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Sunday, February 13, 2011

The Social Security Trust Fund

In another part of the Universe, I was directed to this publication from the CBO, dated 2002.

I find this document to be confusing, and I wonder what it's point is.  Here is the opening section, set off in a box in the original.

By law, the Social Security program is treated as an "off-budget" entity, and its financial figures are displayed separately from the rest of the budget. The separate display, along with the use of trust funds as an accounting device, is a means of distinguishing the program's finances from those of other government activities. However, the distinction can be confusing when it leads people to think of Social Security as an independent financial entity. Social Security is a federal program, and as such, all of its taxes are received by and its outlays dispensed from the U.S. Treasury. 

Focusing on an accumulating balance in the Social Security trust funds can also be misleading. The only economically significant way that the government has a surplus is if there is a unified budget surplus--when total receipts are greater than total outlays. Although separate taxes are collected for Social Security, the money left over after benefits are paid is used to fund other government programs or to pay down the debt held by the public. Moreover, in the future, those separate tax receipts will become insufficient to maintain the program once the post-World War II baby-boom generation begins drawing federal entitlement benefits. Social Security and other entitlement programs will then be dependent on the federal government to cover their costs--at the same time that the government must pay for its many other functions. 

Regardless of how any federal program is financed and accounted for--and whether it is presented as on- or off-budget--a full understanding of the government's looming fiscal strains and the potential economic impact of its fiscal condition requires that all government functions be considered together. It is the federal government's total claims on the nation's resources that affect the economy—not the individual components that make up those claims.

This is incoherent and dishonest.  By law, the SS program is off-budget, with it's own set of financial figures.  The Trust Fund is not "an accounting device."  It holds actual bonds issued by the Treasury Department.   But paragraph 2 insists that SS funds are co-mingled with the rest of the federal budget.  Further, at some unstated future date, the pay-as-you-go aspect of the SS program will not be sufficient to cover outlays.  At that point, the program will have to dip into accumulated funds.  Alas, the government will have already spent them.  Therefore, to pay fund obligations, the government will have to cut other social programs.  The third paragraph indicates that all government programs, must be considered together - that is, we must disregard the fact that one program is self funded, while none of the others are.
I call bullshit!   First off, the separate accounting is mandated by law.  I don't see any way around that.  In fact, I recently examined the condition of the fund in considerable detail.  Data from SS online - a government website.  The fund has an actual balance, is enumerated in U.S. dollars, and its size grows every year.   Somebody in government seems to think it's real.

Also,  "By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.Source.

So, the funds are not in fact commingled, they are loaned to the Treasury in the form of a dedicated bond issue.  This statement (from the quote above) while not an outright lie, is profoundly misleading: "Social Security and other entitlement programs will then be dependent on the federal government to cover their costs . . ."   Sure - in the same sense that any creditor depends on the debtor to pay up.

The government has a debt to the fund that is just as binding as it's debt to China or any other creditor.  Further, the article takes no notice of the facts that other programs besides entitlements - defense, frex - could potentially be cut.  Alternatively, taxes could be raised (horrors) from the lowest levels since the 20's.  So, other options exist.

Later, the article states:

Social Security as a Separate Display and as Part of the Totals

In summary tables of the budget prepared by the Congressional Budget Office and the Office of Management and Budget, Social Security's trust fund income and outlays (and the net transactions of the Postal Service) are routinely shown both separately and as part of the total budget. Those various displays, as well as the concepts of "off-budget" and "on-budget," are often confusing. Few people can understand how Social Security can be off-budget and part of the budget at the same time. To reflect it as off-budget is to suggest that it is an independent financial entity, which it is not. The money received for and dispensed by the program flows to and from the federal Treasury, as it does for all other federal programs. More important, Social Security is a federal program by design: participation in it is mandated by federal law; all Social Security tax and benefit levels are set by federal law; and only the Congress and the President can alter the program through legislation

Yes, the off/on budget dichotomy is confusing, and this paragraph is intended to make it more so. Let's zero in on this key element:   

"To reflect it as off-budget is to suggest that it is an independent financial entity, which it is not. The money received for and dispensed by the program flows to and from the federal Treasury, as it does for all other federal programs."

The point seems to be that since the SS fund money flows through the treasury, it is therefore no different from, for example, the defense budget.  Funds flow into and out of the Treasury.  Big freaquin' whoop!  The intent of this message is to negate the self-funded aspect of the program, and confuse readers into believing that the fund does not exist - as if the Treasury cannot walk and chew gum at the same time.

Also from the above block quote:

"More important, Social Security is a federal program by design: participation in it is mandated by federal law; all Social Security tax and benefit levels are set by federal law"

This is certainly true, and in some context it is important.  But not in the context of this presentation, where it is profoundly irrelevant.

But wait -- there's more:

Moreover, having Social Security appear in this fashion, as if it was a separate financial entity, may encourage others to pursue the same treatment for other government functions, particularly those accounted for through trust funds--as shown by recent efforts to take both the Medicare and transportation trust funds off-budget. Such a proliferation of off-budget programs could complicate the public's understanding of the government's overall financial condition.

Oh, for God's sake - a slippery slope argument.  Give me a freaquin' break.

In the context of long-range fiscal policy, setting Social Security aside from the rest of the budget can obscure the strain that the program may eventually create. Today, the focus of policymakers is on the surplus of Social Security taxes over outlays and how to protect it. That excess of what comes into the Treasury over what goes out, however, is expected to be short-lived as the benefit rolls swell and costs escalate rapidly and permanently with the retirement of the post-World War II baby boomers and the aging of the population. Under the Social Security Board of Trustees' projections, the excess disappears in 2017 and is replaced by a negative cash flow that is uninterrupted until 2041

These dates have been either invalidated or revised since 2002.  Current projections, based on a variety of assumption sets, show the fund growing through 2019, at least Now one hears about the problems STARTING around 2040.  But that is a detail.  The problem definition, irrespective of effective dates, is potential negative cash flow from the fund.  Granting, for the nonce, that that is a problem, what is the solution?  Right wingers want to cut the program in a variety of ways.  But, for a self-funding program, it also makes sense to look at the revenue side.  That flaming commie Reagan wasn't afraid to take that on.  Here's a suggestion.  Raise the ceiling. Raise it by whatever amount is necessary.  Throw it off completely, if that's what it takes. 

The publication concludes, with interpolated commentary:

Budget and Policy Linkages

To focus policy on the segregation of Social Security and other trust funds ignores the significant linkages that exist between them and the rest of the budget. 

This is the crux of the argument.  The SS Program does not exist in vacuum.   OK - but what of it?  This statement dramatically overemphasizes the real importance of the linkages, and most specifically - and, in my opinion, willfully - ignores the self-funding aspect of the SS program, so blithely downplayed and denigrated  throughout this presentation.

The level of Social Security benefits directly affects spending under the means-tested Supplemental Security Income and Food Stamp programs. Payroll taxes on employers reduce income tax collections. The earned income tax credit, which lowers income taxes, was motivated by the desire to reduce the impact of payroll taxes on lower-income workers. 

This is both fatuous and irrelevant, and at last gives a clue of what the point (which we will come to) really is.  Everything listed here is the result of a policy decision.  Therefore, it could be addressed by a policy decision. To suggest that SS funding is a real-life cause for changes in the funding or pay-out of other programs is to ignore all the other determinant variables that come into play for those programs, as well as the fact that any of this could be addressed at any time by a policy change.    

And Social Security and Medicare, by their size, are poised to crowd out other government spending and limit the availability of funding for other government functions.

This alarmist projection restates the idea of the second paragraph which is really very little better than a lie.  And now the nonce is over, and I will withdraw granting that this is a problem.  The Social Security Trust fund was specifically established in 1983 - when the entire program was overhauled and placed on a sound long-term actuarial footing - so that there would be money available to pay the boomer generation.  Drawing down the fund at some future date is the intent, and an example of a program working according to plan.  The fund is real, it's assets are real, it is self-financed by a dedicated tax (or premium payment, if you are so inclined.)  It has absolutely no effect on the funding ability for other government programs. 

If one assumed that the benefit commitments now embedded in current law were to be fully met, Social Security and Medicare expenditures together would increase as a percentage of gross domestic product (GDP) from 7 percent today to 12 percent in 2040 and 15 percent in 2075. 

What a red herring!  The size of the program grows relative to GDP because the percentage of an aging population receiving benefits increases.  This just falls out of the math.  And so what?  Is there some optimized percentage of GDP that we should shoot for?  Does the relationship to GDP even mean anything important?  Does it suggest policy implications?  Should we start eating our grandparents?  But most insidiously dishonest is this: ". . . Social Security and Medicare expenditures together . . ."  To paint a picture worse than reality, the authors drag in Medicare - a separate program, with its own set of problems - including underfunding.  What can we conclude from this other than an intent to mislead in a particularly alarming way?

However, the separate revenues for the programs would remain at around 7 percent of GDP. Absent a policy change, the money to cover the difference would have to come from other government receipts or borrowing.

Well, then - hey - how about a policy change?  For Medicare, that is.  There is no compelling reason to believe that SS actually needs one.  And once again, if one ever is needed, simply raise the ceiling.  After all, rich people get SS benefits, too.

The future of Social Security and Medicare depends on the capacity of the federal government to cover their costs while paying for its many other functions.

Again, the gratuitous and blatantly dishonest conflation of SS and Medicare.  Beyond that, if this statement has any meaning at all, it is as an obvious and trivial tautology.  Either revenues cover expenses, or there is a deficit. I remember when Cheney said deficits don't matter.  Funny how everything changed when a Democrat took residence in the White House.

Viewing them and other federal programs as separate from the rest of the government's finances will only obscure the looming fiscal strains.

No - viewing SS the way this article presents it obscures the fact that as a self-funded program with a current large and growing surplus, it is in no way part of the problem.  The looming financial strains are real, and must be addressed.  But SS is not part of the problem.  Nor should it be part of the solution.

So, what is the point of this article?  It seems to me that it was constructed to confuse, mislead, and deliberately distort both the current state and future state of the SS program.  The question is:  Why would anyone want to do that?  Since this presentation is neither honest not straight-forward, there must be an agenda.  Keeping in mind that this thing came out in 2002, it seems likely to me that the agenda was to pave the way for Bush's desire to eliminate the SS program via privatization.

Do you have a different interpretation of this article, or a different idea of the agenda that fits this information?  I'd love to see it.


Jerry Critter said...

Is the money "borrowed" from SS included as part of the total US debt? In reality it is, but does it show up in the debt numbers?

Jazzbumpa said...

Jerry -

Good question.

I really don't know.

It's an asset to the fund, and a liability to the Treasury. Maybe that makes it a wash. (?!?)


Jerry Critter said...

The reason I ask is this, when SS starts to draw from the money "loaned" to the government, if the government is still running a deficit, then they will have to borrow the money to pay what is owed to SS.

If the SS owed money is already accounted for in the debt, the debt total will not change. The only change is who is owed the money.

If the money is not accounted for in the debt, the debt will increase, lending credence to the argument that SS is increasing the debt.

Steve Roth said...

The trust fund is arithmetically meaningless. It just doesn't matter whether the taxes flow through the general fund or through the trust fund. Same inflows and outflows either way.

But rhetorically and politically, it is far from meaningless. Without the trust fund, SS is a transfer program rather than a savings account.

Personally I'm fine with that. But others decidedly aren't.

Jazzbumpa said...

It all comes down to word games, I guess. But the point is - contra the article I'm attempting to take down here - SS is not a contributor to current deficits, and does not present long term problems that can't be solved very easily.

I'm fine with SS as a transfer program, too. The problem in this country now is ignorant nativist right wing populism - IMHO the most destructive force possible in an actual democracy.

We are living in a very crucial moment. Right wingers will take us back to the dark ages - if we will allow it.


Jerry Critter said...

If anything, SS either has no impact on the current deficit or it has helped to significantly reduce the current deficit by the amount of money that has been "borrowed" from it.

Jazzbumpa said...

Jerry -

I think reduce the current deficit is right.