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Unicorns in Green Eyeshades


The Social Secuity Trust Funds are one of many topics where political factions talk past one another. Some say that there is no money in the funds, that the FedGov has spent them on other things. The response insists that the Trust Funds are invested in Federal securities, as required by law. It would be silly, says the responding faction, to leave piles of cash under a mattress in Washington, earning no interest. And to invest the Trust Funds in the private markets would represent a higher risk and create incentives for Wall Street to rip off the public, since the FedGov still has to redeem the investment even if the its market value goes down.

Turns out the Social Security Administration has a pretty good FAQ on the Trust Funds:

The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.

The funds are a legal and accounting mechanism to relieve Congress of having to approve every benefit payment. This is why Social Security is called “non-disrectionary” spending. Once the program terms are in place the SSA is empowered and obligated to fulfill its commitments. Congress may change the terms of the program, but it does not directly spend the money.

The money received from workers and invested in FedGov securities has, however, been spent by the FedGov on other stuff. The FedGov doesn’t take the SSA’s money and hide it under a different mattress in Washington. To pay benefits, the SSA redeems some of its invested money, asking the FedGov for cash plus interest:

Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When "special-issue" securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.

So where does the FedGov get the cash to pay back the SSA? It robs Peter to Pay Paul:

The resources to redeem a trust fund’s government securities—and thereby pay for benefits or other spending—in some future year must be generated through taxes, income from other government sources, or borrowing from the public in that year. Trust funds have an important legal meaning in that their balances are a measure of the amounts that the government has the legal authority to spend for certain purposes under current law, but they have little relevance in an economic or budgetary sense.

Although there is money in the trust fund, invested in the FedGov, the FedGov itself doesn’t have any reserves to cover its obligations to the SSA. The Social Security Administration is investing a essentially bankrupt entity.

The factions who talk past one another can both be correct because the legislation controlling Social Security is not grounded in normal economics or generally accepted accounting principles.

Finance devolves into mathematical abstractions. Taken alone, the SSA equations balance. But the SSA does not and cannot exist alone. It does have to store its assets somewhere outside, not under its mattress.

The problem of deficit financing is not limited to just governments. Most of the past three decades of global economic growth has been built on the same kind of ethereal promises that fund the SSA. Putting SSA’s funds into Wall Street would still have Peter paying Paul. And it would create incentives to corruption, just as some fear.

Future consumption cannot be borrowed forever. Tomorrow or next year, somebody has to make the stuff that retirees live on. And the producers will need to provide for themselves, too. Debt is faith. Men cannot survive on faith alone.

The WWII debt was manageable because we entered into a period of prolonged growth due to international factors and demographic factors, and because the WWII debt was not generated by structural excesses. Our current debt is now mostly going to rise due to structural excesses. The recession "bump" is over - now social spending takes over. Needless to say the alternative scenario is not sustainable and will generate an epic crash down the road.

Somebody has to fire the unicorns in the accounting department. Establishing and enforcing accounting rules that apply to all investments equally would help eliminate abstract financing. But the system as currently conceived cannot operate without the special rules that isolate it from the difficult choices of real economics.

H/T: Maxed Out Mama