How Social Security Works and How it Doesn’t

Friend and once frequent interlocutor A.I. left a comment to my last post that I think I should respond to here. A.I. says this:

You know KB, statements like the following make it difficult to engage in civil discourse:

"Our great pension program, social security, which we have pillaged for decades, is now going into the red."

You ignore the commission formed in the 80's to address long-term Social Security solvency. It was obvious then that the program would need to build up reserves to remain solvent when baby boomers began retiring. So reserves of some 2.5 trillion dollars were built up and invested in a special series of U.S. treasuries. You say the system is going into the "red" when in fact it is doing what was planned for years ago, it's drawing on reserves.

A.I.: I know of no standard of civility that requires me to believe in imaginary things like trillions of dollars held in reserve that can be drawn upon to finance social security, or leprechauns, or the survival of Elvis. I think it is perfectly civil of me to agree rather with the Social Security Trustees in their 2009 annual report. From CNN Money, here is a quote:

Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

So those reserves you profess faith in aren't assets at all. What are they?

The matter is more clearly stated in Trust Fund FAQs, a document produced by the Social Security Administration. Here are a couple of FAQs, with the answers:

What happens to the taxes that go into the trust funds?

Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.

If all the income is invested, how do benefits get paid each month?

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.

Let's unpack that. Social Security taxes paid into the system are "invested" in "special-issue" securities. Special issue securities are not sold to the public, but are held solely by the trust fund. What do these securities amount to? They are nothing more than IOU notes from the government to itself. They do not represent any "reserve" of money that can be redeemed in the future. They are liabilities rather than assets.

What happens to the money then? It goes into the general fund of the Treasury, along with all the other money Uncle Sam pays his bills with. Unless Sam is running a surplus, all that money gets spent on all the things government spends money on.

One of the things the Federal Government spends money on is Social Security payments. Money is taken back out of the Treasury, and some of the IOU's are erased. But this is just an accounting device.

Social Security is a pay as you go system. That means that money paid into the system goes out immediately as benefits, unless there is a surplus as there has been for several decades. In that case, the surplus money is, as said above, "indistinguishable from other cash in the general fund." It isn't in any sense held in reserve. It is just spent. That's what I meant when I said we have been pillaging the Social Security system for decades. I may have been crude in my choice of words, but I wasn't wrong, was I?

If you want to save Social Security, you have to recognize what it is and why it is going belly up. On one thing we agree. The Social Security system is doing what was planned for years ago. Insolvency is not what is going to happen when the plan fails. That was the plan.

Comments

[Donald Pay]

Why do you always quote incompletely? If you're going to use the SS website, why not also quote the part where they speake about the "IOUs?"

The following (a portion of the FAQs from the Social Security site that deals with the IOU) contradicts your interpretation:

"As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.
Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 25 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds' securities will need to be redeemed on a large scale prior to maturity."

You really do need to do some research. There are reports of the SS Trustees that might be of use. It's hard for me to understand why people are misrepresenting these facts. If it's ignorance, do some minimal research. If it's on purpose, shame on you.

[George Mason]

As usual Donald you are the one who needs to do the research. The government is buying bonds from itself, or so it says. This would be akin to your bank buying its' own CDs and expecting to stay solvent. What has caused the problems with Social Security are lack of foresight at inception, an increasing pool of recipients with a decreasing ratio of providers, and the government chronically increasing benefits and eligibility. People capable of understanding the demography as well as the multiplication and division have been warning that the system is unsustainable since the 1970's. The only surprise is that it has happened sooner than originally estimated. The future of SS is that it will turn us into the Wiemar Republic or be transformed into another welfare/transfer of payments program that will punish the successful and frugal and benefit the profligate.

[William]

Donald,

"full faith and credit of the U. S. Government" is a declining asset...

[Donald Pay]

The only real threats to Social Security are the policies of Republicans.

[joseph]

What is the "full faith and credit of the U.S. government" when it just posted a $1.3 trillion budget deficit and reported a decline in income tax revenue due to high jobless numbers? When the outflow of Social Security exceeds the inflow of revenue we understand this as a Ponzi scheme about to collapse.

[William]

Donald, here's a link that might be valuable to you,
http://www.amazon.com/Economics-Dummies-Sean-Flynn/product-reviews/0764557262/ref=cm_cr_dp_all_summary?ie=UTF8&showViewpoints=1&sortBy=bySubmissionDateDescending

[KB]

Donald: I quote accurately and competently given the question I was addressing. The full faith and credit of the United States does indeed back up those IOUs that make up the Trust Fund. That doesn't make those IOUs an asset that can be redeemed in order to make more money available to pay benefits.

[A.I.]

So KB, since you don't believe in "imaginary things like trillions of dollars held in reserve that can be drawn upon to finance social security" since they're only IOU's backed by that worthless concept phrased "the full faith and credit of the United States of America", I have a deal for you. George, Joseph and William are invited to participate too.

You may forward the proper routing numbers, etc. for me to route all income and savings you might have to accounts held by me. As dollar-denominated assets are worthless anyway--being backed by that full faith and credit nonsense, I sure you won't mind. Oh, and you may want to forward a little extra as I suppose my bank will want to charge a storage fee to keep all those worthless chits.

[duggersd]

So, if I borrow $1000 from my savings account and promise to pay myself back with interest in a year and spend that money on something else and do not have $1000 let alone the interest to pay myself back, how much money do I have?

[KB]

A.I.: I am with dugger on this one. How much the full faith and credit of the U.S. is worth in light of current fiscal realities is one question, but it is not the issue you took me to task for. The question, once again, is whether the Federal Government has in any sense been putting money paid into the social security system aside, and can now draw on it to pay back benefits. It hasn't and it can't.

[Tom M]

The SSA when talking about redeeming the "special issue" bonds does not say where that money actually comes from.

They basically say backed by the FOOL faith and trust in the government.

We need a full audit of the Federal reserve.

[Jimi]

Donald and A.I.

The problem here is that you guys are not incorrect, but just in denial and ignorant to reality.

If the government is using the "surplus" in the general fund then, when it goes to redeem the "Securities" the budget deficit is going up. The only way to maintain the budget deficit, or bring it down is to raise taxes or cut spending somewhere else. The reality is that in the future the Social Security System will be the driving force of the Budget Deficit, and so producers will atke a much larger hit or double taxation to keep the the ponzi/wealth redistribution scheme alive. This process will be very inefficient and in the long run, More people will be hurt by it than helped. This is America and we can do much better.

The other problem here is when we talk about S.S., we need to seperate the solvency of each seperate part. Retirement, Survivors, and Disablity.