Posted on 07/14/2011 12:43:38 PM PDT by Hojczyk
Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades. It must be one or the other.
Here’s why: Social Security has a trust fund, and that trust fund is supposed to have $2.6 trillion in it, according to the Social Security trustees. If there are real assets in the trust fund, then Social Security can mail the checks, regardless of what Congress does about the debt limit.
President Obama’s budget director, Jack Lew, explained all this last February in USA Today:
“Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries. … Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”
Notice that Lew said nothing about raising the debt ceiling, which was already looming, and it shouldn’t matter anyway because Social Security is “entirely self-financing” and off budget. What could be clearer?
Unconvinced, syndicated columnist Charles Krauthammer wrote a subsequent column questioning Lew’s assertions. “This [Lew’s] claim is a breathtaking fraud. The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction. … In other words, the Social Security trust fund contains—nothing.”
(Excerpt) Read more at blogs.forbes.com ...
Kabar,
I’ll address this question to you because you seem to have one of the more informed views of the structure of the social security trust funds in here, but if anyone else has an opinion on it, please chip in.
My question: What is to stop the administration from literally looting the trust fund after the debt hits the debt ceiling?
I’ll explain what I mean. Everyone is assuming that the inflows to the government are about $170 bn in August, of which I believe around $50 billion is from social security taxes. That money is presumed to be the amount available to pay bills in August, bills that total around $310 billion.
It’s assumed that the $50 billion taken in as SS taxes will go to pay bills, including, if Obama directs it, payment to social security recipients. However, what is to stop the administration from just cashing in $50 billion of the non-public debt and using that money to pay the social security recipients, then spending the SS taxes received that month on other expenses?
The cashing in of $50 bn of non-public debt would open up an equivalent amount under the debt ceiling that the Treasury could then issue as publicly held debt, providing the funds to pay the SS recipients.
This would leave the entire $170 bn of August tax receipts available to pay the rest of the August bills, so they would only come up short about $90 billion, instead of $140 billion.
I guess it’s a two part question: 1) Could this be done legally? and 2) Would it be a good thing or a bad thing for those not wanting the debt ceiling to be raised?
And beyond that, could they raid the trust fund for the other $90 billion the same way? Because if they could, it wouldn’t last very long taking nearly a $150 bn hit each month. Plus, Obama could continue to spend money like water for another year and a half or so, before the fund hit zero. The debt ceiling would be moot until then. And then there’s the other trust funds besides...
I’d like to think there’s no way people would stand for it, but as you can see from other comments, this stuff is pretty obscure and hard to digest. If he did it, he just might get away with it for an extended period of time.
Thoughts?
Thanks for the correction.
In 1950 there were 16 workers to every retiree, today there are 3.3; and by 2030 there will be two. The entitlement programs will impose a tremendous tax burden on our children and grandchildren if not reformed, i.e., benefits reduced.
Any system can be made sustainable if you adjust revenue and benefits. Raise the retirement age to 75 and solvency will last for some time. Or double the payroll tax. Or means test benefits. Or change the COLA formula. Or go to personal accounts. But these kinds of solutions run into the face of strong policial headwinds. The politicians are circumstribed by what they can do.
I would prefer privatizing SS and just have a small defined benefit program to cover survivor benefits and disabilities. Trying to fix a flawed system that does nothing for personal wealth accummulation and makes people dependent upon government that can change the rules any time it wants is not worth the effort. You could pay the maximum contribution into SS for 50 years and not collect a cent except for a small burial allowance. SS is just part of the welfare state. It is a Ponzi scheme.
>>If they are growing, we are probably taxing the people too much (surpluses) and if they are declining, then we are not taxing them enough to support the program. <<
I agree with the second half of your statement, but not the necessarily the first. In the early years after establishment of any retirement system, income must exceed outgo, or the fund will never be solvent. You have to build funds so that there is something to cash out when people finally reach retirement age.
Starting it the way they started the SS system, by letting people utilize it almost immediately, meant that income had to exceed outgo by a substantial amount, because those who retired after making just a few payments would be getting someone else’s money, rather than their own, in retirement.
I do think the retirement trust funds serve a purpose, because they serve as a measure of the general health of the system, and their direction provides clues as to whether adjustments have to be made sooner rather than later.
If they were to become line items in the budget, there would be far less of a constraint on politicians who would be inclined to raise payouts to buy more votes. You would completely sever the link between taxes paid in and benefits paid out.
The trust fund does not contain assets, just unfunded liabilities, which is why the trust funds are included in the $14.3 trillion national debt. Here is what the Congressional Budget Office said about trust funds:
I guess it’s a two part question: 1) Could this be done legally? and 2) Would it be a good thing or a bad thing for those not wanting the debt ceiling to be raised?
I don't think it would be legal to take SS revenue from the payroll tax and use it for something else. The trust funds are included in the debt limit. SS is paying out more than it is taking in. The SSTF must cash in some of its IOUs to make up the shortfall. I guess the Administration could decide not to redeem the IOUs to make up the difference, but it would be the same as committing a default for publically held T-bills.
I provided you with the CBO description of the Trust Funds. The problem is that the way they currently operate, they don't contain real assets, just promises to pay. There is a reason why the SSTF is included in the $14.3 trillion national debt under "Intragovernmental Holdings."
If anyone in the private sector tried to run such a pension scheme, they would be put in jail.
Starting it the way they started the SS system, by letting people utilize it almost immediately, meant that income had to exceed outgo by a substantial amount, because those who retired after making just a few payments would be getting someone else’s money, rather than their own, in retirement.
The numbers were far different then both in terms of workers to retirees and the percentage of the population over 65. It was the epitome of a Ponzi scheme. Take a look at the tax rates in 1937, i.e., just 1% of salary each for employee and employer up to a salary cap of $3,000.
In 1937, 42 workers paid 2% in payroll tax to support every retiree. In 1950, 16 workers paid 3% in tax for each retiree. Today around 3.3 workers pay 12.4%. By 2030 there will be just two workers for every retiree. I wonder how much they will have to pay to support the program.
If they were to become line items in the budget, there would be far less of a constraint on politicians who would be inclined to raise payouts to buy more votes. You would completely sever the link between taxes paid in and benefits paid out.
It would actually be more of a constaint on the politicians, especially now when the systems are in the red. The systems would no longer be on automatic pilot. There is no direct link between taxes paid in and benefits received. We haven't raised the SS tax since 1990. We have COLA increases that are not linked to revenue.
The politicians loved the SSTF because they used it as a cash cow when revenue exceeded outgo. It is a way of raising taxes on most of the population. There is an incentive to create a "surplus," which you can use to spend on something else and deposit an IOU into a trust fund that really inceases the national debt. It is easier to borrow from ourselves than from the sale of real T-bills.
Concurrent with transferring SS tax money to the general fund for bonds, the percentage rate of withholding was increased and the maximum amount withheld per year was raised. The increased rate and max cap would allow the "trust fund" to grow at a more rapid rate and better prepare for the arrival of the "baby boom".
Regards,
GtG
>>The trust fund does not contain assets, just unfunded liabilities, which is why the trust funds are included in the $14.3 trillion national debt. <<
I think you’ll find that the trust funds contain the other 5$ trillion or so of the debt issued under the $14.3 trillion debt ceiling. That is, they contain the non-public portion of the debt issued under the ceiling, the portion that you are referring to as an IOU.
You acknowledge as much when you say the trust funds are included in the national debt.
I think my question is a valid one. What’s to stop Obama from converting at least $50 bn of the SS trust funds non-public debt into public debt? Treasury would issue $50 bn T-bills, say, and transfer the $50 bn cash to the SS trust fund, canceling $50 bn of their non-public debt (so the total debt stays at $14.3 bn). The SS trust fund now has $50 bn in cash to pay benefits. I would be surprised if this wasn’t possible to do. I’m just not sure if they’re planning to try it, because I’ve seen no suggestion of it anywhere.
Beyond that, there are other trust funds that could be treated similarly. And then there’s the question of what would happen if they just raided the trust funds of however much non-public debt as they needed.
>>The trust fund does not contain assets, just unfunded liabilities...<
Actually, the unfunded liability of the Social Security trust fund is completely unrelated to any of the numbers we’ve been talking about. The fund doesn’t “contain” an unfunded liability, the way it contains non-public debt issues. Rather the unfunded liability is a measure of how out of balance the future liabilities are to the long term tax revenues plus the non-public debt held, discounted back to the present day. It’s essentially an unknowable number, given the uncertainties of all the variables, but attempts are made to at least estimate it.
The unfunded liability of just Social Security is probably approaching $20 trillion by now and is totally unrelated to the non-public debt issued to the trust fund.
I don't see any utility to that. SS is now running in the red, so it is already cashing in its IOUs, which more than likely adds to the public debt since we borrow 41 cents of every federal dollar spent. And the publicly held debt is far more dangerous to the health of the nation than owing the money to ourselves. The Chinese and anyone else can buy the market T-bills.
Treasury would issue $50 bn T-bills, say, and transfer the $50 bn cash to the SS trust fund, canceling $50 bn of their non-public debt (so the total debt stays at $14.3 bn).
Where is the government going to come up with the additional $50 billion? We are already at the limit of our debt. Treasury must have buyers. And to what end would that serve? Cash from where? What is the advantage of increasing our public debt and decreasing our Intraovernmental debt?
The SS trust fund now has $50 bn in cash to pay benefits. I would be surprised if this wasn’t possible to do. I’m just not sure if they’re planning to try it, because I’ve seen no suggestion of it anywhere.
You have lost me. SS already has a revenue stream. Right now it is running in the red, which is why it is cashing in some of its T-bills to pay benefits. The General Fund is redeeming these IOUs so SS can pay benefits. The impact on the national debt is neutral.
Beyond that, there are other trust funds that could be treated similarly. And then there’s the question of what would happen if they just raided the trust funds of however much non-public debt as they needed.
I provide you with the CBO description of the trust funds. They don't contain assets, just unfunded liabilites. Why would anyone "raid" a trust fund for IOUs? What the USG is doing now is to take some of the money from trust funds that are running a surplus and using that money to pay bills. SS is not running a surplus nor is the Medicare trust fund.
Yes Michelle we already know that's the fund. The question is WHERE'S THE TRUST?
A distinction without a difference. The $2.6 trillion in the SSTF is included in our national debt limit. There is no money set aside to pay for those IOUs. It represents an unfunded liabilty in much the same way the publicly held debt does.
The unfunded liability of just Social Security is probably approaching $20 trillion by now and is totally unrelated to the non-public debt issued to the trust fund.
That is a projection of the additional costs of the program that are not covered by the current revenue based on projected expenditures in the future. 10,000 people a day are retiring and will continue to do so for the next 20 years. By 2030 one in five residents of this country will be 65 or older, twice what it is today. Where is the additional money going to come from under the current 6.2% payroll tax each for employer and employee? That is why the promises that have been made fall $18 trillion short of what is needed. With only two workers for every retiree in 2030, how high must the payroll taxes be to support a doubling of the number of retirees?
I would prefer something like that too. My guess is that unless there are big changes in our government the system will collapse in a few years if not sooner.
In discussing SS with you I was trying to separate the inherent flaws in the system if it were well run and the way the politicians have looted the system and will need to borrow trillions of dollars to make future payments.
The thing I do not see is how it is possible to transition from the current system to a privatized system. You appear to be very knowledgeable on the subject. Do you think it is possible to make the transition from the present system to a privatized system and still take care of the people who have payed into the system for 30 or 40 years but are still working and have yet to retire?
Reagan spoke about this in 1964 in The Speech (A Time For Choosing). Quite frankly, the pols are counting on the boomers dying off and Obamacare is a step in that direction.
Yes, a number of think tanks have come up with possible solutions.
It sounds like you’re missing my point.
The “utility” in doing what I’m suggesting, assuming it can be done (which is my question, whether it can legally be done) is that it would enable Obama to spring at $50 billion from the SS trust fund in August and possibly a nearly equivalent amount from other trust funds. This could give him an additional $100 billion to allocate in August, so instead of coming up $140 billion short, he’s only $40 billion short of making all the August payments.
You ask where he gets the additional $50 billion. That’s the process I was describing. You convert it from non-public debt to public debt by issuing public T-bills and canceling the equivalent amount of non-public debt (so the total debt remains under the debt ceiling.)
I’m not sure what to make of this, exactly. I’m really just wondering if it could be done, and if so, if anyone in the government has contemplated doing it. For all I know, there could well be a law prohibiting it, not that the current administration would feel constrained by any such law.
The non-public debt holding is, after all, an asset to the trust fund. I’m wondering if that asset can be converted to public debt, raising an equivalent amount of cash from the public in the process, that’s all.
I am not only missing your point, I can't understand your logic. There us no money in the SSTF to spring. I gave you OMB's description of the trust fund "assets", i.e., Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.
Where is Obama going to get $50 billion to "spring" some IOU's from the Trust Fund? And what is the utility in redeeming the Trust Fund IOUs? You would have to deposit the cash into the Trust fund or issue new IOUs.
The non-public debt holding is, after all, an asset to the trust fund. I’m wondering if that asset can be converted to public debt, raising an equivalent amount of cash from the public in the process, that’s all.
Sorry, but that is just pure sophistry. "The balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due." Basically, the IOUs represent the full faith and credit of the USG to pay future benefits. They can't be converted into real assets. Again, the SSTF is included in the $14.3 trillion national debt.
I’m sorry. I assumed earlier that, because you were coming up with most of the information, you understood it.
Take some time and carefully read over what I’ve written so far, dropping your assumption that those non-public securities held by the trust fund are absolutely worthless. They are not worthless, for if they were, they would not be counted against the debt ceiling.
Once you’ve overcome that assumption, and understand what I’m saying so far, I’d like to pursue this to a logical end, but we can’t get their if you don’t get what I’m saying up to this point.
If someone else following along does get what I’ve said so far, and wants to join in, I’d then flesh out what I think are some very interesting implications of all this, along with discussing the legality of it.
We can’t keep going around this tree again. Take care.
>>...those resources will need to come from federal revenues or additional borrowing...<<
However, since you repeated this twice in your last post, and stated that you don’t understand my logic, here’s the part that you’re missing: The resources I’m talking about would come from “additional borrowing” as the OMB asserted in the quote you repeated twice for emphasis.
Again, the point is that the non-public debt COUNTS AGAINST THE DEBT CEILING. I’m suggesting a way that it be converted to public debt, leaving the debt ceiling unchanged, while enabling the raising of an equivalent amount of cash.
I haven’t said anything yet about the broader implications of this, nor about whether it’s a good idea or not. That discussion has can wait until someone understands what I’m saying and wants to pursue it. For now, we’re stuck at “It can’t happen.”
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