Wednesday, March 30, 2005



I read another editorial by someone from the "Empty Promise" party today. The writer was 15. That doesn't speak well for my party -- the "Of Course the Trust Funds Serve an Valid Financial Role" party. I was actually going to post on the opposite fallacy first (the "Tell that to China" fallacy) but if 15 year olds are talking about "Empty Promise" that must mean it's more cool.

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.

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