasury bonds with it, going back to being a creditor. In the end it wouldn't have made a bit of difference.

This isn't a complex issue, so I don't know why it is so difficult for some ppl to understand.

You can't blame AARP for guarding those funds like a mama bear.

What funds? That bonds don't determine the payout, a formula does.

I would say you have a good intuitive grasp of the situation.  While it may be true that the Government gains nothing when it loans itself money, or pays itself back, it certainly means something to the lending and borrowing agencies.

It's not quite the same thing as borrowing from yourself, but it is a lot like one spouse borrowing from another one.  There is no net change to the family's situation, but each individual's circumstances are potentially enhanced.

Imagine both spouses have outside incomes, but payday for the husband is the 15th of the month, and he needs money for a fishing rod on sale today, the 5th.  Meanwhile, his wife has some money saved and budgeted for buying garden supplies scheduled to be on sale on the 16th, but she doesn't get paid until the 30th.  She takes the money from her garden account and loans it to her husband.  There's no net difference to the whole family, but within the family the husband can buy his fishing rod.  On payday the15th, he pays his wife back, plus he buys her some hen-and-chicks to show his appreciation.  She plants them in her garden, and after the garden supply sale on the 16th, she has all the garden supplies she originally planned on, and she also has the hen-and-chicks growing and multiplying in her garden.

In the above scenario, the husband represents the Treasury and its General Fund.  It always needs money NOW that it doesn't have.  The wife represents the SocSec Trust Fund.  It has more money than it needs right NOW, but it also has definite needs for the money IN THE FUTURE.  The wife would be very upset if the husband didn't pay her back, even though the financial balance of the total family is unchanged when he does.  The Trust Fund would be very upset if the Treasury didn't make good on its Bonds, even though the total financial balance of the Government is unchanged when the payment is made.  Oh, yes, the hen-and-chicks represent the interest paid on the Social Security Bonds.  They will continue to grow in her garden until they're "harvested," say in 2018 or 2042.

While this is just an illustration, it does parallel in principle what goes on between the Treasury and the Trust Fund, within the "Government."  And the parallel is reasonably exact.

That is an excellent point.  Of course our duly-elected representatives don't see it that way, or they don't want to see it that way.

(1) Ppl use the 6.2% to do analysis.

(2) Ppl think that increasing employers side of the tax is free or somehow different than the employee half.

(3) Ppl waste time wondering if the the employer or employee side should be changed.

These are some really absurd things that I've seen otherwise intelligent ppl talk about.

Interest on the bonds is more like the wife charging interest to the husband.

Converting internal debt to external debt is significant. Wife lends $100 to husband. Husband spends $100. Husband borrows $100 from the bank to pay off the wife. The family now has a $100 debt it did not have before.

The trust fund is very tricky. Right now it is an accounting gimmick. But PRAs would make it more like a real trust fund, so it is sometimes helpful to imagine the trust fund to be real.

The hard truth is that the government cannot sustain wage-indexed benefits increases without increasing the retirement rate.

While it may be true that the Government gains nothing when it loans itself money, or pays itself back, it certainly means something to the lending and borrowing agencies.

No it doesn't. Those bonds don't mean a thing since they are not in the public markets. Future government obligations certain do, but those obligations come from legislated formulas, not from the bonds.

My credit doesn't change one point if I loan myself money, and the credit agencies don't care if I notify them or not. If I did notify them, they would probably laugh at me and tell me not to worry about it. And if I "default" on myself, nobody is going to care either.

It's not quite the same thing as borrowing from yourself, but it is a lot like one spouse borrowing from another one.  There is no net change to the family's situation, but each individual's circumstances are potentially enhanced.

That still isn't correct. A loan between husband and wife is legally enforable. Both are separate entities. The wife can take the husband to court for non-payment. The trust fund cannot take the government to court, b/c they are the same entity. It is far more like the checking and savings account example b/c the trust fund is an accounting mechanism similar to how my banks accounts are accounting mechanisms for me to divide my wealth between consumption and savings.

The general fund is like my checking account and represent government consumption. While the trust fund is like my savings account and represents government savings. Except where I have actual economic assets in my savings account in the form of money, the government savings account has only bonds to itself. It would be like my savings account having loans I wrote myself. It would be meaningless to my financial situation.

At any time the govt can entirely repudiate the trust fund bonds or otherwise shut the program down. In fact, both of those would probably improve our credit standing with lenders since it would represent a reduction in expected future obligations (no more SS payments) and not a meaninful default.

Imagine both spouses have outside incomes, but payday for the husband is the 15th of the month, and he needs money for a fishing rod on sale today, the 5th.  Meanwhile, his wife has some money saved and budgeted for buying garden supplies scheduled to be on sale on the 16th, but she doesn't get paid until the 30th.  She takes the money from her garden account and loans it to her husband.  There's no net difference to the whole family, but within the family the husband can buy his fishing rod.  On payday the15th, he pays his wife back, plus he buys her some hen-and-chicks to show his appreciation.  She plants them in her garden, and after the garden supply sale on the 16th, she has all the garden supplies she originally planned on, and she also has the hen-and-chicks growing and multiplying in her garden.

Did the purchasing power of the family change? No. Did the ability for the family to afford anything change? No. Would there have been any difference if the two just kept their finances combined? Not a bit. The husband and wife are merely accounting mechanisms that don't change a thing -- they only meaninglessly shuffly money around. Things would be far simplier if you just ignored them as individuals. You might as well have reagaled us with a story of finding a genie in a lamp since this example didn't show a thing.

A more correct story is this:

The husband and wife both decide to split responsibilities. They decide that the wife will save for their retirement, and the husband will deal with the day to day finances. Every month they set aside the wife's paycheck for retirement, about $5,000. Every year the husband borrows $60,000 from the wife to pay for lavish current consumption along with his paycheck and puts bonds in her retirement portfolio. After all, the portfolio is filled with $60,000 a year in bonds, so they will be able to retire quite well!

What  a shock they are going to be in for. They confused themselves b/c while they acknowledged the $60,000 a year bond asset in the savings portfolio, they didn't also record the $60,000 liability that each bond comes with. If they did, they would understand why they are retiring with nothing. This is pretty much a direct translation between the SS system and a husband and wife.

I just can't keep going. There is just too much wrong information going around.

jjayson

I hardly know where to start, but I'll try.  It's pretty hard to have a dialogue with someone who states, "This isn't something up for discussion. You cannot have a different view than this and still be reasonable. This the only correct view, and everything else is wrong."  I understand that position.  I have nearly the same position (much less crudely stated) on my "Three Solutions Rule."  (I say, "I'll discuss it, but to change my mind you have to provide a truly different Fourth Solution.")  Taking you at your word, I guess this becomes a dialogue between me and myself, as you just sit there and watch.

To begin, I wonder how jjayson expects to solve the Social Security problem while he pretends a major component of it doesn't exist, or perhaps more precisely, that its economic irrelevance allows its existence to be ignored.

He also doesn't seem to recognize when someone agrees with him, nor that someone else understands some of his other arguments but finds them lacking.  He accuses us of having our understanding "clouded" by the trust fund bonds, but it seems to us he is the one hung up on them.  He's very insistent that a Bond must be a pact between two parties before it's a legal document, and apparently to him "not legal" means "not meaningful."  But he is blind to the fact that the Social Security System and the Treasury Department are two separate entities.  Personally, we don't care about the legalities of the situation.  The reality of it is that one agency owes the other the money, and it will be repaid (or transferred) on schedule, and it will be available for that agency (the Trust Fund) to pay benefits with, up to the point that the money is completely repaid by the Treasury.

When we say that he doesn't recognize when someone agrees with him, we mean that he doesn't recognize that the statement "But your point is well taken in one respect.  The nominal interest on the Social Security Bonds could be set higher, and on paper it would look as if the Trust Fund were in good shape.  And as long as the Treasury could pay the higher interest, it would be in good shape.  And if that were true, we wouldn't be having this discussion now..." was in fact an agreement that  "the government doesn't really get any income from the bonds." Whatever the rate, the "income," or interest is just moved from one Government pocket to the other.  We probably should have added that to the original statement to make our agreement on that point perfectly clear.

The irrelevance of the point was explained in the original reply.  We suspect he may have partly understood it, because he now uses the same term himself.  Of course, the original "irrelevance" was that the Government is not the entity in question, the Trust Fund is.  As such, it is not completely irrelevant what interest rate is on the bonds.  That rate helps determine how quickly or how slowly the Trust Fund is depleted.

But we do agree that the Trust Fund has been used as an accounting smokescreen, to enable Congress to run a bigger deficit in the General Fund without admitting it.  I say we agree, but I haven't actually seen the proof.  Reputable sources assure me it's true.  We disagree in that I can also see the practical basis of the Trust Fund.  jjayson seems to think it is ONLY an accounting fiction.  That has also been adequately explored in these dialogues, so no need for more unless asked.

Touching on the questionable proposition about how the Treasury doesn't care whether it owes the Trust Fund $10 trillion or $18 trillion, we point out that the Treasury is affected by economic, fiscal, and political pressures.  It doesn't require legalities to make it prefer to owe the smaller amount.  (Now if jjayson knows some intimate details of the Social Security Bonds he'd like to share with us, we'd be glad to hear them.)

Finally, we'd like to laugh a bit at the contention that the Trust Fund isn't like an NGO because it's "part of the government," followed in the next sentence by "The trust fund is like my savings account, and the general fund is like my checking account."  In the game of "Dueling Analogies" we believe we win this one.  Perhaps he should try, "the trust fund is like my savings account, and the general fund is like MY WIFE'S checking account."  If he were to then consider the Government as being like his family, he might start to understand the relationships better.  But we doubt it.  After all, his is "the only correct view, and everything else is wrong."

In closing, we'd say to ourselves that this diary should do some good for Social Security reform, because it brings some misconceptions to light.  Furthermore, the question of what to do with the SocSec Trust Fund is definitely a stumbling block on the way to the solution, but jjayson's interpretation of the relationships involved, while commonly held, are incorrect.  Even so, read our original essay and insert jjayson's ideas.  This is easily done by, as he suggested, imagine an interest rate of zero percent for all the Social Security Bonds.  The result and the logic remain unchanged, which is testimony to how insignificant this whole disagreement about the Trust Fund is.  As far as the reality of Social Security goes, it's an argument about accounting technicalities, akin to tilting at windmills.

The way I hear tell is that it would have no effect on any current seniors.

Next thing is that it would be voluntary.  You would have to join up many years in advance.

So how does this affect AARP except to diminish their future base?

I think you meant "without increasing the retirement AGE."  You appear to be right.

Sorry you didn't find my example entertaining and enlightening.  To explain:

I used the hen-and-chicks because I was into a gardening example, and few husbands pay monetary interest to their wife.  So use the cost of the hen-and-chicks if that makes it better for you.

You'll note that I chose the dates very carefully, to illustrate that the husband was repaying out of his income without borrowing, although I thought it went without saying. His paycheck is the equivalent of tax receipts into the General fund, not SocSec tax receipts.

The example wasn't intended to illustrate "borrowing to pay off a debt."  It was intended to illustrate how borrowing/lending between two entities that are both subsets of a larger entity can be to the benefit of both of the smaller entities without having any effect at all on the larger one.  As such, the analogy is exact.  But it's an analogy designed to illustrate a principle, not an exact reproduction.

To just comment on your statement on borrowing (which was not part of my example), "Converting internal debt to external debt is significant. Wife lends $100 to husband. Husband spends $100. Husband borrows $100 from the bank to pay off the wife. The family now has a $100 debt it did not have before."  At the same time, the family also has a $100 asset it didn't have before, the fishing rod.  Net change: zero.  And when the husband repays the bank, that result is also a net change of zero.  $100 goes away from both his cash account and his liabilities.  In the end, it's just as if he had repaid his wife without borrowing from the bank.  But none of that has anything to do with the original transaction between the husband and wife.

Most of the bad information is coming from you.  We aren't talking legalities.  These are examples.  They aren't exact.  They are approximations to illustrate a point.  My bad if they aren't clear to you.  They are certainly simple enough.

*Did the purchasing power of the family change? No. Did the ability for the family to afford anything change? No. Would there have been any difference if the two just kept their finances combined? Not a bit. The husband and wife are merely accounting mechanisms that don't change a thing -- they only meaninglessly shuffly money around. Things would be far simplier if you just ignored them as individuals. You might as well have reagaled us with a story of finding a genie in a lamp since this example didn't show a thing.*

While very sophisticated, your analysis overlooks the fact that the if you ignore the two people as separate entities, there is no longer any parallel to the bigger picture we're trying to simplify.  The example is quite easily understood.  In fact your first sentences, "Did the purchasing power of the family change? No. Did the ability for the family to afford anything change?"  confirm the point of the example.  There was no change in the family; the change was in both the husband and the wife.  They borrowed, they purchased, and they repayed, all without a legal document.  If you couldn't understand that, then I guess I should have made up something like "they each were paid by an irrevocable trust fund that didn't allow them to comingle their incomes and assets."  That would have made them more than "mere...accounting mechanisms."  Perhaps you should look for that genie yourself.

Your example illustrates a different point.  It illustrates your own inability to recognize the difference between your example's "reality" and the reality of true life.  The reality in your example is that the money has been spent WITH NO WAY TO REPLACE IT.  And the problem isn't that they didn't record a liability in a ledger book, it's that THEY SPENT ALL THEIR MONEY. THEY SPENT MORE THAN THEY COULD AFFORD.  In real life, the Government/husband has the continuing ability to tax its/his neighbors, and therefore to repay the debt at any point given a change in spending habits.  It also has an excellent credit rating, so borrowing is always available to it (that may not be a good thing, but is significantly different from the situation in your example).  Also, although the government is definitely a wasteful spender, it's not nearly as bad as your example husband.  It spends a lot, but it's been fairly successful at not spending more than it can afford.  Finally, the "bond assets" in the wife's account are junk bonds that have defaulted.  The bonds in the SocSec Trust Fund are as highly rated as you can get, and they won't default.  So after all, as opposed to  accounting assertions, your example is far from being analogous to real life.

Another point:  If the husband in your example doesn't borrow from his wife, he'll have to borrow from his friends.  In the end, the family will STILL be broke, because they'll still end up owing all his wife has saved by not lending to him.  So if you want to carry your analogy to its inevitable conclusion, someday our total Government debt will overwhelm us all and the US will go belly up.  It could happen, but not because the Congress created a Social Security Trust Fund.

Finally, you will never understand if you never try to understand.

The best answer is that SocSec is a Ponzi scheme, and you can't prop up a Ponzi scheme no matter how much money you pour into it.

The problems of SocSec can't be solved by additional money alone.

(1) Although I've never seen any serious discussion of the issue that only used 6.2%

(2) The only real difference is the employee pays income tax on his 6.2% half.  I may be wrong, but I believe the employer can deduct his 6.2% half from his gross income.  Do you know?

(3) It's far to early to worry about that kind of detail.

Jjayson

You dearly want to insist that the Social Security Trust Fund is merely a sub-account of the General Fund. If that were true, most of what you say would be accurate.  But it's not true.  Two agencies of the government CAN loan money to each other.  In the case of the Treasury and the SocSec Trust Fund, they use the formalized method of issuing special bonds to acknowledge the loan.

But let's look at it as if the division weren't real, as you insist. Then, indeed, the Bonds are "meaningless."  What does this imply?

For starters, it implies that SocSec Benefits are just another obligation of the General Fund, to be paid for with Income Tax receipts if necessary.  It means that the excess SocSec taxes that have been collected since the `80s or `90s are really just an underhanded Government method of collecting more tax, just to have more money to spend.  In fact, I believe some people do make those claims, although I don't see them in your note. If that is what you mean, I won't quibble with your right to believe it.

But your argument that the Social Security Bonds are "meaningless" because the Government can't loan money to itself is just plain silly because the premise is wrong.  Foregoing the "legality" argument, why would a bond issued by the Treasury, but held by another government entity be any less "meaningful" than a bond held by an individual?  It's not the legality of the claim that makes a government redeem bonds; it's the reality that if they don't, their credit is ruined.

You write

*Asking if the bonds are worthless or not is incorrect. They are real in that they are printed and sitting in a file folder, but they don't change the finances of the trust fund in any way since the trust fund is still part of the government.

The correct question is what do they mean and what are their implications? And the correct answer is that in an economic sense, they mean nothing and do not change a thing. They could be some stange bond that only pays back on the flip of a coin, being one of the least reliable bonds you could buy, but it wouldn't matter economically. The government would just put more in face value in the folder.
*

These are unsupportable assertions.  First, the bonds do change the finances of the Trust Fund.  The Fund can call on those bonds to be redeemed, but only up to the amount they hold, at the time they mature.  So they do mean something--they are proxies for the cash that has been deposited into the Trust Fund by SocSec tax receipts.  And the Fund holds only the amount they have bought from the Treasury.  It's not as if the Government just says, "Put X billion dollars in Bonds into the Trust Fund today."  That may not be what you meant, but it is what you said.

In fact, the bonds are far from meaningless.  They are finite, and they represent cash owed by the TAXING AUTHORITY SIDE OF THE GOVERNMENT (the Treasury/General Fund/IRS side) to the Trust Fund, also a tax recipient, but not a recipient of monies that can be appropriated from the General Fund.

Legislation could be enacted tomorrow that could make your analysis of the issue close to right (although some of your statements about borrowing would remain irrelevant no matter what). But with today's laws, your ideas are just plain wrong.

YOU know it can't be "paid back," and Clinton knew it, too.  But he also knew that very few other people would know that, and a slogan like "Save Social Security First" could go a long way in his fight to overcome those wascawy Wepubwicans.  He wouldn't have cared too much that he was proposing the impossible, as long as it made a good sound bite.

I still say that it shows his character as a man and as an ex-President that he won't support the effort to create Personal Retirement Accounts in Social Security now.  Either he didn't believe in it before and was just mouthing platitudes then, or he really does believe but he holds political advantage in higher esteem than he does doing the right thing.  External accounts are just nonsense.

And as a self employed person, I am allowed to deduct half of my self employment taxes from my gross income prior to calculating my income taxes.

Yup by Adam C

The AARP would support 100% taxation if it all is funneled to the elderly.  Since the original 2% payroll tax wasn't enough and now the 12.4% isn't enough, the AARP would prefer we tack on another 3 or more percent to that tax.  Since its members generally are past their taxpaying years, but receive substantial welfare transfers from SS it makes sense.

Too bad they don't factor in future generations somewhere in their thinking.  The problem only gets worse until we start "pre-funding" the system or we move to a defined contribution instead of a defined benefit plan.

jjayson's post contained an implied thought experiment: Suppose that right now there were $100 trillion in bonds in the SS trust fund paying 80% interest. Better still, suppose there were $1,000,000 trillion in bonds paying 500% interest.

What difference would it make?

"Pay back" is probaby the wrong phrase, although there was discussion at the time about retiring publicly held debt and then investing some S.S. funds in stocks.  How about "stop raiding the funds"?

Not raiding the S.S. trust fund for current expenses means that the younger generation will have less debt burden and will thus be better able to pay out Social Security to the baby boomers when the trust fund is cashed in.  It is not a sign of poor character to believe that as Clinton always has.

I understand that they moved their retirement systems to the same personal accounts models.  Has that been successful?  If so, what measures have success have been documented?

I was intially for the President's Personal Accounts until I started hearing more of the details.  I admit to being confused.  (Finance is not amongst my best subjects.)

I didn't understand how government IOUs would all of a suddenly become worthless?  If they were to be worthless in 2042, 2045, pick-your-year, what are the implications for foreign treasury bills currently being sold on the market?

My other primary issue with President Bush's Personal Accounts plan was the realization that the federal government would STILL have to borrow money to pay benefits to people who would be under the old system, because those of us young enough to move to the new system would have some portions of our dollars unavailable.  How does creating further deficits in an already overburdened system lead to a "fix?"

Any help/thoughts from the finance experts would be appreciated.

Congratulations on ignoring the substance of the diary and its related (48 thus far) comments, and asking everyone to start over at square one just for you.

(2) The self-employed version of FICA is SECA. There is no economic difference although the payroll taxes do move some things around the books (also depends on if you are W-2 or 1099).

The self-employed 1099 person will pay both halfs of the payroll tax, but for calculating adjusted gross income will deduct half. This is done to mimick the way the FICA works though businesses. (For W-2 it is similar).

The same amount of taxes wind up getting paid and the burder is split the same way, but who does the actual remittance can be different.

Also, the employer/employee payroll tax division does intersect with some other laws, such as minimum wage. But that is a technical matter of law and not an economic matter.

Currently, with the trust fund "invested" (used in the loosest possible sense) in government debt, there is no way to "stop raiding the fund." It is implicit in the operating mechanism.

And there are other ways to do this without investing in stock, such as bonds from other countries.

A lot of ppl are rightly scared of the govt owning a fairly signigicant chunk of public companies. Buying up european, Japanses, Australian, Canadian, etc. bonds might be a good middle solution for now. That is a real asset.

Re: Retiring publicly held debt:

We retire publicly held debt whenever we run a unified surplus (budget + trust funds). Total government debt (public and intragov) goes down whenever we run an on-budget surplus.

I can't keep going. It's not that I don't allow for discussion on things. Fire away at issues like min wage or free trade, but this is one things where isn't room for dissenting opinion. Dissent in this case is just a euphamism for incorrect.

Your husband and wife example is merely arguing that we shouldn't collect payroll taxes and put them in a safe, but that we should share the money around the government and act like it is all one big purse that way nobody gets shut out when they need money for their pet project. There is no real indication that this is a good thing. That fishing rod the husband wanted could be his fifth this season, while the wife wanted that $100 to save for needed car repairs. The example doesn't provide any insight into the economic meaning of the trust fund though. It is this view that essentially leads us into the problems in the first place.

Here is the ultimate question that should be conclusive: If the trust fund were abolished and the govt just decided to pay everything out of the general fund, would the economics of social security change? The answer is a clear and resouding no, not in the slightest.

for knowledge!  You, sir/madam, can be OK with mediocrity.  That's a badge I choose not to wear.

"I didn't understand how government IOUs would all of a suddenly become worthless?  If they were to be worthless in 2042, 2045, pick-your-year, what are the implications for foreign treasury bills currently being sold on the market?" is a straight leftist talking point.  I'll assume you are just reading it elsewhere.

SS benefits are not guaranteed under current law.  Google Nestor v. Flemming, 1960 to read the SC ruling that says you don't have a right to your benefits.  In other words, Congress can end the program today if it wants and stop paying people.  More likely it can change the rules midway by raising the retirement age, lowering benefits, etc.  In fact, it has to do something because the promised benefits exceed the revenues starting in 2017 or 2018.  We have been taking in additional revenue to save up for this happening but every Congress since the mid-1980s has spent the money immediately.  If we get back those "IOUs" they will last us until 2041.  Then our revenue will be 72% of our promised benefits and retirees will only receive that 72%.

This is still the best graphic I have seen to explain the SS problem.

So something must be done.  The way I see it is there is a structural problem when we define a promised benefit and then figure out where the money will come from later.  We should move to a defined contribution setup where one puts money into an account and what that account has in it when they retire is their SS benefit.  This is by definition solvent.  If we setup an SS system today, I believe this is how it would be setup.

Problem is, we still have to cover the people retired now and those who retire real soon.  So somebody has to pay twice.  By phasing in voluntary PRAs slowly, this transition is spread out across generations.  This is done by making PRAs voluntary (so some stay in the old system) and by only allowing people to move 4 percentage points of the 12.4%.  Thus 8.4% is still in the old system.  I think this will prove popular after the fact and people will want to put more than 4 points into their accounts.  Over time, we can move from a defined benefit to a defined contribution plan which cannot go insolvent and we can avoid this problem that every other decade we have to raise payroll taxes to cover SS.  They were originally 2%, now they are 12.4% and some want to raise them to 15.5% to cover the future shortfall.

That's the summation.  I hope you were honestly wanting it and I wasn't wasting my time.

To those that rated this a 1 and 2, sometimes threads can become overwhelming to jump into or read through -- I know I feel that way sometimes. Didn't you two learn in kindergarten that there is no such thing as a stupid question?

The questions asked in this post are exactly the right ones too and show how the President's confusion on the issue has confused everybody else and reduced his support. (Bush terribly needs better advisors.)

I can't really offer an answer to the Chilean or UK questions. I've read a little about Chile and am pleased with the results I read about. I've read enough about the UK to know that it is too complex for me to understand in a short time. I don't think it has much information for us concering how we would change our system.

I didn't understand how government IOUs would all of a suddenly become worthless?

Worthless is just a bad way of putting it, and all those dates for when the trust fund runs out of bonds is an unnecessary diversion from other ppl who don't understand the issue. Nothing changed about the bonds, except the politics around them.

The bonds aren't necessarily worthless, but just that they don't change the economics of the social security system. They don't make the trust fund any more valuable. You can analyze the SS program by just assuming that all the money goes to and come from the general fund, and you get the same answers, but without the surrouding confusion that makes others misstep.

If they were to be worthless in 2042, 2045, pick-your-year, what are the implications for foreign treasury bills currently being sold on the market?

There is no implication concering the bonds. They are not bonds held by the public, so not paying them doesn't matter. The payout for SS is determined by a formula, not the bonds. That formula has implications for the public markets b/c it show what we expect to pay in benefits, but that doesn't have anything to do with the actual trust fund bonds.

My other primary issue with President Bush's Personal Accounts plan was the realization that the federal government would STILL have to borrow money to pay benefits to people who would be under the old system, because those of us young enough to move to the new system would have some portions of our dollars unavailable.  How does creating further deficits in an already overburdened system lead to a "fix?"

The debt created by PRA isn't quite new debt. It is a realizition of promised benefits -- that is, beneifts we expect to pay out are put onto the books in the form of bonds. It would be like you not recording your monthly car payment in your checkbook. It doesn't mean you don't owe it, just that you don't have it written down. PRAs effectively write down that monehtly car payment so you can get a better understanding of your financial situation.

In the current system:


  • Current workers pay for current retirees by their payroll taxes.
  • Future workers will pay for future retirees by their payroll taxes too.
  • The benefits to those future retirees are promised but not on the books. We expect to pay them, but that "debt" isn't complete recorded anywhere except in the social security projections.

With PRA:


  • Current workers pay for future retirees (themselves) by their contributions.
  • Future workers will pay for current retirees by their taxes through bonds that will be floated.
  • The benefits to those future retirees are now on the books. Their benefits didn't rise, but the "debt" is recorded by the bonds sold to the public, and social security projection don't really matter anymore since they are the same as the bonds now.

This is kind of confusing, but the simplest explanation is that people changed responsiblities: Before it was current paying for future, but now it is future paying for current. There was no new debt created, just it is explicitly recognized.

In the "current system" listing above I said that the benefits to future retirees isn't "completely recorded." It is partially recorded in these intragov bonds in the trust fund itself. This is why they are called an accounting mechanism. They show how much has been put into the kitty and how much is left to divy up to retirees. Supposedly when the fund dries up, we will cut benefits, but everybody knows that will never happen. The last time it came close, they raised taxed to cover the accounting gap.

Because of the way this debt is recorded, that headline $7 trillion debt you alway hear about will not be raised that much either. Those trust fund bonds already partially account for the PRA changes. That $7 tn number will rise by exactly the amount promised but not yet put on the books.

I am not a finance expert, but I am knee deep in this kind of stuff every day.

On the numerical rating and see who rated the comment what.

In this case, only Shadx gave the comment a 1. Doverspa gave it a 3. And then you gave it a 5.

I just didn't feel like typing their names. And Doverspa originally gave the comments a 2, I believe.

My rating of the comment was based not only on the dismissal of the entire discussion that had taken place on this thread, but also on the general behaviour of the poster elsewhere on the site, demonstrating he/she was more interested in namecalling and disrupting discussions rather than advancing conversation.  

I also have no desire to encourage the "Republicans hate blacks and gays" trolls with high comments scores anywhere on the site.

It does seem a pity that CW managed to get himself banned before taking the opportunity to thank you for investing the time and effort into writing up a comprehensive reply to his comment, though.

I've avoided commenting on this thread since most of the conversation is a little over my head (I'm an economic dunce).  But you have done a very good job here and elsewhere making the case for PRAs, and even as a left-of-center layperson I can see the attraction.

I would wholeheartedly endorse an add on PRA system in the short term and an eventual move to replace SS in the long run-- provided there is still some kind of minimal government safety net to protect those whose investments plummet shortly before retirement.  The one concern that keeps me from endorsing Bush's plan (beyond confusion over the finer details of what the plan would actually entail)is where the money would come from to switch systems.  As I understand it, either I would be taxed for my own account (as a young worker) and existing seniors' benefit, or we would have to go into debt to provide the transitional money-- in which case I would still pay for both only a few years later and with interest.  Is this right?  Is there a better way to handle the transition costs?

 THIS Ponzi scheme can be fixed without detonating it. You can change benefit ages, which is something that SHOULD have been considered from the start - as medical science keeps us living longer and we are able to stay productive longer, we will have to change the age now.

 Secondly, you can means-test benefits - Warren Buffett still gets a check. As he put it, 'I cash it, but I woulnd't miss it if I didn't get it'.

 As far as supplementing SS, we have plenty of private ways to do it. I'm sure many of us here have IRA's and the like.

 What bugged me most about this was the cap on earnings. If I was to manage my account with consummate skill, I'd still be capped on the year to year growth on what I've saved - and, of course, the rest goes into the government that lots of Republicans say is too big and takes too much money anyhow.

that SS can't be solved by money alone? Are you saying that expenditures will rise to an infinite amount?

The SS Trustees report has three different scenarios as to what will happen in the future.

In the last 10 years or so the scenario that came closest to reality was wehat they call the Low Cost scenario.

If that turns out to be the case in the future as well SS not only will not need tax increases or spending cuts it will actually run a surplus.

in this subthread comes from how you look at the SSA and the General Fund. If you look at govt in consolidated basis you are right. But if consider the SSA as controlled by the governmnet but not necessarily having to be consolidtaed wit it then Flagstaff (as I read him) is corect. There are many exam[ples of "control but no consolidation" in the private sector, specially in structured finance. Even in pensions. IBM's pension plan can hold IBM securities and no one considers them meaningless. For diversification purposes  IBM is not allowed to fund its pension plan 100% with its own securities but that is another story.

Fix the Ponzi scheme without detonating it.

For discussion's sake, I accept this as a good idea.  In my opinion, the changes you suggest do more to "detonate" it than would allowing those who want to a chance to use their tax money in an investment account.

I completely reject the idea of "supplementing" SocSec.  As you say, we already have vehicles such as IRA and 401k accounts.  And SocSec should supplement them, not the other way around.  But allowing lower income workers to invest some of their SocSec taxes might be the only savings/investment they ever make.  It would certainly improve their lot later in life.  If they don't want to participate, they don't have to.

*What bugged me most about this was the cap on earnings.*

What you describe is also objectionable to me.  That's a detail I've heard suggested, and it should not be adopted.  But it doesn't contradict or override the basic benefits of the concept of PRAs.

I don't think expenditures will rise to an infinite amount. I do believe that, given increased lifespans and better health combined with more expensive care for the disabled, the current benefit calculations will increase total outlays to a point that workers will rebel at paying the taxes required to support those benefits.

Costs don't have to be infinite to be exorbitant in the viewpoint of the person paying.  When you have 2 workers or less for every beneficiary, it's obvious that the average worker will have to pay half of the average individual benefit each year, if there isn't something like a PRA to relieve some, or perhaps eventually all, of the burden.

That seems to be a popular phrase.

Leaving Clinton out of this, my question to all the "anti-Raiders" is, "What should be done with the excess Social Security Taxes being collected right now?"

The Personal Retirement Account would be an answer if it existed, but it doesn't, as yet.  So what do we do with the money right now?

*I didn't understand how government IOUs would all of a suddenly become worthless?  If they were to be worthless in 2042, 2045, pick-your-year, what are the implications for foreign treasury bills currently being sold on the market?*

The government IOUs (bonds) don't become worthless in 2042.  The are all used up at that time.  They've all been redeemed.  There aren't any more of them.  The safe-deposit box is empty.

I think you made a very telling point, when you identified the underlying problem of the SocSec System is that it's a Defined Benefit plan.  It's the same problem the airlines, GM, and (I hope not) others are facing.

Combine that with the fact that it was intended for a population that died sooner and worked longer, that it now appears to be funded like a Ponzi scheme, and you have the current recipe for disaster.

Well by GT

According to the SSA SS outlays will rise from about 4% of GDP today to about 6% of GDP in the next 75 years. That's a 2 points of GDP jump in more than seven decades.  We had a similar jump in military spening in just a few years, not seven decades. I see no evidence anywhere that Americans consider this too much.

And there is a a good chance that SS will never run out of money, even if we don't do anything.

Show me one credible source who agrees that "And there is a a good chance that SS will never run out of money, even if we don't do anything."

The debate over whether the current system is sustainable ended long ago.  The question is what to do about it.

I would wholeheartedly endorse an add on PRA system in the short term and an eventual move to replace SS in the long run-- provided there is still some kind of minimal government safety net to protect those whose investments plummet shortly before retirement.

That is one of the most reasonable statements I've read anywhere about this subject.

But---an add-on PRA system is already in place.  It's called the IRA.  If that doesn't make sense to you. then I don't know what you mean by an add-on PRA.

As I understand it, either I would be taxed for my own account (as a young worker) and existing seniors' benefit, or we would have to go into debt to provide the transitional money-- in which case I would still pay for both only a few years later and with interest.

It's not clear to me yet what all the "transitional costs" are.  Do they include current benefit costs?  Since the PRAs are proposed to cost only about 1/3 of the current tax bill of only the individuals who opt for the plan, it's hard for me to see how that can take out enough from the system to require additional taxes to be levied to pay current benefits, at least for a few years.  This is supported by the fact that much of SocSec taxes now are collected from older workers, who would be unlikely to participate.  More details of a plan will be required in order to answer your question.

What difference would it make?

It wouldn't make any difference, because it has no relationship to reality.

Jayson insists that the Trust Fund Bonds are "meaningless."  I disagree. They are obligations of the General Fund to pay to the Trust Fund.

The problem with his logic is that he seems to also believe that Congressional legislation is also meaningless.

Laws require that Social Security Benefits be paid from Social Security taxes, not from the General Fund.  Other laws provide the Bonds as a means for the Trust Fund to do something with the excess SocSec tax money that's collected each year.  Jayson may think of the Bonds as meaningless, but they're real, and they must be addressed in any analysis of the system.

But as I have stated elsewhere, imagine the rate on the Bonds at 0.00%.  They are now just like cash in a safe-deposit box, and that doesn't change any of the arguments in my essay.

Finally, this entire issue about the Bonds is a side-track.  We are wasting time discussing a mechanism created to allow excess SocSec taxes to be used for something productive.  That mechanism is extraneous to the solution of the SOCIAL SECURITY problem.  That they can be used to make the annual deficit seem smaller than it is, is a DIFFERENT problem.

You ask

"How does creating further deficits in an already overburdened system lead to a "fix?"

Assuming you're referring to the fact of the PRA taking some of the SocSec tax out of the "old system," the answer is that eventually the reduction in an individual's "old system" tax payments also results in a reduction in his "old system" benefits. Those benefits are replaced (and more) by his accumulated PRA. Reduction of liabilities is part of the fix.

for your comment.

er by GT

Just read the SSA Trustees report. Look the Low Cost scenario. Check which scenario has been the most accurate in the last 10 years.

Just because you think the debate is over doesn't make it so. There is  a lot of misunderstanding of the basic issues as your question shows.

If you look at govt in consolidated basis you are right. But if consider the SSA as controlled by the governmnet but not necessarily having to be consolidtaed wit it then Flagstaff (as I read him) is corect.

That is correct. There isn't any "confusion" on this on my part. However, the view of the trust fund being essentially the same as the government just like the Treasury is -- ie, my view -- is the only correct way to analyze this issue.

There is no private analogy to the trust fund. That is one thing that PRA supporters are trying to create. Private defined benefit pension systems have a number of important regulations that the social security system doesn't have. Perhaps the most important is that they cannot invest in their own company in the same way that the trust fund is required to invest in the government. Private pensions have fudiciary standards that the trust fund entirely lacks, so any comparison is incorrect. Beside the word "pension" they have very little common ground.

You are confusing economic meaning and legal meaning. I have been very consistent to separate the two. While the legal construct of the trust fund exists, just like I said the bonds exist and are real, it have no economic meaning.

Finally, this entire issue about the Bonds is a side-track.

Exactly! But then why in your post do you menion when the bonds run out?! There are meaningless and irrelevant to any discussion of SS reform.

And later in a comment you say that the interest matters in as much as the govt can pay it. No, you are right in that the interest rate doesn't matter - 0% or 10000000000000% -- it doesn't matter. $100 trillion or $1,000,000 trillion in the trust fund, it doesn't matter.

But as I have stated elsewhere, imagine the rate on the Bonds at 0.00%.  They are now just like cash in a safe-deposit box, and that doesn't change any of the arguments in my essay.

No. The cash would be a real asset. The zero coupon bonds you talk about are still only an accounting mechanism. You could go get the deposit box money, but you have to tax it out of the economy to collect on the bonds.

Jayson insists that the Trust Fund Bonds are "meaningless."  I disagree. They are obligations of the General Fund to pay to the Trust Fund.

Fair enough.

But then we don't have a problem with SS funding at all, do we. Once SS payments exceed SS receipts, the shortfall will be made up through the mechanism of repaying the bonds through the general fund.

even as a left-of-center layperson I can see the attraction

I'm generally to the left on most issues -- I am a Democrat after all -- except for a few, such as taxation, but I'm perfectly happy also being left of center on many other economic issues too. So it is difficult to pin me down on the spectrum.

I'm not trying to make a case for PRAs, just correct a misunderstanding of the trust fund. Recognizing the proper role of the trust fund doesn't necessarily bring you to the conclusion that PRAs are a wanted change.

For Democrats, the misunderstanding seems to be driven by a partisan reaction against anything Republicans say. If a Republican says the trust fund works one way, many Dems feel a need in the currently radicalizing environment to deny it.

For Republicans, the misunderstanding seems to be driven partially by Bush's misunderstanding. Flagstaff's contortions around these threads is a great example. In one comment he's saying that the bonds are "extraneous", yet in another he's saying that the interest rate on them is somewhat important (as long as we can pay it). It's this exact same confusion you can see in Bush that is leading the administration down the wrong path. They say that the bonds aren't real and worthless, but then they float the idea of raising taxes and increasing the retirement age now as a solution -- policies that don't need to be executed now and not for another 15 years if the government really can build equity in the trust fund bonds. The public has been very astute about this. They are rightly giving Bush the thumbs down b/c it seem very likely that he will negotiation for unnecessarily raising taxes and not even giving strong PRAs in return. It's criminal how he's not just ruining this chance, but also poisoning the well for any future chance.

The one concern that keeps me from endorsing Bush's plan (beyond confusion over the finer details of what the plan would actually entail)is where the money would come from to switch systems.  As I understand it, either I would be taxed for my own account (as a young worker) and existing seniors' benefit, or we would have to go into debt to provide the transitional money-- in which case I would still pay for both only a few years later and with interest.  Is this right?

The transition costs are tiny. Since a PRA system is essentially just prepaying benefits, the costs isn't in the principle borrowed since that is just used to pay current benefits that would be paid anyways even w/o PRAs, but the cost is in the interest rate on the public bonds used to borrow money to pay current retirees.

The other question is if the initial borrowing, although it might not increase the load of debt over time, will push up interest rates. I don't think that is likely though. First, the global bond markets are hundreds of trillions of dollars large so they can easily soak up any extra we decide to drop on it for this. Second, if PRAs improve the long term finances of the trust fund b/c of less borrowing needed in the future, that should make the bonds markets all the more willing to accept some new debt. Third, around the Bush election when SS reform looked on track, we should have seen interest rates move some then it seems.

But yeah, in some way ppl will be paying the transition costs and the transition bonds. It's hard to pin it on anybody, since that debt like all other debt will be rolled forward hundres of years if necessary. It's like any other public debt in that regard. However, in the current system any return above what you contribute to the system is taxes and borrowed. In PRAs retuns come from the appreciation of real assets. This also reduces your liability too.

I think the real question is if taxes will have to be raised. The problem with bonds after all is that they mean future taxes. Economically, I can't see the transition bonds forcing higher taxes because of the reduced liabilities with PRAs. Culturally, Congress likes to spend every penny it gets and PRAs essentially prevent that from happening.

There are phase in plans to slowly ease into the transitional bonds, but I think the benefit is minimal. The bond markets are going to react to expectations and if floating the bonds over five year or ten years isn't going to matter much.

However there are other changes that could be made to the trust fund operation, not just PRAs, that would improve the financial standing of the social security system. Investing the fund in other security foreign govt bonds -- such as the UK or Japan -- would provide a way to grow real equity. Many have proposed having the trust fund run like a state pension system with a board that invests in stock and bonds. However, I'm with those that are scared of the govt owning private companies. Sometimes the socialism word is overused, but this is close to a taxtbook case. We've seen a number of states abuse their funds for political reasons, and that seems very likely. The chance for corruption is huge, like a certainly. Foreign bonds are still likely to be corrupted somehow, but it doesn't appear to be as big of a problem.

Your observation:

"Once SS payments exceed SS receipts, the shortfall will be made up through the mechanism of repaying the bonds through the general fund."

That's true, up until the point where there are no more bonds left to be redeemed.  That will happen in about 2042.  At that point, since all benefits must, by law, be paid from Social Security Tax receipts, those receipts will not cover the total benefits promised.

That's why benefits will be reduced then.  I understand a payment plan is already in place.  Individual checks will not be reduced.  Instead, checks will be SKIPPED until enough tax money has accumulated to pay full benefit for a month or some similar period.  Over time, the reduction is projected to be about 40% off of full benefits.

This will happen unless Congress changes the laws governing the Social Security Administration, including the tax and/or benefit laws, or unless the projected demographics are greatly in error.

You say

"Flagstaff's contortions around these threads is a great example. In one comment he's saying that the bonds are "extraneous", yet in another he's saying that the interest rate on them is somewhat important (as long as we can pay it)."

Trying to answer your misinformation is likely to cause me to make statements that you would think are contradictory, but which, in context, are not.  

You bring up an interesting point in this note.

"I think the real question is if taxes will have to be raised. The problem with bonds after all is that they mean future taxes. Economically, I can't see the transition bonds forcing higher taxes because of the reduced liabilities with PRAs. Culturally, Congress likes to spend every penny it gets and PRAs essentially prevent that from happening."

I don't take much exception to this.  Most people don't consciously think of it at all, so credit to you.  But bonds don't automatically mean future taxes, at least not necessarily future "increased" taxes.  What they do mean is "future repayment."  This can also be accomplished by rolling over the debt, a very common solution which doesn't increase National Debt at all, or by redeeming the bonds by reducing government spending below deficit status, paying off the bonds with the surplus.

"Investing the fund in other security foreign govt bonds -- such as the UK or Japan -- would provide a way to grow real equity."

Now, why are Japanese bonds a better investment than US bonds?  Oh, yes, you can't borrow from yourself.

By the way, if you are making your argument about the Trust Fund because you think it should be invested in something other than US bonds, just say that.  Convince Congress that they were wrong initially and they should change the law.  But even foreign bonds won't pay high enough interest to keep the Trust Fund solvent forever. I think we both agree though, that the Government itself shoudn't be investing directly in American companies.  That's the reason the PRAs are required.  Individuals will be making the investment allocation decisions, not the Government.

In another post, you mentioned that

"I am not a finance expert, but I am knee deep in this kind of stuff every day."

I suggest that may be a reason that you can't understand why I disagree with you on the technical point of the Trust Fund's reality.

So, the problem is going to happen in 2042?

No problem.

How about we wait 25 years or so to decide if we really have a problem after all. Do you really think the government's ability to forecast on a 37 year horizon is good enough to bank on?

Maybe point by point is the way to understanding. I'll try to answer your questions and comments.  You say

"the bonds exist and are real, it have no economic meaning."

You must have a different definition of "economic meaning" than I have.  Macroeconomically, they have obviated the need for higher taxes NOW, or for additional public borrowing NOW.  Microeconomically, they are a mechanism for the Trust Fund accounts to grow, at the expense of the Treasury's future taxing or borrowing ability.

When I said that "this entire issue about the Bonds is a side-track" you misconstrued my meaning.  This discussion about a dead horse side-tracks us from the real issue, that there is no viable plan to permanently reform SocSec that doesn't include some form of PRA.  You said,

"Exactly! But then why in your post do you menion when the bonds run out?! There are meaningless and irrelevant to any discussion of SS reform."

On the contrary, they are integral to SocSec reform, because they have to be dealt with, and we can't deal with them just by wishing them to be something they aren't.  The Social Security Bonds are tied to SocSec account balances.  Let's say one bond has a face value of $100, payable on demand, with a coupon rate of 3%.  (This is just an example.  All made up.  I don't claim to know what the bonds look like.  I'm sure you can find it somewhere.)  Suppose the Trust Fund holds 100 of these bonds.  Each year, the Trust Fund accrues $300 interest in total on just these 100 bonds, and the Treasury issues three new $100 bonds to pay the interest.  It's more complex than this, but as we both know, it is the end result.

After the first year, the Trust Fund has 103 bonds, now worth $10,300.  It can now redeem all of them and collect the money, but it can't collect $10,400 or $10,500 or $1,000,010,300.  Just $10,300.

Project that into the future, and you see that at the point when bonds start to be redeemed, there is only a finite amount that they can be redeemed for.  In projecting the final redemption date as about 2042, the administration has projected future SocSec tax income streams, future SocSec benefit payment streams, and future SocSec Bond interest rates and redemption rates.  If any of those projections changed, that 2042 date might, and probably would, change as well.

To put a very fine point on it, it is relevant what coupon rate the bonds carry, because that rate affects the amount that the Treasury must pay back.  I don't know how the rate is set, but it's not set by administrative fiat.  The rate is some kind of market rate, and it's a rate that the Treasury can be expected to repay.  

When you say

"the interest rate doesn't matter - 0% or 10000000000000% -- it doesn't matter. $100 trillion or $1,000,000 trillion in the trust fund, it doesn't matter."

you are just flat wrong.  If there were a realistic rate high enough to fulfill benefit demands until, say 2142, do you think we'd be having this debate right now?  On the other hand, do you recognize that if realistic rates were so low that the bonds would all be redeemed by 2020, the entire political class would already be in panic mode to "Save Social Security NOW!"  The bonds are neither meaningless nor irrelevant to a discussion of SocSec reform.

You say I'm confused, but your insistence on the "meaninglessness" of the SocSec Bonds has prevented you from understanding some basic facts, the chief one of which is that unless and until the law is changed, the SocSec Administration can't use anything but the assets of the Trust Fund (newly collected SocSec taxes plus the bonds) to pay SocSec benefits.  All the misconceptions you continue to support are exactly why I mentioned the Trust Fund Bonds in the first essay.

You point out (referring to a hypothetical situation I used for an example)

"The cash would be a real asset. The zero coupon bonds you talk about are still only an accounting mechanism. You could go get the deposit box money, but you have to tax it out of the economy to collect on the bonds."

If you find someone who believes a US Government obligation isn't essentially as good as cash, I suggest you buy US Bonds from him.  He'll be pricing them lower than everybody else.  

ALL bonds are accounting mechanisms.  Cash is a "real asset," but it's also "only" an accounting mechanism.  After all, there is no intrinsic value to a paper dollar. Even when they were backed by gold, that was true. Bonds are real financial assets, just as stock certificates, or even CDs, are real financial assets.  Where the money to redeem the bonds comes from is only relevant to this issue to the extent that they can or can not be redeemed.  That's why a 500% interest rate is not worth discussing.  And your statement that the economy has to be taxed to collect on them is wrong, unless you consider borrowing from the public, foreign or domestic, to be the same as taxing it.

Your position on the Trust Fund Bonds is somewhat akin to that held by the folks who believe they aren't obligated to pay income taxes because of an esoteric interpretation of tax laws and the Constitution.  No matter how fervently it may be held, the position is in error.

Partly because they tend to err on the side of happiness, rather than reality.  My guess would be that it will happen before 2042.

You sound more like a grasshopper than an ant.

There is a very big advantage in tackling the problem now, rather than waiting for 25 years.  The power of compounding starts 25 years sooner.  It's the same reason a prudent person starts saving/investing for his own retirement at age 20 instead of age 31.

You may have heard that a twenty-year-old, investing $2000 for just the first 10 working years into an IRA at 7% and then leaving the balance to compound at 7%, has more at retirement ($295,024 at age 65), than he does starting in year eleven (age 31) and investing $2000 every year for the next 35 ($276.474).  The disparity is even greater if higher rates are posited.  Of course, doing both is best ($571,498).  So the difference with just an 11 year delay is $295,024 for just one person investing only $2000 per year.

Another advantage is that by starting now, taxes can be reduced sooner, or benefits increased sooner.

Finally, every year we wait, we dig the hole deeper.

You make the statement

"Your husband and wife example is merely arguing that we shouldn't collect payroll taxes and put them in a safe, but that we should share the money around the government and act like it is all one big purse that way nobody gets shut out when they need money for their pet project. There is no real indication that this is a good thing."

That's only partly correct.  The example is to illustrate what is happening now, not advocating wasteful spending.  But I do believe it's better to lend the money to the General Fund than to put it in a vault at Fort Knox.  This belief is based as much on common sense and on the effect of stashing the money away as it is on the effect on Social Security, although I believe that's beneficial, too.  Since all those excess tax dollars are only buying Bonds right now, I'm not saying that the current structure is the best or advocating that we keep it.  I just point out that it exists and we need to deal with it.

By the way, you earlier said

"The government doesn't really get any income from the bonds."

Assume I agree with you.  It doesn't change any of the rationale in my essay.

I ask you, given that we have excess taxes for SocSec coming in, what would YOU do with that money?

Your question was

"If the trust fund were abolished and the govt just decided to pay everything out of the general fund, would the economics of social security change? The answer is a clear and resouding no, not in the slightest."

Surprise, surprise. In general, the economics of the total government wouldn't change. To maintain your "no economic change" position, we also have to increase Income Taxes somehow to match the now missing FICA taxes.  So, assuming that Congress would continue to fund SocSec the same amount it will be funded under the current structure, and that benefits wouldn't change, then there would be no change to its "economics." But it sure would change Social Security. Social Security would become just another entitlement program, subject to the annual whims of Congress and budgetary considerations.  There would no longer be as good a way to project its long-term health or current status, because it would have only its current annual budget to provide benefits from.  Of course, it also would not have a dedicated income stream (FICA taxes).  It would still have a projected stream of benefit payments, but as has been ruled by the Supreme Court, those payments are only good-faith PROMISES, not enforceable debts.    

But so what.  You're supposing pie-in-the-sky.  As you may know, Congress went to great lengths to keep SocSec from being considered a "welfare" program.  The device of having the Social Security Administration have its own income stream (FICA taxes) was used to assure that perception.  Also, remember that your benefits are partly determined by how much you pay in FICA taxes over a 30 (or is it 35?) year span. When they decided to try to pre-fund the benefits with excess taxes, they used the mechanism of the Trust Fund and SocSec Bonds to effect the separation from the General Fund.

Of course SocSec could be described as a simulation of a retirement plan.  But it's problem isn't that it has the mechanism of SocSec Bonds in a Trust Fund.  It's that it promises more benefits than it can deliver given its income stream.  (See reference to United Airlines and GM elsewhere in this stream of comments.) That is why PRAs have to be part of the solution.  Taxes alone can't pay the projected benefits, and the public isn't going to be happy with too many more benefit cuts.

You note

"We've seen a number of states abuse their funds for political reasons, and that seems very likely."

That's a great point.  Takes it out of the realm of the theoretical.

There is a very big advantage in tackling the problem now, rather than waiting for 25 years.  The power of compounding starts 25 years sooner.  It's the same reason a prudent person starts saving/investing for his own retirement at age 20 instead of age 31.

PRA advocates always talk as if nations could save in the same sense as individuals do. Nonesense.

Tell me, what words, written by the government on a piece of paper 50 years ago, could possibly make us richer today? What words do you plan on writing down that will create wealth 50 years from now? By what mechanism do you think societies pass wealth to the future?

Saving is not a single sided transaction. It is not sufficient to put money into "investments" and just watch it grow. For the act of saving to have economic meaning, there must be a accompanying act of deferred comsumption.

Where is the deferred comsumption in your PRA proposal? Looks to me like you expect to borrow a bunch of money, put it in the stock market, and wait for compounding to make us all rich. Do you really think that will work?

You state

"PRA advocates always talk as if nations could save in the same sense as individuals do. Nonesense."

Don't know where you heard that, but it wasn't from me.  That's a big reason to support PRAs; they allow the individual to decide (to some extent) how to do the saving.  They take money out of the control of the government.  They would force the deficit to be more representative of reality, by forcing more of government borrowing to be from the public market, if indeed that borrowing is being hidden now by not reporting it.

"Tell me, what words, written by the government on a piece of paper 50 years ago, could possibly make us richer today? What words do you plan on writing down that will create wealth 50 years from now? By what mechanism do you think societies pass wealth to the future?"

Had the legislation for Roth IRAs been written 50 years ago, I'd be a much wealthier person today.  I hadn't planned on writing any words, but enabling legislation for PRAs will certainly make "us" wealthier as a whole in 50 years.  Societies pass wealth to the future by leaving it in the hands of the most productive people, not by taking it through taxation at death.  Of course, none of this "creates" wealth.  It only allows it to be husbanded by the able.

"Where is the deferred comsumption in your PRA proposal? Looks to me like you expect to borrow a bunch of money, put it in the stock market, and wait for compounding to make us all rich. Do you really think that will work?"

Assuming you really want an answer, the deferred consumption is already present in the SocSec System.  The PRA allows it to be directed where it will be more productive.

Who's borrowing?  And if you think investing is just putting money into the stock market and waiting to get rich, I advise you to stick to CDs.  The example about compounding was intended to illustrate that starting early is an extremely powerful factor in the process.  There are better examples, but I had to make that one up on the fly.

Assuming you really want an answer, the deferred consumption is already present in the SocSec System.

Nonesense.

100% of the dollars paid into the current SS system are spent in the current period.

Again, you demonstrate that you do not understand the difference between individual action and collective (societal) action. Individually, you may feel like you are deferring consumption when you pay your FICA taxes. You are not. You are spending money on retirees.

enabling legislation for PRAs will certainly make "us" wealthier as a whole in 50 years.

Really? Please explain how. In particular, explain how the economy, as a whole, will grow as a result of the PRA legislation.

I'm sorry. I thought you could understand a simple statement without requiring an explanation. The deferred consumption I refer to is that of the workers who individually pay into the system, while accepting the bargain that they will later receive some benefits for those taxes.

If they didn't feel that way collectively, there would have long ago been a (peaceful) revolt against the system, starting in the House of Representatives.

Whether the current taxes are spent on current retirees or not is irrelevant.  The taxpayer is doing so for his own benefit, not theirs.

To say that a taxpayer isn't deferring comsumption when he pays his taxes is to say that paying taxes is equivalent to consumption.  You can believe that, but it is twaddle.

To answer you straight, in the simplest manner, PRAs will reduce the burden on SocSec taxes to provide SocSec benefits.  Taxes can be reduced, while benefits will be greater.  That will make more money available for individuals to spend on their own needs.

Please don't bother to ask me how that will make the economy grow.

PRAs will reduce the burden on SocSec taxes to provide SocSec benefits

When and how?

An individual's position will be improved as soon as his PRA has grown to the point when it can be annuitized to provide more benefits than he would receive from that portion of his account under the old system.  My rough, conservative calculations put that at about 20 years from the time he starts participating.  Starting in 2008,  the individual's benefits would be improved every year after 2028.

Even before that, the "old system's" obligations would be reduced for that individual by the ratio of about 4:12, if 4% is the amount of SocSec taxes that is used for his PRA.  

Thus the burden is reduced, while benefits are increased.

The question was "When and how do the PRA proposals create growth for the overall economy?"

I meant to address this earlier...

The deferred consumption I refer to is that of the workers who individually pay into the system, while accepting the bargain that they will later receive some benefits for those taxes.

You want to have your cake and eat it too.

Workers are not saving when they pay taxes to FICA. They are paying benefits. They are spending their money on the elderly (and disabled). There no savings. There is no deferred consumption.

You have to look at this from a societal, macro economic perspective.

That is where your proposals fall down. PRA proposals are nothing more than the absurd idea that the government can borrow money, give it to people to invest, and in the process create wealth. Utter nonesense.

Look, I know you are opposed to PRAs, but try to curtail your propensity to misquote me and to ascribe soemthing you've either made up yourself, or heard elsewhere, to me.

You won't find anyplace here or elswhere that I've said that workers are saving when they pay into FICA.  They aren't.  But they ARE making a bargain with the government to provide them with benefits later because they've paid the taxes.  And paying those taxes does, indeed, result in deferred consumption.

With PRAs, they will at least be saving some, because some of their taxes will go directly into their own, individual account.

And you keep claining that, with PRAs  

"the government can borrow money, give it to people to invest, and in the process create wealth. Utter nonesense."

That whole statement is utter nonsense.  I have yet to see a proposal for the Government to  "borrow money [and] give it to people to invest...."  Nor does "investing" create wealth; the wealth creation is located in the objects of the investments.

You keep setting up straw men to knock down with your even then flawed understanding of economics.  But the straw men have nothing to do with the reality of the proposals.

To address your straw man further and directly, have you ever heard of margin accounts?  Have you ever heard of mortgages on commercial real estate?  Both are examples of using debt as a stategy to create investment gains.  But don't misquote me.  There is no proposal that I know of that intends to "borrow money [and] give it to people to invest...."

Read the comment you replied to, and then think about what it says.  I'll even repeat the key paragraphs for you here:

Even before that, the "old system's" obligations would be reduced for that individual by the ratio of about 4:12, if 4% is the amount of SocSec taxes that is used for his PRA.  

Thus the burden is reduced, while benefits are increased.

Just in case it confuses you, "about" means "approximately," or "not exactly."  

If you aren't able to draw the simplest inference from the words presented to you, I can't help you. I think you're just intentionally wasting my time; you're not looking for information.

I ask you, given that we have excess taxes for SocSec coming in, what would YOU do with that money?

You seem to be butting up against Flagstaff's poor understanding of the issue. While I probably disagree with you (and agree with Flagstaff) on the desirableness of PRAs, at least you seem to understand the nature of the system. You are not going to get anywhere with this thread. It's circular and the same landmarks have been passed a few times.

the wealth creation is located in the objects of the investments

Lets follow the dollars:

Joe works, and pays $100 to FICA.

The government takes that $100, and splits it: $75 goes to current retirees, $25 goes into Joe's PRA.

The government borrows an additional $25 to fund the remainder of the current retirees' checks.

Joe puts his $25 into the stock market.

So far so good?

Explain how that transaction, taken as a whole, can create wealth.

You declared

"Investing the fund in other security foreign govt bonds -- such as the UK or Japan -- would provide a way to grow real equity."

Earlier, I responded, tongue-in-cheek

"Now, why are Japanese bonds a better investment than US bonds?  Oh, yes, you can't borrow from yourself."

I should have added that every dollar NOT borrowed from the SocSec Trust Fund has to be replaced by another dollar either taxed out of the economy or borrowed elsewhere, such as from Japan or the UK.

I've missed your insights into what everybody else does or doesn't understand.

Interesting.  It seems I don't understand the issue, but you agree with me on the outcome.

Perhaps you didn't see comment #101 directed to you, given no answer.

I repeat it here.

"I ask you, given that we have excess taxes for SocSec coming in, what would YOU do with that money?"

I believe that PRAs would be your preferred answer, but what if they won't absorb all the extra?  (They won't, of course).  What about that remainder?  And what is your answer, sans PRAs?

It's not a rhetorical question. If I don't understand the issue, maybe I can understand your answer.

Incidentally, the issue is "How do we save Social Security in the real world?"  It's not, "How do we change things so the annual deficit/surplus is reported transparently?" or "Why is it possible or not possible for the Government to borrow from itself?" (I agree it can't. What it can do is set up a system whereby money is moved from one agency's accounts to another agency's accounts, with a promise that the second agency will return more money in the future, based on a written agreement.  Technically, that's not the Government borrowing from itself, but it acts in every respect just like one agency borrowing from another.  So mea culpa, I explained the process as if they really were bonds, since that's the simplest way to describe it.  Of course, we've both already agreed that they really ARE bonds, haven't we?)

That's really confusing, isn't it?

Jjayson, you've obviously really gotten into this.  You must have a diary entry or story on the subject of the Trust Fund and its Bonds and how they work in relation to the rest of the "government" where you explain it completely instead of piecemeal. Would you point me to it, please?  That way you don't have to think about it anymore; just show me what you've already written.

"Explain how that transaction, taken as a whole, can create wealth."

Asked, and answered.

Another straw man.

For you, it definitely wouldn't.

asked and answered

Where?

You created an example:

"Joe works, and pays $100 to FICA.

The government takes that $100, and splits it: $75 goes to current retirees, $25 goes into Joe's PRA.

The government borrows an additional $25 to fund the remainder of the current retirees' checks.

Joe puts his $25 into the stock market.

So far so good?

Explain how that transaction, taken as a whole, can create wealth."

The transaction you describe doesn't create wealth.  No transaction does. I certainly haven't claimed that anything like you describe does.  Over time, given an entire nation of Joes, and given PRAs that average better returns than do the multiple $25 bonds, the nation becomes wealthier.  It's because the underlying investments did well, not because of the transactions.  And the individuals who participate are benefited even more.  But that's not the significant thing about your example.

Believe it or not, I've been reading all your comments, trying to figure out why we're not connecting.  I think I found it in your example.

When you say, "The government borrows an additional $25 to fund the remainder of the current retirees' checks," you have clarified for me why you keep insisting that "the government can borrow money, give it to people to invest," as if that were part of any proposal.

I now understand how you view the immediate effects of PRA creation.  It's not an unreasonable view, except you've created an extra step in the process.  You've included the $25 General Fund/Treasury public borrowing ($25 bond) as part of the process.  The error in this is that the $25 bond may be a consequence of the PRA, but it's extraneous to the process.  The process includes only the collection of the taxes and the distribution of the money into the "old system" (that is, the $75 that goes to retiree benefits and the Trust Fund) and the new PRA (the $25). It's extraneous because the effect on SocSec wouldn't be any different if the "government" decided to just spend $25 less from the General Fund and not issue the bond.

I'll admit it's a technical point, because it's an almost inevitable consequence.  But it's also the same thing that would happen if FICA tax rates were reduced.  It's just the result of having less money available in the Trust Fund for the General Fund to acquire by transfer. The cost of issuing the bond early is probably part of the "transition costs" we hear about.  

So, what do we agree on?  As a result of the implementation of PRAs, using your example, the General Fund will borrow $25 more today than it otherwise would have borrowed.  Good or bad?  I take it from your other comments that you think this is bad, because it increases borrowing today.  Again, not an unreasonable view, because it usually is "bad" to borrow.  In that respect, I agree with you.

We part company here, however, because I recognize two other factors.  First, the benefit of having the individual use $25 of his FICA tax to fund a Personal Account outweighs the cost, in my opinion.  (I know from your diary that you disagree.  Fair enough, but when you make any kind of reasonable calculations, the benefits are significantly greater.) Second, under the old system, that $25 would eventually be borrowed anyway, when the Trust Fund Bond (which would have been $25 larger under the old system) is redeemed and the money is returned to the Trust Fund.  When that time comes, both old and new systems have the same total debt burden on the Treasury, but the individual has his PRA and whatever amount it's grown to become.  So, in my opinion, the change is good.

I won't accuse you of wanting to have your cake and eat it, too. I don't find evidence that you have advocated the abolition of the Trust Fund transfers to the General Fund because it's "just being used to mask the size of the deficit."  It would be inconsistent to want to stop those transfers in general, but be against stopping part of them for a particular purpose.  In fact, you seem to be against the reduction of the total amount of money transferred from the Trust Fund to the General Fund via Social Security Bonds, period.

Have I accurately described our agreements and differences??  If I have, thanks to your questions, my knowledge has been increased.  If not, what did I miss?

I'm going back through your comments.  I think we've been misunderstanding each other.

Government Retirement Securities are not the same as any other bonds.  They are called Bonds to make them a bit more understandable.

Logically, no entity can literally borrow money from itself.  If it takes money out of one pocket (account) and puts it into another, the transfer doesn't represent any income to the entity, nor is it a loan to itself.

Any two entities, no matter how closely related, can agree to transfer funds back and forth according to certain agreed upon rules.  Externally, this can look exactly like one is lending money to the other.  The agreement can include something that acts exactly like interest.

If we're still together, the next step is to address the "Bonds" themselves. Not legally enforcable like other bonds, they are the agreements between the SocSec Trust Find and the General Fund that contain the rules mentioned above.  They are internal monetary transfer agreements, defined by Congress, that set out the rules upon which the transferred funds must be returned by the General Fund to the Trust Fund, and whether or not more must be transferred back than was originally transferred over.  Since more must be returned than the original amount, the extra looks exactly like interest.

Neither the first transfer nor the second transfer changes the condition of the over-arching Government, of which both Funds are a part. But the General Fund receives the benefit of using the money paid in as SocSec taxes for other purposes until SocSec needs it back. The benefit for the Trust Fund?  After the round trip transfer is complete, the Trust Fund has more money than it would have had if the transfers had never taken place.

The Trust Fund has done nothing more than engage in two money transfers, and it has gained some money in return.  It doesn't care what the General Fund did with the money it transferred over, and it doesn't care where the returned money plus "interest" came from.

So, although as you correctly said in comment #6, "[t]he government doesn't really get any income from the bonds," the Trust Fund does receive a benefit by allowing the transfers to occur, and that benefit could be characterized as interest, income, or just more money added to its account.  (I could quibble that the Government does benefit as well by not having to borrow on the open market, and by keeping the Trust Fund dollars in circulation, but that is a quibble, not "income.")

As for Bush talking about the time when the "trust fund runs dry," that is shorthand, regular-speech for the time when "the last of the transfer agreements has expired and there is no more money scheduled to be transferred from the General Fund to the Trust Fund."  Having the "trust fund run dry" is a lot more pithy than the exactly accurate statement, and it conveys the idea quite well.

I was essentially doing the same thing when I wrote the paragraphs about Trust Fund Bond interest in my essay, although I wasn't doing it consciously.  It is a lot easier and more understandable to call the account funds transfer agreements "bonds," and to call the extra money transferred on repayment as "interest."  I'm not sure why this was so important to you, but you have been technically correct (with the caveat that the extra money repayed is probably technically "interest" after all).

There are some other minor points on which we disagree on terminology, but have I captured your position on these matters?  If so, we're not in disagreement.

I view PRA's from a societal perspective. It is not enough to say "If I put x% of my FICA into a PRA instead, I'd have a bunch of money in 30 years". To me that is self evident, but not very meaningful. Take any tax that I am paying, allow me to keep and invest it, and I'll come out ahead.

Instead, we need to ask how the country will afford its proportion of idle retirees in (to pick an arbitrary year) 2040. The most concise statement of "the problem" is that current mechanisms will not be up to the task once the proportion of retirees in society exceeds some percentage.

So, what are we to do?

I think there is only one answer: We must grow the economy to the point that we will be able to afford that higher proportion of retirees. From a macro, societal perspective, retirees are a luxury. In order to afford such a luxury, we have no choice but to become richer.

BTW, that brings to mind one obvious and needed reform: Reduce the extent of our luxury by raising the retirement age. 65 is an absurdity today.

But that reform aside, there is simply no other solution than to grow the economy. PRA proposals, examined macro-economically, ammount to nothing more than shuffling around the same pieces on the board. In particular, every single proposal on the table (or off, considering Bush's recent announcement) boils down to directing more capital into equity markets, funded by incremental Federal borrowing. In your comments, you said you consider the borrowing to be extraneous to the process, but I disagree. As long as we are running combined budget deficits, every dollar going into PRA's will be funded by incremental federal borrowing. Every single one.

Which means that PRA's will be nothing more than a systematic shift on the nation's collective balance sheet: We will be trading debt for equity. That makes no sense to me. Those who advocate it need to answer the obvious thought experiment: Why even bother with SS? Why not just borrow a few trillion dollars, invest them in the market, and the entire country (man, woman and child) can retire in 25 years?

The reason, of course, is liquidity, which goes to the heart of the other fallacy of PRA proposals. In 2040, when (in theory at least) retirees will be redeeming their PRA's to fund their retirement, to whom will they sell their stocks?

You can't live on equity. You live on cash. The ability to turn equity into cash (ie, liquidity) can not be assumed or ignored.

Which leads full circle to the following observation: A country with enough current period economic activity to purchase all the stocks implicit in the PRA proposals would have no trouble affording that luxurious level of idle retirees even if funded through other means. I am not convinced, for example, that we can't solve the SS problem by simply allowing SS payments from the general fund.

That's what makes a good comment.

I don't agree with all of it, but I couldn't agree with you more about the need for a growing economy.  Besides the structure, which is what I was addressing, there is a lot to be said for re-evaluating the concepts behind SocSec.  Of course, whomever tries to do that will be accused immediately of "trying to destroy Social Security."

Your final statement,

"I am not convinced, for example, that we can't solve the SS problem by simply allowing SS payments from the general fund."

is where we'll end up if nothing else is done.  Perhaps that's the Dem's long-term objective.  Wait for the crisis to become immediate, and then demand that SocSec be turned into a direct welfare plan.  That would be ironic.  Not that I agree with your statement.  After all, if it's too much to ask 2- average workers to share the burden of each retiree's benefits when the taxes are paid as FICA, it'll still be too much if the taxes are levied as Income Tax.

Suppose there was no such thing as SS today, and suppose that Ted Kennedy and Hillary Clinton proposed a compulsory retirement savings program, one with extremely limited (government defined) investment options. Do you think they would get the support of conservatives?

The fact that so many free market conservatives are attracted to PRA's is a function of (IMHO) animus toward the current system. This is parallax error of the highest order.

But I'm not all negativity. I believe in solutions as well. My solution is the FairTax, which among other things allows everyone an unlimited IRA. More to the point, I don't see any other proposal out there that has the long term stimulus potential as the FairTax. I believe that FairTax will stimulate growth such that the "retirement bubble" will be comfortably managable.

But that's OK, a conversation can branch out.

"The fact that so many free market conservatives are attracted to PRA's is a function of (IMHO) animus toward the current system. This is parallax error of the highest order."

I see your point, but I think it's more that they're realistic in addressing the issue with a practical solution. (A lot of them would like to join the Democrats and completely ignore it.) Sometimes you have to work incrementally. I won't be around to see it, but if PRAs can be enacted they will eventually prove themselves to the point where they'll completely replace the retirement portion of Social Security.

The last time I heard "FairTax" was in a Steve Forbes interview.  I don't remember the details, but at the time I agreed with his basic idea, even though it would raise my taxes.

You've stated,

"The government doesn't really get any income from the [Trust Fund] bonds."

I say that although your statement is technically correct, it's not relevant to the solution of the SocSec problem.  And that's the point we seemed to originally part on.

 
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