Monday, September 19, 2011

Social Security and "funny money"

Social Security has been in the news lately, with the decision of current Texas governor and GOP presidential hopeful Rick "" Perry to refer to the program as a Ponzi scheme.  While his rhetoric has been roundly disputed, and while the decision of W² to firmly grasp the third rail of US politics with both hands so far appears unwise; such rhetoric plays well into the hands of those who believe that the program is on unstable financial footing.

From an actuarial point of view, the Social Security Trust Fund is reported to have sufficient funding to pay all its expected obligations until 2036, at which point the trust fund itself (currently about $4 trillion) will be depleted--an event would sharply reduce benefits were it to occur, but which would not end the program completely.  With various tweaks, such as no longer capping payroll taxes or further means-testing of benefits, the life of the trust fund can be extended many decades beyond that.  (Medicare and disability insurance have more pressing funding problems; this article focuses entirely on the non-medical social insurance).

However, many critics of the program instead argue it is in perilous trouble, with apocalyptic terms such as "bankruptcy" or "fraud" or "Ponzi scheme" thrown around; accusations which are routinely given credence in the press.

What's in the trust fund

A major issue of contention is just what is in the Social Security trust fund.  Conservative columnist Charles Krauthammer referred to the trust fund as "a fiction", which contains nothing but IOUs which are, in his words, "worthless".   Other commentators have stated that the trust fund contains "funny money", as though there's a bank vault somewhere in the DC suburbs full of Monopoly scrip or Burger Bucks. 

What the trust fund actually does contain is various types of US government treasury securities--debt which is the US is legally obligated to pay, and is backed by the full faith and credit of the US government.  As such, monies owed to the Social Security trust fund is counted as part of the national debt (Social Security obligations are about 30% of the total public debt of about $14 trillion). 

Mr. Krauthammer is an intelligent fellows, and both know full well how the SS trust fund is structured and what it contains.  Assuming that both are being forthright in their assessments of the situation, it stands to reason that they believe either one of the following things are true:
  • The US government will indeed, in the near future, default on its public debt.  I'm sure that Wall Street and the world of international finance (particularly the Chinese), not to mention the many patriotic Americans who directly hold Treasuries in their investment portfolios, will not be happy to hear that the securities widely considered the safest investments in the world, are in fact "funny money" and/or "worthless".  The financial markets, needless to say, don't believe either to be the case, and are happily continuing to by US Treasuries despite a ridiculously low rate of return (and despite Standard and Poor's ridiculous decision to downgrade US debt).
  • OR---there won't be a general default on the public debt of the United States, but that the Social Security trust fund--at some point in the future--will be stiffed, either by a targeted default or by act of law.

Smart money bets that they are assuming the latter.

How independent is social security?

In discussing Social Security, it is important to consider its structure, and its independence from, the rest of the US Government.  Under current law, Social Security is structured as a program with separate books from the US Treasury.  It is run by a Board of Trustees (who enjoy wide immunity from political interference), and its operations are prescribed by law:  Payroll taxes come in, social security checks go out.  Excess funds are required, again by law, to be invested in US Government debt, and the Treasury is required to redeem these bonds when they expire.  For a long time, while the Baby Boomers were in the work force, the value of the trust fund grew as receipts exceeded benefits; with the Boomers starting to retire, now the opposite is happening and the trust fund is starting to decline in value.  Presently, the value of the trust fund--which represents the amount of taxes collected over the program's life, minus the benefits dispersed--is around $4 trillion, invested in US securities.   This view of Social Security, as an independent actor separate from the US government, and a creditor thereto, is held by many people.

Many Washington insiders hold a different view of Social Security--namely, that it's just another government agency among many, and that the trust fund and the Treasuries contained within are little more than an accounting fiction.  In this point of view, Social Security has no more claim on the Treasury than the US Forest Service or the U.S. Board on Geographic Names; and current and future recipients ought to have no expectation of future benefits.  (Indeed, former Wyoming Senator Alan Simpson often refers to "greedy geezers", and infamously called the program a "cow with 310 million tits", implying that the claims of retirees are somehow illegitimate).

Which view is right?  In a way, both.  The key phrase above is "under current law".

If no act of Congress changes the law, Social Security will continue to operate as prescribed until the trust fund runs out (at which point benefits will be reduced to match payroll tax receipts).  But that's a big if--the program is a creation of law, and if Congress wishes to alter or abolish the program, nothing prevents it from doing so.  Nothing prevents a future Congress (and a like-minded, or veto-overridden President) from abolishing the program, ending benefits immediately, and redirecting payroll tax revenues into the pockets of the most job-creating billionaires the government can find.  Likewise, nothing prevents a future Congress from deciding to bolster the trust fund with general fund revenues funded by a new soak-the-rich tax.  And nothing prevents the government from reducing the overall public debt by essentially reducing the trust find size (cancelling or forgiving some of the Treasuries in the process), and reducing benefits accordingly.

Of course, all of these things would take an act of Congress to pull off.  And there is not, at the present time, sufficient political support in Congress or among the electorate to defund the program--it isn't called the third rail of US politics without a good reason, as the governor of Texas is starting to discover.  Social Security is immensely popular, and no generation has a desire to be the generation that pays into the program but gets nothing out of it.

So why do so many conservative politicians speak of Social Security as though its demise is imminent, and as though the post-Baby Boom generations are going to find an empty cupboard when it is their (our) turn to retire and collect benefits?  And why, when the program was running demographic surpluses, were they happy to go spend the money on other things (like tax cuts), but now seem to regard the upcoming pig-through-the-python as an insoluble problem?

The questions are rhetorical.  The answers--are left as an exercise for the reader.


  1. I think we forget that in the end, in the real physical world, retirement is always pay-as-you-go. I'm "saving" for retirement, but I'm not saving up dried beans so that 30 years from now I'll have a supply of 30 year old dried beans that may or may not be edible. I'm not puting a mobile phone in the closet so 30 years from now I'll have a 30 year old totally unusable new-in-the-box phone. I'm not saving clothing to have very dated ill-fitting and deteriorated from age clothing when I retire. I'm saving numbers, in an account. I'm counting on being able to trade numbers in the account for real goods and services when the time comes. At any moment, there is only so much stuff available and how it is divided between working people, retired people, children, etc. is decided one way or another. We can aim to have higher productivity (and thus more total stuff) in the future, but, by itself, putting lots of numbers into accounts by any possible means doesn't guarantee that will happen. (At one extreme, we could close all the schools to save money and thus put lots of numbers into the accounts, but it's unlikely that would cause future productivity to increase.)

  2. Certainly--but at present time (and for the forseeable future), how big the number is in your account related directly to how much of the physical stuff you are permitted to have.

    A big part of the SS debate is the suggestion that currrent and future retirees should have a smaller number than they were expecting, so that somebody else's number can be higher.


Keep it clean, please