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Krugman v. Krugman on Social Security:

Is Social Security in trouble? If you're talking to Paul Krugman, it would depend on when you asked him, as Ruth Marcus documents in this column. It's almost enough to make one think Krugman's become a crude partisan.

UPDATE: Krugman responds to Marcus here. Mark Thoma thinks Krugman has a good defense. Ramesh Ponnuru less so. And Henry Farrell is glad to see newspaper columnists engaging -- and actually challenging -- each other.

Morat20 (mail):
You probably should have checked into Ruth Marcus's quotes a bit better. I'm afraid the only crude partisanship is on Ruth's side. Mark describes it pretty well, but if you want the simple version....

Krugman stated the following in 2005:
"Four years ago, I and many other economists urged policymakers to think about the future cost of Social Security benefits, not because we thought there was anything wrong with Social Security itself, but because we regarded the future costs as a compelling reason not to cut taxes even if the overall budget was in surplus."

You'd think, if you were trying to do a "then and now" piece, you'd identify when someone's position changed and see if they said anything about it. Apparently this was too complex for ole' Ruth.

Frankly, looking at the full quotes and articles Ruth is pulling from, "hatchet job" isn't really stern enough. It's pretty out-and-out BS. Not up there with Creationism cut-jobs, but a pretty transparent and pathetic attempt nonetheless.
11.21.2007 5:29pm
Morat20 (mail):
Good job on the updates. I find Ramesh's second point to be a little...off. Rameesh states:

"The context was different. I was saying that Social Security was a problem only to block tax cuts. I didn't meant to talk up the problem in order to get people to do something crazy like fix Social Security. (Since the tax cuts in fact passed, wouldn't that mean the Social Security problem is bigger now?)"

Which doesn't seem to be Krugman's argument at all. Anyone talking about a "Social Security" crises is really talking about a "General funds" crises. Even back in the 90s, you were looking at decades until the trust fund ran dry and Social Security went into the red.

The actual crises was the day Social Security stops buying T-bills and starts cashing them out. At that point, the general fund stops getting a steady income stream (SS T-bill purchases) and starts having to start paying out (SS T-bill sales).

At that point, the general fund has a big problem.

Krugman's comments at the time -- and everything I recall him saying about SS over the last 5 to 10 years, really, has been basically that it'd be a pretty good idea to retire some outstanding debt and get ready for the day SS wants it's money back.

Wasn't that the whole point of the 1983 agreement on Social Security? They raised SS taxes to build up a large trust fund, that would be used to pay for the boomer retirement?

Since then, of course, I've heard a lot of fun arguments about how it's not real debt (it's just IOU's), and even if they're remarkably T-bill shaped IOU's they're not REAL T-bills, and even if they were REAL T-bills that defaulting on them wouldn't upset anyone really because they're still just IOU's and a lot of handwaving trying to pretend that the 1983 deal didn't really happen and shouldn't be honored.

But in the end, the basics are pretty clear -- Social Security is in fine shape. Medicaire and Medicaid are suffering heavily under the same inflation of health care costs as everyone else (compounded in that they tend to cover the sick, the old, and the otherwise uninsurable).

And the US general fund, whose income comes from all those non-FICA taxes, is in a moderate deal of trouble and trying really hard to make it someone's else's (Specifically Social Security's) problem.
11.21.2007 5:54pm
tvk:
Unless I am seriously misreading, Krugman's defense is basically: "In 2001 I was talking up a social security crisis [in the context of] making the case against tax cuts, whereas now I am talking it down [in the context of] making the case against privatization." To each his own interpretation of whether this is a good rebuttal to Marcus.
11.21.2007 5:55pm
anym_avey (mail):
And the US general fund, whose income comes from all those non-FICA taxes, is in a moderate deal of trouble and trying really hard to make it someone's else's (Specifically Social Security's) problem.

And if the general fund "has a problem", what pays for Social Security once payouts exceed revenues and the T-bill cashing begins?

The government has, with bipartisan support, been engaging in a very neat trick whereby both the general fund and the SS surplus have been spent -- as in, money gone, out the door, no longer exists -- but the transfer from SS to General Fund was accomplished with IOU notes. Call them T-bills, call them IOUs, call them magical pink fairies. Call them what you will, but in private business an attempt to operate a trust fund this way would see people sent to federal prison, and with good reason: the fiduciary effect is no different than if Congress had simply done nothing in 1983 except to issue a memorandum stating, "Screw it, we'll worry about it when we get there."

Hence, either taxes will have to be raised by quite a lot as the payout/payin ratio becomes increasingly skewed, or benefits will have to be cut, or more likely, some combination of these. This is exactly what would have happened if the trust fund had never existed, so for all practical purposes, it doesn't exist. The only thing the trust fund has ever managed to produce is a lot of silly arguments from the Math-Deniers.
11.21.2007 6:26pm
Morat20 (mail):
tvk: Try reading the articles (they're online somewhere) he was writing at the time.

He was expecting SS to start drawing on the trust fund a lot sooner (ie: closer to that point in time) then, and was making that case that it was a bad idea to cut taxes when it looked for all the world like the general fund was going to lose revenue slowly over the next decade, and then start owing money.

I happen to agree -- the best thing that surplus could have been used for was retiring debt, as in the best case (SS looks better and the date for their first dip into the trust fund pushes further off into the future) you've retired debt, lowered the percentage of income going to servicing the debt, and could thus actually make larger tax cuts.

Worst case, SS needs the trust fund sooner -- you'd have more room to borrow and less pressure on the general fund to service debt.

I can't see any way to read Krugman's comments in any other way.

From 1996 to 2001, he felt that the best use of any surplus was to pay down debt to prepare for the day when the boomer's retirement forced SS to start drawing on their very large trust fund. Once Bush's tax cuts were passed, and the suggestion was moot, he turned to pointing out that SS wasn't facing a "crisis" -- that they did, in fact, have plenty of money in the trust fund for the next 50 years, but that the general fund was going to have problems.

In short -- he was still highlighting the exact same problem -- the day that the SSA starts drawing on the trust fund, and the big question of how Congress is going to find the money for it (since they happily spent the trust fund, instead of doing something sensible with it like retiring debt).

There's a lot of loose terminology when people discuss Social Security and it's shortfall. If you don't bother to discriminate between "When SS starts accessing it's trust fund", "When SS empties it's trust fund" -- or when you conflate "Social Security" with "Medicare and Medicaid" you run into problems.

There's nothing complex or even hypocritical here. In the late 90s, Krugman was pushing for using a surplus to deal with the day that SS started cashing in it's huge stock of T-bills (the real "crisis"). After the Bush tax cuts, with the rise of "OMG, SS is going bankrupt soon!" he started talking about the actual facts -- SS is in NO danger of going bankrupt, but they WILL start asking for their money back.

Given the surprisingly large number of people -- some of them quite important who should know better-- who believe that the US Government could easily default, consequence-free, on the SS Trust Fund t-bills, I'm not really surprised he shifted focus, especially since "Using the surplus to prepare for the redemption of SS T-bills" was now moot.
11.21.2007 6:31pm
Bad (mail) (www):
Ah Ramesh. Snidely misrepresenting and caricaturing people's views in a snarky blog post is what pretty much all bloggers do for a living. But only Ponnuru is ingenious enough to misinterpret himself.
11.21.2007 6:31pm
Thorley Winston (mail) (www):
Unless I am seriously misreading, Krugman's defense is basically: "In 2001 I was talking up a social security crisis [in the context of] making the case against tax cuts, whereas now I am talking it down [in the context of] making the case against privatization." To each his own interpretation of whether this is a good rebuttal to Marcus.


Nope you're pretty much reading him correctly. Whether Social Security is (not) a crisis to Krugman depends wholly on whether making it (not) a crisis can be used to beat back whatever policy is being offered by his opponents. He's a pretty decent economist when it comes to trade theory but he fails pretty miserably whenever he tries to comment on domestic issues like entitlement programs and health care.
11.21.2007 6:33pm
Morat20 (mail):
anym_avey:

My investments contain a large number of US T-bills. In fact, last I checked, world-wide investment in T-bills was in the trillions. Our current President's millions were, last I checked, 90% invested in T-bills.

You call them "IOUs" and "magical pink fairies". The entire investment world considers them the safest possible investment.

What else should the SS Trust have invested their money into, if not the very instrument the entire world regards as the safest possible long-term vehicle for your money?
11.21.2007 6:34pm
PGL (mail):
Morat20 gets it right. Adding to what Mark said - see Brad DeLong. It is sad to see our host doing his best impression of Donald Luskin. For more see my Angrybear post. WaPo did a hit job and it seems some fell for it. Sad.
11.21.2007 6:40pm
Drake (mail) (www):
I think Bloix has the pithiest description of Krugman's thinking of this thread at DeLong's:

In 1996, Krugman was thinking about entitlements generally, because no one was trying to destory Social Security. In this decade, he's been focused on the specific programs, because he's now participating in a political debate over privatisation that didn't exist in 1996.
Bruce Webb also has some helpful background.
11.21.2007 6:49pm
anym_avey (mail):
You call them "IOUs" and "magical pink fairies".

Wrong. I said one might as well call them that in the context of the SS trust fund.

The entire investment world considers them the safest possible investment. What else should the SS Trust have invested their money into, if not the very instrument the entire world regards as the safest possible long-term vehicle for your money?

SS shouldn't have invested them in anything if the goal was to have a TRUST fund, since the same fiscal manager doing the investing had access to spend out the other end. You're confusing the case of transactions between third parties, with transactions between one's own self.

I have no reason to believe that the government will screw itself out of a major finance vehicle by defaulting on any of its T-bills. But it's not too hard to imagine that the same kind of fiscal finagling that got us the "trust" fund in the first place might get those T-bills paid off in ways by which the funds are then transferred back into the General Fund through some other(again, illegal in the private sector) accounting shenanigan that sees all or some of the money transferred back, without harming the credibility of the T-bill in the global financial markets. Or, benefit payouts from SS are reduced such that the payoff rate is reduced. Or, some combination of the above, probably in tandem with increased taxes to offset the discrepancy around the edges.

Which, as stated, sooner or later gets us back to the case where the net outcome is no different than if the trust fund had never existed. And I am flatly amazed at how the words "SS Trust Fund" instantly deafen a certain type of hearer to obvious sense that any particularly bright 8yo could have immediately understood by shuffling piles of M&Ms back and forth on a coffee table.
11.21.2007 7:33pm
Alan Gunn (mail):
Morat20 said:

My investments contain a large number of US T-bills. In fact, last I checked, world-wide investment in T-bills was in the trillions. Our current President's millions were, last I checked, 90% invested in T-bills.


W@hen you own T-bills, their value is part of your wealth because the government owes you money. When the government owns T-bills, their value (to the government) is zero, because they represent both a claim to a certain amount of money and an obligation to pay that amount. There is no Social Security trust fund in any meaningful sense, just as I would have no increase in my assets if I wrote myself a large check. When it comes time to use the so-called trust fund, the government will have to raise cash--either by selling bonds (which it could do if there had never been a trust fund) or raise taxes (which it could do if there had never been a trust fund).
11.21.2007 8:25pm
Crackmonkeyjr (www):
<i>When the government owns T-bills, their value (to the government) is zero, because they represent both a claim to a certain amount of money and an obligation to pay that amount.</i>
On a balance sheet, maybe. But in reality, any suggestion that they should have been invested in something else assumes that that money would have come out of federal spending as well. It makes more sense to think of T-Bills in the SS trust fund as a method of avoiding debts that the government would otherwise owe to other parties. If you think that the government should invest SS in stock, you might as well argue that the government should just sell as many T-Bills as possible and use the money generated from them to purchase stock. Orange County, California tried this scheme for a bit in the 90s (I think) and it worked great, then the bottom fell out of the market and Orange County went bankrupt.
11.21.2007 8:42pm
Foobarista:
There is no such thing as the "trust fund", at least in terms of a reserve pool of assets that can be used to fund SS. It is really just a legislative device to redirect non-SS taxes to top off SS for "awhile" without the icky need to raise general taxes - except to fund the "topping off" part.

The cool thing is that while SS is in "surplus" (as it is now), Congress gets to spend the "surplus" and call it savings.

Another interesting point is that raising taxes now does precisely nothing for SS, except to convert an external deficit into more of these internalized notes, and give the government more money to spend.
11.21.2007 8:53pm
Alan Gunn (mail):
Crackmonkeyjr:


But in reality, any suggestion that they should have been invested in something else assumes that that money would have come out of federal spending as well.

If the government had used the money in question to buy stock, it could not have spent that money on operations, which is what it did. And if the government had used the money to buy stock, when it came time to pay the beneficiaries, the government could have sold the stock and used the proceeds. Since what the trust fund holds is government debt, it will either have to sell that debt (i.e. borrow) or raise taxes to pay beneficiaries.

This isn't hard: a debt obligation held by someone other than the debtor is an asset in that person's hands. The same debt obligation held by the issuer is not an asset. (Or, if you prefer, it's an asset offset by an equal obligation.) If I were to send you a cashier's check for $1000, you'd be $1000 wealthier and I'd be that much poorer. If I go to the bank and buy a cashier's check payable to me, I'm no wealthier than before. When the government "buys" its own bonds, it's doing something exactly equivalent to my writing myself a check: it's meaningless.

In short--there is no Social Security trust fund, except in the meaningless sense of a promise by the government to pay itself some day.
11.21.2007 8:59pm
Crackmonkeyjr (www):
Alan:

Does it appear that the Federal government has much trouble, or hesitation, borrowing money? Certainly not more than they do in cutting (or even not increasing) spending. If SS stopped buying T-Bills with its funds, and started investing in stocks, it would almost certainly just sell the t-bills otherwise purchased by SS to someone else. The government would be facing just as much debt, but instead of owing the debt to the SS trust fund, it would owe the debt to whomever purchased the T-Bills.

It is true that this would arguably mean that SS would not be facing a potential crisis when it has to start drawing on its "trust fund," but as has been pointed out, the problem isn't with SS, it's with the massive deficit that the general fund is running, and selling t-bills to China instead of the SS trust fund would in no way help the general fund.

With regards to people who pointed out that T-Bills are a safe investment, their point is that the Federal government has two options with SS funds, invest the money in some other investment tool and sell t-bills at a fixed rate that the Federal Government will have to pay back, hoping that the other investment tools give a better return than the interest rate they promised to pay on the t-bills they sold, or "buy" t-bills, effectively reducing the Federal Governments future obligation to pay back at that interest rate. Its generally seen as safer to assume that the interest rates of t-bills will be higher than the rate of return on other investments. This isn't always the case, sometimes you can make a killing on other investment tools, but at the same time, sometimes you lose.

I certainly agree that the SS trust fund is accounting hocus pocus, but my point is that if you look at it as one giant fund, its better to use money brought in through SS taxes to avoid fund government programs than it is to sell t-bills to fund those same programs and then use SS funds to invest in something that may or may not be able to keep pace with the interest rate of the t-bills.

Beyond that, do you really think it is a good idea to have the government investing about $200 billion per year into the market? That's just screaming for corruption and abuse by special interest groups.
11.21.2007 9:28pm
Alan Gunn (mail):
Crackmonkeyjr:

We seem to agree on the only point I was trying to make: the Social Security trust fund is accounting hocus pocus. Questions of what else the government ought to have done are not what I wanted to address, save for one point: by engaging in this hocus pocus, the government has conned a lot of people into believing that the Social Security system is sitting on a huge pile of assets, so we need not soon worry about how to pay the beneficiaries. It isn't, and we do, though we should probably worry even more about Medicare and Medicaid. Among its other faults, the trust-fund scam allowed the politicians to fund current expenses with a very regressive tax--the Social Security tax may not look regressive if you assume that all the money raised will go to geezers, but when much of the money just went into general federal spending, this justification went away.

As government programs go, Social Security's not bad. But it shouldn't have been sold to the public by lying to them about how it was going to be paid for. Starting in ten years or so, either taxes will have to be raised, the government will have to borrow more (itself a way of raising future taxes), or benefits will have to be cut. For all his many faults, I think President Bush deserves some credit for being the first major political figure to even admit that there was a problem (not that his solution was so great), and nearly all of the current candidates merit criticism for pretending that the problem is many years away.
11.21.2007 10:03pm
Mark Bahner (www):
Since then, of course, I've heard a lot of fun arguments about how it's not real debt (it's just IOU's), and even if they're remarkably T-bill shaped IOU's they're not REAL T-bills, and even if they were REAL T-bills that defaulting on them wouldn't upset anyone really because they're still just IOU's...


They're not "IOUs." They're "IOMEs".

Suppose you said you were going to save $20,000 for your retirement. Then you went out and bought a car with that $20,000. Do you think your landlord or bank would accept a piece of paper that had a promise to yourself to save $20,000 for retirement, instead of cold hard cash for your rent or mortgage payment?

If you think so, welcome to the (dishonest) world of Paul Krugman and Dean Baker.
11.21.2007 10:35pm
Mark Bahner (www):

When it comes time to use the so-called trust fund, the government will have to raise cash--either by selling bonds (which it could do if there had never been a trust fund) or raise taxes (which it could do if there had never been a trust fund).


Yes, the "Trust Fund" is worthless in the most basic and absolute sense of the word: the EXACT same things will happen whether it exists or not.

If the U.S. government erases all the electrons the store the amount that's in the "Trust Fund," absolutely nothing will change.
11.21.2007 10:44pm
Mark Bahner (www):
My investments contain a large number of US T-bills. In fact, last I checked, world-wide investment in T-bills was in the trillions. Our current President's millions were, last I checked, 90% invested in T-bills.

You call them "IOUs" and "magical pink fairies". The entire investment world considers them the safest possible investment.

What else should the SS Trust have invested their money into, if not the very instrument the entire world regards as the safest possible long-term vehicle for your money?


The Social Security Administration has NO general issue U.S. government bonds (which are negotiable security). The "Trust Fund" is made up of "SPECIAL issue" bonds, which are NOT negotiable securities. The Social Security Administration can only go to the Treasury department with it's bonds. REAL U.S. bonds are held by the public.

If the U.S. government defaults on REAL bonds, everyone who owns those bonds is hurt. If the U.S. government defaults on bogus SPECIAL bonds held by the SSA, only the people who expect money from Social Security are hurt.

This is an absolutely basic and crucial difference. One shouldn't even be commenting on Social Security unless one both recognizes and acknowledges this difference.
11.21.2007 10:55pm
jpe (mail):
When the government "buys" its own bonds, it's doing something exactly equivalent to my writing myself a check: it's meaningless.


Is it? The question here is whether the SS trustees can compel repayment of debt, and IIRC they can. The T-bills are legal instruments backed by law, not IOUs scrawled on napkins and stuffed in a briefcase ala Dumb and Dumber. What distinguishes the paper IOU from the bona fide asset (and whether this is interfund or intercompany doesn't matter) is whether the debt can be enforced (or prioritized, depending on how ugly this gets)

So, it's like writing a check from myself to myself qua trustee, and that's certainly an enforceable instrument.
11.21.2007 10:58pm
Shahid Alam:
So, it's like writing a check from myself to myself qua trustee, and that's certainly an enforceable instrument.
So, who's going to enforce it?
11.21.2007 11:37pm
Mark Bahner (www):
The question here is whether the SS trustees can compel repayment of debt, and IIRC they can.


No, they can't. They aren't the boss of the Treasury. They present the SPECIAL bonds to the Treasury, and the Treasury asks Congress what to do about it. That's EXACTLY what would happen if if the "Trust Fund" didn't exist at all. If the "Trust Fund" didn't exist at all (which it doesn't), when payouts from Social Security exceeded money coming in, the Treasury would ask Congress what it wanted to do: 1) Issue more debt (that's REAL bonds, which are negotiable securities), or 2) Cut spending in some other area, or 3) Reduce benefits...or 4) some combination of all three. That's exactly what happens if there is NO Trust Fund.

So, it's like writing a check from myself to myself qua trustee, and that's certainly an enforceable instrument.


The question is not "enforceable." The question is "negotiable." Are the "Special Issue" Social Security bonds negotiable securities? That is, are they something the Social Security administration can sell to the general public to get cold hard cash? And the answer is, "No, Special Issue Social Security bonds are not negotiable...they can't be sold to the general public."

That's a HUGE difference, because if the Treasury defaults on a REAL bond, it affects the value of all the other bonds. So essentially almost everyone in the entire world, and certainly in the United States, is hurt if the U.S. defaults on a REAL Treasury bond. If the Treasury refuses honor the bogus "Special Issue" bonds the SSA holds, the only people who are hurt are the people who are hoping to get their Social Security checks at the time of default.

Again, this is an absolutely basic and crucial difference. One shouldn't even be commenting on Social Security unless one both recognizes and acknowledges this difference.
11.21.2007 11:43pm
A. Zarkov (mail):
From the FAQ at the Social Security Trust Fund Data.
"By law, income to the trust funds is invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues." Such securities are available only to the trust funds."

snip

"In the past, the Trust Funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash"
Pay close attention here. The SS Trust Fund now owns a different kind of Treasury security, one immune from market forces that could raise or lower their value. This is a tip-off that something funny is going on here. If the Trust Fund bought stock, or even long-term government bonds, they could trade in a secondary market. But these "special issue" bonds can't. They are simply a claim on the future revenues (taxes) due to the Treasury. The government will need to increase taxes to give the Treasury the money that it pays to the Trust Fund when it redeems the securities it holds. In other words, the SS pension system is really just a retirement system paid out of current taxes, similar to the French National retirement system. At least the French government is honest about what's going on. Think about it this way. If the Trust Fund bought foreign government bonds, then foreign taxes would go to pay benefits to US retirees.
11.22.2007 5:41am
byomtov (mail):
And if the government had used the money to buy stock, when it came time to pay the beneficiaries, the government could have sold the stock and used the proceeds. Since what the trust fund holds is government debt, it will either have to sell that debt (i.e. borrow) or raise taxes to pay beneficiaries.

So what? It could also sell the stock and use the money to avoid further borrowing. If you assume the govt is going to operate in bad faith and default on its obligation to the trust fund there is no scheme that can prevent it. And take it one step further. If the money had been put in stocks the debt held by others would have been much larger - by exactly the amount of the debt to SS. So we still would have had the problem of paying it off. The problem is not SS, it's fiscal responsibility.

Look, repaying the trust fund debt is just one of many things the government is going to spend money on at some point. There is no more reason to single that out as a crisis than to single out defense spending or anything else.

As for negotiability - again so what. Securities are sometimes not negotiable. That doesn't mean they don't represent legitimate claims.

As for Krugman 1996 vs. Krugman 2007 did anyone here consider that circumstances have changed in eleven years, so that appropriate policies might change also? Or are his critics so determined to find "flip-flops" that they ignore reality?
11.22.2007 10:04am
byomtov (mail):
Ponnuru's reading of Krugman is dishonest, or maybe stupid. Krugman was pointing out that the existence of the debt to SS was a reason for caution on tax cuts. That doesn't mean SS was in crisis.

In fact, when Ponnuru writes, "(Since the tax cuts in fact passed, wouldn't that mean the Social Security problem is bigger now?)" , he reveals his own lack of understanding rather than Krugman's. The tax cuts didn't affect the trust fund, they affected the government's ability to meet its fiscal obligations.
11.22.2007 10:34am
A. Zarkov (mail):
"If you assume the govt is going to operate in bad faith and default on its obligation to the trust fund there is no scheme that can prevent it."

A default on a special issue is quite different than a default on a tradable Treasury security. In the case of the latter, it would ruin the ability the US to borrow, while the former amounts to an internal policy change. Of course there would be some effect, as such a default would spook the markets. On the other hand, if the Trust fund held a diverse portfolio like a responsible private pension fund, there would be no question of a default, just the normal market risk. But we know why they don't. The government wants the budget deficit to look smaller than it actually is. It's not a question of the Trust Fund holding worthless IOUs, it's a question of giving the public an honest account of government operations.
11.22.2007 10:40am
Bpbatista (mail):
It's very easy to figure out Krugman and his positions: Democrats saints in political garb. Republicans evil incarnate.

If Bill Clinton says Social Security is in trouble and needs to be saved, then he is manifestly right and his plan to do so is holy writ.

If George W. Bush says Social Security needs to be saved, then it is obvious that there is no problem and his plan was dictated by Satan himself to dupe us into enacting a plan that will bring about Armageddon.
11.22.2007 11:00am
Alan Gunn (mail):
byomtov wrote):

And if the government had used the money to buy stock, when it came time to pay the beneficiaries, the government could have sold the stock and used the proceeds. Since what the trust fund holds is government debt, it will either have to sell that debt (i.e. borrow) or raise taxes to pay beneficiaries.

So what? It could also sell the stock and use the money to avoid further borrowing.

If the government had stock to sell, and then sold it, it would have cash to pay the beneficiaries, and that would be the end of it. If it sells its own bonds, it will have to pay off those bonds someday. So the sale of the bonds is borrowing--it isn't a way "to avoid further borrowing." This is just another example of why debt held by the debtor is not an asset. Again, consider a check or note, payable to you, which you yourself have written. The fact--if it is a fact--that you can sell that check or note doesn't mean that it is an asset in your hands, because when you sell it you will incur the obligation to pay it, and that obligation offsets whatever "value" your ability to sell it gives you. Same when it's the government, not a person, who holds the debt.

None of this is the least bit controversial--as Mark Bahner pointed out, if the Social Security trust fund were to disappear tomorrow, the government would not be a penny poorer--whether the trust fund is there or not, payment of the beneficiaries will require future tax revenues or future borrowing. The "excess" tax payments that supposedly went into the trust fund were spent long ago.

Those who insist that the trust fund holds real assets are engaging in double counting. Suppose that, in some past year, the government collected $10 billion more in Social Security taxes than it needed to pay current benefits. It then "bought" its own bonds with this money, put the bonds in the trust fund, and then spent the $10 billion proceeds of its sale of the bonds to itself on current operations. Those who argue that the trust fund is real are claiming that the $10 billion is also "in" the trust fund, in some real sense. So, somehow, $10 billion has become $20 billion. Nice trick--maybe we should have trust funds for all government spending, which would then be costless. The government could just collect tax money, spend it, and also "keep" it in a trust fund.
11.22.2007 12:38pm
Mark Bahner (www):
As for negotiability - again so what. Securities are sometimes not negotiable. That doesn't mean they don't represent legitimate claims.


Negotiability is everything, when it comes to Treasury Bonds. REAL Treasury bonds are negotiable. That means that if the Social Security Administration held REAL, negotiable Treasury Bonds, the Social Security Administration could simply sell them to the public for cold, hard cash, to pay for any difference between incoming money and outgoing payments.

And if the Treasury defaulted on those REAL Treasury bonds, the value of every single real Treasury bond would be harmed. The entire world would be furious.

With the FAKE, non-negotiable "Special Issue" Treasury Bonds, the Social Security Administration can't simply sell them to the public for cold, hard cash. Instead, the SSA can only present them to the Treasury, and ask what the Treasury wants to do. The Treasury will in turn ask Congress if it wants to: 1) Issue REAL Treasury bonds, which raises the debt, 2) Raise taxes (on Social Security or elsewhere) 3) Cut spending elsewhere, or 4) Cut Social Security benefits.

Again, the failure of Paul Krugman, Dean Baker, and others to immediately acknowledge this unquestionable fact--that "Special Issue" Treasury bonds are not the same as NEGOTIABLE Treasury bonds--simply indicates their fundamental dishonesty on the issue.
11.22.2007 1:02pm
L H:
I remain surprised by how many obviously intelligent posters on the VC believe in susbtance behind the Trust Fund. The Trust Fund is:
- an obligation from the government to itself
- that cannot be sold or transferred
- can only be enforced by itself
- creates no consequences to other debt if the obligation is not honored

It doesn't take a graduate degree in accounting and finance to realize these obligations have no value.

As a final irony, the Government would prosecute any company executive that tried this kind of accounting gimick. The FASB / SEC would not look favorably (at all) on any company that tried to show separate economic substance behind any of the standard rabbi trusts / deferred compensation trusts that are created with internal IOU's. The SEC will not even let company subsidiaries that are separate legal entities reflect intercompany obligations receivable as balance sheet assets in their standalone, non-consolidated, financial statements (except in very narrow circumstances). By the SEC's own rules, the Trust Fund would be regarded as having no econmic substance.
11.22.2007 1:55pm
A. Zarkov (mail):
Even if the Trust Fund owned genuine negotiable Treasury Bonds, as it used to, there could still be a problem. If SS had to redeem them to compensate for large shortfall in revenues (say in a recession), it would flood the secondary market thereby reducing the price of current issues. That means a rise in interest rates, which could conceivably run counter to Fed policy at the time in trying to fight a recession. That doesn't happen now because SS runs a surplus of revenues over expenditures even in a recession. But as the ratio of retirees to employees falls, one day SS won't enjoy that healthy surplus. Then SS will have to constantly roll over its debt like a sub-prime mortgagee.

Social Security System is basically a Ponzi scheme. That's not just my opinion because Nathan Keyfitz said the same thing in the 1960s, correctly predicting its early 1970s crisis. Keyfitz was an academic consultant to the Social Security System, author of numerous books and articles on mathematical demography. You can read his bio, and see a list of his publications here. The system really isn't fixable without an increase in taxes or a reduction in benefits.

US immigration policy only makes matters worse as we keep adding beneficiaries via the SSI program. Somehow the government thinks that people who never contributed a dime to the system deserve to collect benefits just because they migrated here when they were over 65. Does that make sense? Then we have the US-Mexico "Totalization Program" agreement signed in 2004, but not yet finalized. This lop-sided agreement is yet another give-away to Mexico via the US Social Security program. You can read about it here and here.
11.22.2007 2:43pm
byomtov (mail):
Mark Bahner,

Putting the words "REAL" and "FAKE" in caps does nothing to strengthen your argument. Even if you used a bigger font, it still wouldn't help. The bonds you refer to, negotiable or not, are obligations backed by the full faith and credit of the US government.

Alan Gunn,

If the government had stock to sell, and then sold it, it would have cash to pay the beneficiaries, and that would be the end of it.

You've missed the point entirely. The Treasury borrowed the SS surplus to fund govt operations. If the SS surplus had been invested in stocks the Treasury would have had to borrow that money elsewhere. The so-called "crisis" is the fear that the Treasury will be unable to repay the borrowed money. But that would be no different if it had borrowed the money someplace other than the trust fund. If you can't pay your credit card bill, it doesn't make any difference if it's Visa or Mastercard. Your argument amounts to saying that if we had used Mastercard instead of Visa there would be no problem.

Zarkov,

Higher rates of immigration would actually help SS, not hurt it. If you look at the Trustees Report you will see that assumed higher immigration is associated with more optimistic projections.
11.22.2007 4:40pm
BobDoyle (mail):
byomtov et al

It does not matter whether the bonds in the trust fund are negotiable or not, real or just bookkeeping entries. Let us count them as assets of the SS trust fund. The question is, for whose benefit does the SS trust fund exist? The answer, of course, is the beneficiaries of the trust fund -- U.S workers and taxpayers. And whose obligations are those bonds -- the U.S. Treasury, and by extension, the workers and taxpayers of the U.S. The U.S. workers as a group have assets in the trust fund that are exactly and equally offset by their obligation as taxpayers to pay off that debt thru their future tax payments. The net worth is zero. So, as others have stated above, the trust fund balance is entirely irrelevant for financial purposes (the financial situation of SS would not be changed one iota if the government just erased the trust fund from its books). Its ONLY purpose is to give people who do not understand double-entry bookkeeping a false sense of security that, in fact, does not exist while permitting the government to take in payroll tax dollars in lieu of income tax dollars and pretend that its deficit spending is not actually as great as it really is.
11.22.2007 5:24pm
A. Zarkov (mail):
"Higher rates of immigration would actually help SS, not hurt it."

Those numbers are assumptions as opposed to projections. The problem with immigrants is they get old and retire too. The current immigration to the US consists mostly low skilled Mexicans, who will retire into the systems with minimal contributions. If you look at the benefit formulas, you will see that the benefits are strongly biased in favor of low wage earners. I'm trying to find a recent report that dealt with exactly this question. I do rememeber the conclusion: no help.
11.22.2007 5:30pm
BobDoyle (mail):
byotomov et al:

According to the 2007 Trustees report, to maintain the benefits that are promised under the SS program as it exists today, the OASDI portion of payroll taxes would have to be permanently raised from the current level of 12.4 percent of payroll by 4 percent of payroll to 16.4 percent (assuming, of course, that the amounts so raised were actually "invested" in the sense that other federal borrowing was correspondingly reduced). Consequently, as long as we are collecting only 12.4 percent of payroll to pay future benefits, each and every person added to the U.S. workforce (assuming they participate in the SS system), whether as a result of being born here and reaching working age or as a result of immigration (illegal or otherwise) INCREASES the problem. On average, at the 12.4 percent payroll rate, each new worker adds future obligations to the system that are about 1/3 greater than the amount his or her payroll taxes finance (because we need 16.4 percent of each person's payroll to break even). Therefore, we cannot "immigrate" our way out of this problem unless the level of immigration increases to such an extent that we have roughly increased our work force by one third or more.
11.22.2007 5:41pm
A. Zarkov (mail):
"Putting the words "REAL" and "FAKE" in caps does nothing to strengthen your argument. Even if you used a bigger font, it still wouldn't help. The bonds you refer to, negotiable or not, are obligations backed by the full faith and credit of the US government."

If there is no difference between "special issue" Treasury securities and tradable securities then why did the Trust Fund switch?

Look at the University of California, which runs the biggest pension fund in the US. Does it buy only Treasury Bonds? No. It has a diversified portfolio invested in the equity markets. Back in the 1970s, the UC deducted about 7% of your salary for the pension fund. However, starting in 1989, they stopped deducting because the yield on the portfolio was enough to pay obligations to current retirees. The yield on Government bonds is terrible compared to the stock market, barely above the rate of inflation. Wouldn't it be better for the Trust Fund to act as a responsible fiduciary and seek to get the best yield on the surplus? In this way the Trust Fund could enjoy the fruits of economic growth for the benefit of the taxpayers and retirees? Of course we know the answer.
11.22.2007 5:45pm
Alan Gunn (mail):
byomtov wrote:


You've missed the point entirely. The Treasury borrowed the SS surplus to fund govt operations. If the SS surplus had been invested in stocks the Treasury would have had to borrow that money elsewhere.

True enough (one quibble aside), assuming that government spending had been the same. Far from having missed the point, I agree entirely--the creation of the Social Security trust fund didn't differ at all from simply spending the excess Social Security tax revenues over the years on current operations. In short--the trust fund is hocus pocus. A trust fund funded with stocks, or any other real assets, would not have been hocus pocus, and would have required the government to have come up with additional funds from somewhere in order to buy those assets. The one quibble is that it doesn't deem to me to make sense to describe the Treasury as having "borrowed" the funds--from whom did it "borrow" them? You can't really borrow money from yourself. If you regard different government agencies as different entities, I suppose you could say that the "operational" portion of the government borrowed the money from the Social Security system. Fine, I guess, but that just means that when the Social Security system needs repayment to pay claims, the government will have to raise the money, just as if there had never been a trust fund at all. In short, the Social Security trust fund gives the Social Security system an "asset" that the rest of the government will have to pay for--not "did pay for," but "will have to pay for." So the trust fund does not correspond to any ability to pay claims without burdening the taxpayers.

Do you really disagree? Do you not see the difference between having genuine assets to sell--which would raise cash that would never have to be repaid--and having the government's own bonds to sell--which would raise cash that would have to be repaid with interest?
11.22.2007 8:07pm
philwynk:
I've noticed that defenders of the "there's no crisis" position love to remind us that the Social Security "trust fund" (which we all pretty much agree does not exist) is backed by "the full faith and credit of the United States Government," as though the phrase itself is a talisman that summons the Solvency Gods. Al Gore did it in 2000; several posters here have done it tonight. Unfortunately for them, this is just a tautology to avoid the discussion.

The impending crisis in Social Security is defined as "the point in time when the government has to default on its obligations". The "full faith and credit of the US Government" is worth something precisely because it has NOT defaulted on its obligations. When such a point is reached, the "full faith and credit of the US Government" will be appropriately in the toilet. So invoking "the full faith and credit" as an argument to say that there's no crisis is just saying "There's no crisis because there's no crisis at the moment."

I don't find that very convincing. Do you?

They'd be better off hiding behind the fact -- and fact, it is -- that the Trust Fund is an accounting fiction, and, as we all know, the government is going to have to pay all future Social Security benefits out of its general revenues.
11.22.2007 8:25pm
wm13:
The difference between me and Krugman is that, like Keynes, when circumstances change, I change my opinions, but, unlike Krugman, I try not to hold each position with a maximum of sanctimonious self-righteousness or to defend each position by asserting that those who disagree with me are criminals and con men. That's sort of why I wouldn't fit into the world of newspaper columnists, bloggers, or university professors.
11.23.2007 9:34pm
byomtov (mail):
Alan.

No. I see no difference. The problem you allude to is the government's possible future inability or unwillingness to pay the debt held by the trust fund.

Now it's true that Congres can refuse to make these payments. (The notion that this would have no effect on the overall credit standing of the US is bizarre, since it would mean the US was prepared to default on its obligations as a matter of convenience, rather than (shudder) raise taxes to meet them).

But I see no difference between this and the stock alternative you discuss. Bear in mind that, by (reasonable) assumption, the national debt is just as big in your scenario, but is owed to creditors other than SS. So we would face the same fiscal problems as with the current arrangement. Now the trust fund starts to sell the stock to make SS benefit payments. What in the world is there to stop Congress from simply redirecting the sale proceeds to pay off general debt? Nothing.

It is completely inconsistent to argue that in one case Congress will renounce its obligations because of general fiscal problems and in the other it will honor them strictly. Yet that is the argument you are making.
11.24.2007 1:10pm
AK (mail):
The bonds you refer to, negotiable or not, are obligations backed by the full faith and credit of the US government.

A new approach is needed to get through to those who don't understand the non-negotiability distinction.

The government is just like you and me. It can only get money in two ways:
(1) Sell stuff (in this case, T-bills)
(2) Take it at gunpoint (in this case, FICA)

T-bills have value because anyone who presents one to the Treasury will get a known quantity of cash for it. If the government ever decided not to give cash when a bond was presented, it would have tremendous difficulty selling any more bonds. Everyone who held one of these bonds would instantly see its value plummet to zero. The first avenue for raising revenue would be gone, probably never to return. So the government will always find a way to scare up enough cash to exchange for those bonds, mostly by resorting to #2, taking it at gunpoint from someone else.

Now suppose that the government decides to dishonor the special T-bills presented to it by the Social Security Administration. Nothing would happen to the value of the regular T-bills. You could still confidently go to the treasury and get the same amount of cash for your T-bills that you always could. Until the day comes when the government doesn't pay you for your T-bills, they'll hold their value.

The government's credit rating is not jeopardized by defaulting on the special T-bills. That's why they have no real value.
11.24.2007 2:51pm
AK (mail):
The "There Is No Crisis" ostriches are correct in at least one sense: the government will meet its obligation to pay out benefits. Old folks will get more than enough to live on, even if the benefits aren't as lavish as some would hope. The government doesn't have the willpower to say "sorry Granny, you get nothing. Sucks to be you."

Retirees are a potent political force. Add to that the people who don't save or invest (for whatever reason) and who expect to get a good return on their FICA and there will always be a majority who demand that benefits stay high, even if it means that FICA goes up or spending in other areas goes down.

That's the real crisis: the effect of increased taxes on the economy, and the difficult choices when it's time to trim other areas of the budget.
11.24.2007 3:06pm
byomtov (mail):
Now suppose that the government decides to dishonor the special T-bills presented to it by the Social Security Administration. Nothing would happen to the value of the regular T-bills.

This is completely ridiculous. The US government decides it doesn't have enough money to honor the obligations to SS and refuses to pay, and you think its other lenders, actual and potential, aren't going to be in the least bit concerned? What are you smoking?
11.25.2007 12:36pm
David M. Nieporent (www):
Now it's true that Congres can refuse to make these payments. (The notion that this would have no effect on the overall credit standing of the US is bizarre, since it would mean the US was prepared to default on its obligations as a matter of convenience, rather than (shudder) raise taxes to meet them).
The problem is that you keep using the word "obligations," but a promise to pay yourself isn't an "obligation." If you take $5000 from the account you had set aside for a college fund for your kid to take a vacation to Barbados, and in its place you leave a note to your kid saying, "IOU $5,000," there's no "obligation" there.

If you never bother to replace the $5,000, Equifax isn't going to care one whit, and it won't affect your FICO score in the slightest. If you miss a $50 payment to Visa, sure. But a $5,000 payment to yourself? Nope.
11.26.2007 6:29am