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.