The Right Coast

Editor: Thomas A. Smith
University of San Diego
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Thursday, July 28, 2011

Scaring Seniors With Social Security

Social Security historian Nancy Altman and my Pepperdine colleague Mark Scarberry have updated their original op-ed in light of President Obama’s Monday night speech to the nation, in which the President once again warned that Social Security checks might not go out on time if the debt ceiling is not raised. (Michael McConnell (Stanford) agrees that the President's "attempt to scare Social Security recipients is without legal foundation.")


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This op-ed is only half right. It's true that the existence (in a legal sense) of the trust fund gives the government the power to continue borrowing to make Social Security payments even if the debt limit is not raised. But the op-ed's insistence that the trust fund has "assets" and "earnings" is absurd. Its only assets are the government's own promises to pay. Those promises are assets when they are owned by someone other than the government, because someone other than the government who owns a government bond can sell that bond and get cash, and that's it. If the government itself owns a government bond, it can get cash for it only by borrowing. Pointing out that the government is obliged to satisfy these obligations is beside the point: sure it is, but that doesn't give it anything to make the payments with. To do that, it must collect taxes or borrow--just as if there were no trust fund. The trust fund's "balance" is the measure of how much more has been collected in Social Security taxes over the year than has been spent on Social Security payments. All that extra money has been spent, and you can't spend the same money twice.

All the trust fund does is to add an extra layer to the debt ceiling. Bernie Madoff is in jail for doing precisely what Congress did by creating this fraudulent "trust fund."

Posted by: Alan Gunn | Jul 28, 2011 12:37:01 PM

I'm afraid it's working though there are all sorts of half-informed protesters out there urging "don't default on our dream" and similar nonsense

Posted by: mike livingston | Jul 28, 2011 7:23:47 PM

The Social Security trust funds are entitled to payment from the US Treasury of the amount of the trust fund bonds. Because proceeds of redemption of the bonds may only be used to fund social security payments (a point reinforced by statute in 1996), the program as a substantive matter does have the resources to make payments. In the past the trust funds have held marketable bonds; they could be issued marketable bonds again (though then there would be risk to principal if bond values drop). The Treasury could swap marketable bonds for the special issue bonds currently held. Would the bonds be real assets if they were marketable? In some ways the special issue bonds are better than marketable bonds: they can be redeemed on demand for face value plus accrued interest. The soc sec. trust fund trustees have the power to demand redemption; it is true that they are govt officials and govt appointees, but there is a degree of independence and practical accountability, and a degree of legal obligation to redeem bonds as necessary. This is not as a substantive matter a case of a borrower owning the borrower's own debts. The govt cannot set off the debts, absent a change in current law.

Anyone who borrows money is expected to use it rather than keep it in a shoebox. Would you have wanted the US to buy GE bonds or Greek bonds or muni bonds issued by a powerful politician's home district, or Enron stock, or Euros? Whether the govt spent the money wisely is a different matter, just like the question whethe money borrowed from the public is spend wisely. (Personally I would have preferred that the surplus have been used to pay off other debt in exchange for issuance of bonds to the trust funds, or equivalently, to buy Treasury securities in the open market for the trust funds. That would have gotten us the same economic result as at present, with regard to the trust funds, but would have kept the total debt at a more manageable level.)

Remember the Beverly Hillbillies episode where Jed Clampett went to Mr. Drysdale's bank and asked to see his millions of dollars? Of course the bank didn't keep the money in a shoebox. Ditto for "It's a Wonderful Life."

Posted by: Mark Scarberry | Jul 31, 2011 1:23:31 AM

Let me add that the only way to pay debt held by the public when it matures is by borrowing or by taxing. Mr. Gunn's point would suggest that public debt also has nothing to back it up. In fact it has the full faith and credit of the US, the same as the bonds in the soc sec trust funds. Of course Congress could reduce soc sec benefits (or raise FICA taxes) such that the bonds might never need to be redeemed. But they are still there to back up whatever the statutory level of benefits may be. And they can serve that function so long as the trustees choose to use them for that purpose. Failure to pay soc sec benefits during the current crisis thus would result from a choice not to pay them, not from an inability to pay them. Inclusion of the principal amount of the bonds in the debt subject to the debt ceiling allows such use of the bonds without causing a major impact on other govt operations, because effectively the trust fund bonds can be liquidated and an equivalent amount of public debt can be issued.

Posted by: Mark Scarberry | Jul 31, 2011 1:32:13 AM

The make-believe nature of the "assets" of the trust fund has nothing to do with whether the government will honor them. I assume that it will honor them. They are make believe because they are not something the government can use to pay benefits without getting the money by borrowing or taxing. If the government sells a bond, it is borrowing the money: that's how governments borrow. If it uses tax money to pay off the bonds, it is using tax money.

If there were no trust fund, the government would have to use tax money or borrowed money to pay Social Security benefits. The fact that there is a trust fund doesn't change this: the government will have to use either tax money or borrowed money to redeem the bonds. Nothing in the trust fund gives the government a means to pay benefits without taxing or borrowing.

The situation would not change if the bonds were marketable. Yes, if they were marketable, the government could sell them and use the proceeds to pay benefits. But it would then have to pay the buyers interest on the bonds they bought and it would have to redeem them at maturity. Selling your own bond is borrowing. This is why it is foolish to say "government bonds are real assets when the Chinese hold them, so they must be real when the US holds them." When the Chinese hold a US government bond, they can sell it, keep the cash, and never have to pay interest or return the cash. When the US government sells its own bond, it will have to pay the buyer interest and return the principal when the bond matures. It's just like checks: If I write a check and give it to you, you are richer by the amount of the check (ignoring the possibility of insufficient funds, stopping payment, etc.) If I write a check payable to myself, that doesn't make me one cent richer than I was before I wrote it. This is true even if I make a binding promise to honor the check. I still have to come up with the cash to honor it. Just as the government has to come up with the cash to honor the bonds in the trust fund.

Every one of the several trillion dollars "in" the trust fund is a dollar that the government has already spent on something other than Social Security. To say that the trust fund has assets that the government can use to pay benefits is to say that it can spend the same money twice. Nice trick if it could, but it can't. The trust fund is a fraud, just like the "assets" Bernie Madoff's victims thought they were buying. The only difference is that, with the trust fund, all the details of the fraud have been published, so the people who fall for it are more gullible than Madoff's victims.

Posted by: Alan Gunn | Jul 31, 2011 7:09:45 AM