Wednesday, March 30, 2005
What's the fallacy? You might hear it in various forms:
* Trust Funds aren't real!
* Just a bunch of empty I.O.U.s!
* It's the left hand lending money to the right hand!
* The government has already spent that money!
* No marketable assets!
What's the reality?
Well, first, a quick reminder on the operations of Social Security. The SSA collects, say $600B in payroll taxes and disburses $500B in benefits. Since there is excess revenue, the SSA is required, by law, to loan that money to the Federal government (i.e. buy Treasury Bonds).
So are the Trust Funds real?
Well, not in the sense that Fort Knox is real. You probably can't open up any secret vault and find stacks of money, or even I.O.U.s. But I might ask the same question about your pension fund. It's real enough because, if you were to pursue legal action, a judge would force the holder of your assets to cough up the money. Although I'm not sure who would be doing the suing here, I think that it can be said that the Trust Funds have the same degree of reality as any other fund.
Are they just a bunch of I.O.U.s, then?
Well, yes. As in all cases, when the Federal Government (or anyone else) issues a bond, it is nothing more than a promise to pay in the future. If you look through Table VI.A2.—"Historical Operations of the OASI Trust Fund, Calendar Years 1937-2004" of the 2005 Trustees Report, you will notice that the Federal Government has been making good on these I.O.U.s, leading to the collection of 10s of millions of dollars in interest income per year over the last 5-10 years.
But isn't just money moving from one department to another?
Well, yes. But the same could be said for any fund within the government. Take, for example, emergency relief funding. Some amount of money is allocated each year for states, when they declare a state of emergency, as poor Florida had to last Fall. The agency that collects the money (the Treasury) allocated that money to the agency that spends it (FEMA, I think, but I don't honestly know). And spend it they did.
What's the difference between that the Trust Fund? Duration. We don't have the same confidence in the Trust Fund because we don't expect to see disbursements for another 12-15 years or so. That's a valid concern, but I'll try to hit that in a separate post.
But the government has already spent that money!
This is my favorite fallacy. Take a look at a bank. First I deposit $1,000 with Bank, expecting them to hold it for a while. They then turn around and lend $500 to you, which you immediately spend on oranges. Where's my $500? It has been spent. Why is it legal for banks to operate this way? Because they collect a lot of deposits from folks like me and they know that we won't all need it back at the same time. They hold some amount in reserve for when we do (fractional reserving) and the rest they loan out. They have converted one kind of asset (my cash) into another kind of asset (a promise, from you, to pay them back).
How is this like the SSA? They lend everything they don't need to the Feds. The Feds spending it is just like you buying oranges. In both cases, the asset still exists, but now it is a promise to pay in the future. You might feel that the Feds have more leeway not to pay the money back (again, the same valid concern which I will try to hit another day) but the assets are still equivalent.
So, do you mean to say that the Trust Fund really does contain marketable assets?
I'm not sure. That should have been the conclusion of this post but for one thing - I'm not sure that the SSA has the legal right to sell those T-Bonds. They don't really want to, as they will probably be needing them in a few year, but I think that, even if China offered to buy them at a handsome profit, the SSA wouldn't have the right to sell them, which, technically, means that they are not marketable. Otherwise, I would have thought them to be just as marketable as the T-Bonds I used to buy when I first graduated from college. I think that this statement is actually true, but irrelevant, as what keeps the assets from being marketable is law, not value.
So what's the bottom line?
Not only are Trust Funds real enough for the purpose of contributing the welfare of individuals receiving SS benefits, but they are not even theoretical. In 1983, expenditures were greater than income, so the SSA dipped into the Trust Fund and coughed up $2.4B (see the same table referenced above). Nothing has changed in the Trust Funds operations to make the Trust Funds any less real, except that the amount of money we will be looking for from the Trust Fund will be much larger in the future.
This is an important point, but the subject for some other post.
As always, thanks for reading.
Tuesday, March 29, 2005
Is Social Security Insurance?
I have recently heard debates as to whether or not
Social Security is insurance. I suppose that one can
always argue about the definition of unique programs,
like SS, but this one seems pretty clear to me.
I imagine that nobody would argue about disability or
survivor benefits from SS, but I would argue that even
retirment benefits constitute insurance.
Insuramce is a vehicle one buys to transfer risk. For
example, when you buy auto insurance, you transfer
some of the financial risk associated with hitting
others (unintentionally) with you car. The risk that
the SSA takes on is the risk that you will outlive
your ability to support yourself by working. It is
social insurance because the premium, social security
taxes, are related to income.
Of what import is this? When one considers the return
on SS taxes, it is necessary to consider the value of
the risk transferred, risk which has value regardless
of whether it comes to pass.
As always, thanks for reading.
Monday, March 28, 2005
A truly modest proposal
First, 2 pieces of background:
* Currently, collected revenue from social security taxes exceeds payment of social security benefits
* That excess is lent to the government (i.e. the Social Security Administration buys U. S. Treasury bonds)
My proposal would be to allow the SSA to use this excess revenue to invest in a vast portfolio of stocks instead. This portfolio would not be imputed to individuals (i.e. there will be no Individual Retirement Accounts) but the dividends and capital gains would be used to fund future SS payments.
What does this achieve?
Stocks (~8%+) will produce a higher return than Treasury bonds (~5%). That might not sound like a lot, but by itself, this change would likely push the expected demise of the Social Security Trust Funds by quite a few years.
What about ownership?
This doesn't create any ownership, either through allocating funds to individuals, or enabling them to pass assets on in their wills. In a later post, I will attempt to say I don't favor such ownership.
Do we have to borrow to do this?
No. There exists the possibility that this won't close the funding gap, in which case borrowing, increasing taxes or reducing benefits still looms large as a possibility.
Aren't stocks more risky?
Yes. That's why the return on investment is higher. On the other hand, this plan would use the stocks to fund retirees decades from now (and should probably convert stocks to less risky assets as the need to use them draws nearer). While stocks are much more risky on a short-time horizon, they are less risky over a span of decades.
What other problems need to be addressed in this proposal?
There are plenty:
* Who chooses the portfolio (technocrats with Congressional oversight)
* Who sells the stocks (good question)
* Isn't there potential for fraudulent behavior (you bet)
I don't pretend that this is a fully fleshed out plan -- I just want my mythical readers to have a sense of where I am headed as travel.
As always, thanks for reading.
Sunday, March 27, 2005
If I were about to be shot and told that I could only utter 3 more sentences about Social Security, they would be as follows:
a) The whole in medicare is far more serious than the whole in Social Security.
b) We really ought to do something about Social Security.
c) What the U.S. needs now is proposed details, not ideology or ambiguity.
Over the course of this blog, my intention is to
1) Expand on the sentences above
2) Propose a plan
3) Touch on current events as they pertain to social security
4) Attempt to dispel false and non-truish statements that I often hear about the current system.
In the interest of not being accused of [c] above, I will try to lay out a little detail which I think would be beneficial in my next post.
Thanks for reading.