Concerns about the latest Social Security proposal

Having raised public awareness about the longer term challenges of funding Social Security, the Republicans now ride boldly to the rescue with– a new accounting gimmick. To the extent that it amounts to anything more than that, I’m a little worried.

Suppose I told you that I had figured out how to solve my personal debt problems. My plan is to write myself an IOU for $1 million, payable in 2010. As the credit card balances continue to pile up, I smile and tell friends and family not to worry, because I have a million dollars coming my way in another five years.

I doubt I’d fool too many people with this Alfred E. Neuman scheme. But that’s exactly the game Congress has been playing for years with Social Security. The Social Security Trust Fund currently claims to hold assets of $1.6 trillion. What do these assets consist of? Nothing more than IOU’s from the U.S. Treasury. Of the $7.4 trillion in gross federal debt outstanding at the end of the last fiscal year, $1.6 trillion represented money that the federal government (in the form of the U.S. Treasury) owes to itself (in the form of the Social Security Trust Fund). Considered as a single fiscal entity, the federal government has no net assets whatsoever that have been set aside to provide Social Security payments to future beneficiaries. Rather, the federal government owes a vast sum that needs to be paid in the future even if it never delivers a dime to the retiring baby boomers.

The trust fund amounts to nothing more than an accounting fiction that the dollars currently collected from Social Security contributions are a different color from the dollars collected from income taxes. Social Security contributions and disbursements are counted as red dollars, and when the federal government collects more red dollars than it spends, it records the difference as a surplus on the Social Security accounts. The accumulation of these sums over time is likewise duly recorded as the total “assets” or “investments” of the trust fund. General revenues and expenditures, by contrast, are very different– they’re blue dollars, you see.

Of course, the reality is that all the dollars that the government actually collects or spends are green. When the number of green dollars spent (whether on Social Security or defense) exceeds the number of green dollars received (whether from Social Security contributions or income taxes), the government has to borrow more green dollars from a real person somewhere. In fiscal year 2004, the federal government borrowed another $339 billion worth of green dollars from real people. But it pretended that it borrowed $595 billion blue dollars, and used that extra pretend blue debt to accumulate extra pretend red assets worth $256 billion for accounts like Social Security. The government could pretend to have borrowed or saved any quantity of blue or red dollars it wished, as long as they netted out to be the $339 billion green dollars which represent the underlying reality.

It never ceases to amaze me how otherwise intelligent and informed people can ponder and worry with great seriousness about the date when Social Security goes “bankrupt”, by which they mean that the accumulated sum on the red dollar account turns negative, as if that accounting event held any real-world significance.

Perhaps some people believe that keeping separate “red” and “blue” accounts serves some sort of purpose, such as calling attention to the fact that, with the aging of the population, we’re going to have to come up with some green dollars somehow to keep the system functioning. But the balance on the red dollar account is at best a rather crude indicator of this actuarial reality.

Not to worry about any of that, though, because into the picture step eleven Republican senators who have announced legislation to “Stop the Raid on Social Security.”

The most important thing that you have to understand about their plan is that it doesn’t change anything about the green dollars that the federal government currently takes in or spends. So, if you had the quaint notion that we somehow needed to do something about the number of green dollars coming in or going out in order to deal with the aging of the population, the plan isn’t likely to do much for you.

What it does instead is to specify that the surplus from the Social Security Trust Fund– that red dollar balance that we were talking about– shall be “directed” into “personal retirement accounts,” in the form of marketable Treasury securities that would be held in the names of individual future Social Security recipients.

So just how do you “direct” nonexistent red dollars into some newly created accounts? Why, you do it the same way you created those red dollar accounts in the first place, namely, just declaring the funds to be there, balanced by those other blue dollars that you declared to be there as well. The Republican proposal is to make the red dollars vanish at the stroke of a pen, and replace them with, if you will, “yellow dollars,” to be called “personal retirement accounts.”

Now, there’s one important difference, and this must be what the proponents are counting on. Whereas the red dollars were just money that the government owes to itself, the yellow dollars are, in principle, money owed to individuals. But what exactly is owed, and what are the terms? As Mark Thoma at Economist’s View noted, all these individuals are presumably going to receive Social Security benefits some day, whether we create personal retirement accounts or not. Whatever level of benefit Congress may have intended to pay without these accounts, it could pay exactly the same level with these accounts, by just reducing the nominal “benefit payment” (purple dollars?) by the exact amount that the recipient’s PRA claimed the individual had accumulated in interest on the yellow dollar account. Eventually I suppose you get to a point where what’s promised in yellow dollars is greater than what Congress was otherwise planning to disburse, in which case what we’ve done is lock the federal government in the future into a position of less flexibility in figuring how to make disbursements to retirees. In that case, the plan would not just be an accounting gimmick, but would introduce an added liability for the government to be disbursing more green dollars to Social Security recipients at some date in the future.

So what’s the point of that? Lawrence Hunter and Phil Kerpen
at National Review Online (hat tip: Angry Bear) seem to view this as a plan that will incrementally force Congress into a solvent private retirement account system, apparently on the argument that as what is under the current system the red dollar or Social Security surplus vanishes in the years to come, the popularity of the new accounts will force Congress to take some kind of green dollar action to keep the government afloat and the accounts going.

I must say that I’ve always been very suspicious of arguments like this one. The premise seems to be, Congress lacks the political will to act now, so let’s create an institution that points a gun directly at their head, in the form of creating a new explicit liability beyond what we currently have, thereby institutionalizing the fact that the federal government is indebted for even more than the green dollar account currently shows. The concern I have about such schemes is that the effect of loading such a gun, rather than giving some future Congress additional courage to enact what the current Congress lacks the political will to do now, is more likely to end up with somebody getting shot.

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9 thoughts on “Concerns about the latest Social Security proposal

  1. Jack Krupansky

    No amount of so-called “reform” will accomplish any good whatsoever until the “reformers” themselves make a deep and passionate commitment to two concepts: 1) Social Security is an inter-generational social commitment or transfer from the government to the people, not a pre-funded account, and 2) the future cannot be forecast with *any* certainty, whether for six months or sixty years.
    Social Security is not an IOU that I’ve written to myself to be paid out of my own FICA tax contributions. That thinking fails to reflect the inter-generational social compact. Please go back to whoever gave you this IOU idea and tell them the following: That’s a very *stupid* idea.
    There are two particularly relevant aspects of the future of the economy that we know very little about: 1) the true evolution of the demographic dynamic (including immigration), and 2) the productive capacity of the economy. After all, Social Security is really nothing more than a “claim” against the future productive capacity of the economy. Other than simply extrapolating from current “trends”, litle is known about either, other than that there is no shortage of economic Cassandras who are *adamantly and absolutely positive* (so they say or seem to suggest), that the future is very, very gloomy unless their pet economic projects are pursued.
    Note to all economists: Focus your attention on enhancing the long-term health of the economy and then Social Security will indeed take care of itself.
    I’ll close with my eternal question: Why is it that so many economists have such little faith in either free and open markets or the evolving partnership between government and private interests?
    – Jack Krupansky

  2. JDH

    I wasn’t saying that Social Security is an IOU, Jack. I’m saying that what are carried on the government’s books as assets of the Social Security Trust Fund represent an IOU from the federal government to the federal government, and as such, they are not true assets by any reasonable definition, any more than an IOU that I wrote to myself should be counted as one of my assets. My point is one about the accounting of the Social Security Trust Fund, not one about the substance or nature of the Social Security program.

  3. Gast

    JDH,
    Sorry to divert from the topic..
    Just wanted to say Thank you for the font changes.
    Looking forward to your posts on OIL. This seesm to be most important factor affecting everything from stocks to finance ministers sleep around the world.

  4. bncthor

    J. Krupansky asks..”Why is it that so many economists have such little faith in either free and open markets or the evolving partnership between government and private interests?”
    My 50 or so years of observation of the “evolving partnerships between governments and private interests” suggests that the “little faith” to which he refer stems largely from the fact that far to often the private interests either collude with government officials, or government officials collude with private interests to arrange outcomes skewed heavily toward private rather than public benfits. As for free and open markets, such exists primarly in the literature of economists, and, in any event, such free and open real world markets in the past have quickly evolved into oligopolies or monlopolies. Free and open markets would be wonderful if such existed in the real world.

  5. Jim Glass

    Of course the government bonds in the SS trust fund aren’t an asset that the government can use to finance future SS obligations — they are a liability of the gov’t, which is why they are included in the national debt.
    “So just how do you ‘direct’ nonexistent red dollars into some newly created accounts?”
    Exactly the way we have promised to do under the status quo — by increasing income taxes (quite substantially!!) to provide the dollars.
    “DeMint” does nothing at all but make transparent and enforceable the promises of the status quo, by making sure Congress pays off on the Social Security trust fund bonds instead of getting out of doing so by cutting future SS benefits to make the bonds unneeded.
    As such the criticism of it from both left and right strikes me as very peculiar.
    I mean, on the left bloggers like Drum and Yglesias (not to mention politicians like Pelosi and Reid) have been claiming about Republican plans:
    “The first phase is to default on the General Fund’s debt to the Social Security Trust Fund”
    This certainly puts an end to that, so what’s their complaint?
    On the right this changes nothing at all except make more clear the promises in the status quo — yes, there will be a cost to paying off those trust fund bonds, in full as promised, as Drum, Yglesias, Pelosi and Reid want.
    Transparency and making costs clear to the public is supposed to be good, right?
    “Eventually I suppose you get to a point where what’s promised in yellow dollars is greater than what Congress was otherwise planning to disburse”
    What? What? Congress has been lying for 30+ years, all the time it has promised to pay off those trust fund bonds?? I’m shocked! Shocked!! ;-)
    “in which case what we’ve done is lock the federal government in the future into a position of less flexibility in figuring how to make disbursements to retirees. In that case, the plan would not just be an accounting gimmick, but would introduce an added liability for the government to be disbursing more green dollars to Social Security recipients at some date in the future.”
    Here’s the point: The one and only thing “DeMint” does is make the commitment to pay off on the SS trust fund bonds real, instead of mere political posturing.
    This can create an “added liability” only if Congress was never intending on paying on the bonds. And be a problem only for people who don’t intent to pay them off.
    Democratic squealing about this is revealing… For others to want to reserve the right not to pay them off, considering the size of the budget crunch coming 2030, is more reasonable.
    But from either side, anyone who doesn’t want to pay off the bonds should explain what they intend to do to reduce the cost of this program *now*.
    The old game of “we promise to pay everything, absolutely everything! while reserving the right to decide later not to pay it” is dishonest — and the delay it is used to create in putting off decisions only makes the coming day of decision worse.
    The problem isn’t in DeMint, it’s in the *status quo*. Killing DeMint is killing the messenger.
    Will killing the messenger and effectively locking in the problem into the status quo by rolling it over until 2016 be a whole lot better? Methinks it will merely be politically more convenient in the meantime.

  6. pgl

    Voxbaby (Andrew Samwick) pointed out your blog in his recent discussion of oil prices – and Andrew is right about this being the place to go for energy related economics! A belated thanks for mentioning my discussion of the Hunter and Kerpen discussion. Later, Kerpen had something else on the DeMint proposal et al. – which prompted another Angrybear post.

  7. Boonton

    “I wasn’t saying that Social Security is an IOU, Jack. I’m saying that what are carried on the government’s books as assets of the Social Security Trust Fund represent an IOU from the federal government to the federal government, and as such, they are not true assets by any reasonable definition,”
    *******
    ****
    **
    *
    What is missed about the SS surplus is that it does provide a real return by reducing the number of green dollars borrowed today. Let’s take your example where Congress pretends it is borrowing $256B more than it really did. Well the reality is that Congress did borrow $256B less than it would have if Social Security were made revenue neutral (in other words SS taxes decreased so that there would be no surplus or deficit in the SS fund).
    At 4% that represents a savings of $10.24B per year in interest costs give or take. The only way to get around t his is to pretend that if Congress had began the year by lowering SS taxes by $256B it would have likewise cut $256B from spending. Considering the history of the Bush tax cuts this is pretty hard to swallow.

  8. terry

    I HEARD A SOUND BITE ON THE RADIO WITHIN THE PAST WEEK TO THE EFFECT THAT OUR STATE DEPARTMENT IS/HAS BEEN IN NEGOTIATION WITH THE GOVERNMENT OF MEXICO ABOUT U.S. SOCIAL SECURITY.
    FOR MEXICAN CITIZENS? LEGALS? ILLEGALS?
    I KNOW NOT. CAN ANYBODY CONFIRM, DENY, CLARIFY?.

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