Wednesday, October 2, 2013

Social Security "Lock Box" Revisited (and Its Relation to the Government Shutdown)

Reader Doug is concerned about Social Security. We all should be.

Doug emailed "Most Americans assume that Social Security has money in the bank, so to speak."

He wants to understand the mechanics by which Congress can take Social Security receipts and use them for other purposes.

Specifically, he asked if I would elaborate on something I said in More Government Shutdown Hype.  The section Doug asked about is in reference to a hyped-up report How budget showdowns could squeeze the US economy by the Associated Press.

Here is the section that triggered the email:
Q. What about the federal borrowing cap? First of all, what is it?

A. It's a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasurys. And it borrows from itself, mostly from Social Security revenue.

Mish: It's important to note there is no social security fund whatsoever. Every penny and then some has been borrowed and spent. Here comes the hype. ..... [click on the top link for my point by point analysis of the hype]
emphasis in red added

No Lock Box

I am not sure what most believe, but anyone who thinks there is a trust fund, a lock box, or money in the bank is way off base. I have commented on this numerous times actually.

Social Security Recap

  1. April 03, 2009: Social Security: There Is No Trust; There Is No Fund
  2.  
  3. January 11, 2013: Social Security Payouts Per Worker; Accrued Interest on Accrued Promises; Imagination
  4.  
  5. January 11, 2013: Making Social Security Actuarially Sound in a Business-Friendly Manner
  6.  
  7. January 17, 2013: Social Security Cliff in Sight; Retirees Will Outlive Trust Fund; Ramifications of Nonmarketable IOUs and Privatization


For a nice recap of the problem, please see links 2 and 4. For my proposed solution, please see link 3.

Here are some charts from Reader Tim Wallace from link 2 The charts are from year-end 2012.
Social Security Burden on Non-Farm Workers



The line in red shows the expected trend if payouts had increased at the rate of inflation. Instead, escalating costs and the shrinking number of workers per beneficiary, has placed tremendous stress on workers ability to support beneficiaries.

Average Monthly Social Security Benefit



Social Security Beneficiaries vs. Total Non-Farm Employment



Ratio of Workers to Social Security Beneficiaries



Social Security Benefits Analysis

  • The ratio of workers to beneficiaries peaked in 1999 at 2.927 to 1.
  • The ratio of workers to beneficiaries was 2.361 to 1 at the end of 2012.
  • The ratio of workers to beneficiaries is falling fast and will continue to fall fast for a decade as the baby boomer population ages.
  • The average payout and the number of payouts are both rising fast
  • Total Social Security payouts (a multiplication of two rising numbers) are on an unsustainable exponential growth path.

Social Security Deficit?

In my first post I cited a CNS News article that made this claim Social Security Ran $47.8B Deficit in FY 2012.

Reader David White objected, noting an increase in assets. Here is the chart from the Social Security Administration.



White protests "The "$47.8 billion deficit" mentioned in the post does not include interest income. This omission blatantly misrepresents the Social Security Trust Fund data."

Blatant Misrepresentation

If anything, the above chart highlights the sheer absurdity of the alleged "Trust Fund".

The blatant misrepresentation is the notion there is a trust "fund" at all.

In reality there is no fund, and if there is any trust in the system, there shouldn't be.

Accrued Interest on Accrued Promises

The assets are nothing but IOUs, and interest income is actually interest on money long since spent.

The entire "Trust Fund" is nothing but a promise to pay. There are no real assets (other than the ability to raise taxes to meet current expenses). Everything else is just a promise, and even more absurdly, accrued interest on accrued promises.

The chart provided by Wallace should give everyone second thoughts about the ability to raise taxes to meet expenses.
The Cliff

Link 3 above, discussed "the cliff", including a response from Jed Graham at Investor's Business Daily. Here is a snip ...
Cliff Now in Sight



Nonmarketable IOUs

Jed and I are 100% in agreement that the alleged "trust fund" is nothing more than "nonmarketable Treasuries — really IOUs from one branch of government to another" that have no real value.

As Jed states, those IOUs provide the Social Security administration the "legal authority to run cash deficits until they're spent."

The key points are as follows: There is no lock box, there is no fund,  there is a deficit, and IOUs in a pretend piggy bank are not the same as marketable bonds.

Amusingly, I got into an exchange with a reader just a few days ago over the IOU concept. Reader Elliot wrote "You don't seem to understand bonds. They're just an IOU. The Chinese give us $$, we give them an IOU, and then we spend the dollars."

Clearly, one major difference is the trust fund has nonmarketable IOUs, not marketable bonds.

I responded to Elliot that "You cannot owe yourself money and it's even more ridiculous to put an IOU in a piggy bank and pretend to collect interest on it."

Elliott was not convinced. The discussion with Elliott proves that some people will continue to believe whatever nonsense they want, no matter how carefully facts are presented otherwise.

One thing I did not realize before exchanging emails with Jed Graham was that the payroll tax cut did not actually contribute to the current Social Security deficit (SS was not charged for the reductions in payroll taxes). Rather, the cuts simply added to the general deficit, funded as temporary stimulus.

Thus, the current deficit is real, not imagined, no matter how one looks at it. The payroll tax cut did not temporarily overstate the problem.

Simply put, Social Security is already insolvent if one ignores imaginary interest deposited into an imaginary piggy bank. Only on a pretend basis, by counting interest owed to oneself in a piggy bank that does not even exist, is Social Security solvent.

Elliott's of the world aside, Jed points out the IOU pretense is universally understood by the CBO, by the administration, etc. Unfortunately, Congress ignores the problem for political reasons.

It's Magic

Curiously, the government is running right now by borrowing against money budgeted for something else, then pretending to collect interest on the non-marketable securities owed to itself.

If you think that makes sense, then put an IOU to yourself in your piggy bank, accrue imaginary interest on it, and then try to spend the IOU and the accrued imaginary interest.

With Congress, the bigger the imaginary interest, the more it can spend. You cannot do that, but Congress does.

Proposed Solutions

For my proposed solutions, please see Making Social Security Actuarially Sound in a Business-Friendly Manner

Unfortunately, making Social Security actuarially sound is insufficient because nothing stops Congress from using social security receipts for something else.

In practice, we also need a balanced budget.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com