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pudge's Journal: Social Security "Trust" Fund 49

Journal by pudge

The way social security works, essentially, is that we pay for it from our payroll taxes. Right now we pay more than is needed for benefits, and the extra goes into a "trust fund." Most everyone agrees -- for now -- on the forecast that around 2018, social security will be sending out more money than it takes in -- this requiring the use of the trust fund to cover the difference -- and that sometime after 2040 the trust fund will have no more money.

Republicans say this constitutes a crisis, because we will start to deplete our resources in 2018. Democrats say it is not a crisis, because we have a long time to fix it.

But the truth is that it's worse than that, and it is a crisis.

We have no trust fund, in the common use of the word. It's a filing cabinet with a folder full of IOUs. There's no actual money there, because the government borrowed that money to use for other purposes. In 2018, we will need to raise revenue to pay off those IOUs in order to pay for social security benefits. So it's not in 40 years that we begin to have to pay more money we don't have for social security, it's in 10 or so.

I don't know what the solution is, but don't let people tell you we have the money to pay for benefits once the revenue drops beneath the expenditures. It isn't true.

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Social Security "Trust" Fund

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  • by sulli (195030) * on Tuesday January 25, 2005 @01:00AM (#11465024) Journal
    Do you think the insitutional investors who buy them every day consider them as worthless as the Republicans do for their current political goals?
    • You say they are Treasury Bonds as if this changes anything I said. Why?
      • Either Treasury bonds are government debt backed by the full faith and credit of the US, or they are not. If not, we have a much more serious problem on our hands. If so, then the trust fund retains its value and the bonds cannot be excluded from calculations of it.
        • Either Treasury bonds are government debt backed by the full faith and credit of the US, or they are not. If not, we have a much more serious problem on our hands. If so, then the trust fund retains its value and the bonds cannot be excluded from calculations of it.

          Unfortunately, it's slightly more complex than that. Currently, there are Treasury bonds in the bond market, which have a value determined by the supply and demand for those bonds in the usual way. These are already accounted for in every way.

          • Try redeeming them by transferring them to the market, you're flooding the market and shifting the price dramatically - in economic terms, you've just exploded the deficit.

            No no no. That's not how it works. The Trust Fund buys t-bills, bonds, notes, and the so-called 'special issues' from the US Govt. The special issues make up the overwhelming majority of the mix, these can never be sold on the open market and therefore their value is not influenced by market forces.

            In terms of the economic effec

            • The special issues make up the overwhelming majority of the mix, these can never be sold on the open market and therefore their value is not influenced by market forces.

              Which means they can never be converted into actual money except by taking real money out of another part of the federal government, thus increasing the deficit by that amount. Unless you're going to start paying SS benefits in special issues which cannot be used (and thus have no intrinsic value), you have to convert them into actual mone

              • People should stop dodging the issue by calling them by euphemisms such as "special issues".

                Why is it dodging the issue to use the term that the SSA and the Treasury use?

                Only to those who fail to think about the economics of it. Economically, they are not currently part of the national debt - yet. They are just an internal accounting fiction, nothing more.

                I think you're missing the point - it's the federal government that has been wildly spending all of its revenue, and then quite a bit more, for th

                • I think you're missing the point - it's the federal government that has been wildly spending all of its revenue, and then quite a bit more, for the past 20 years.

                  Rather more than 20 years, but you're right about federal government spending.

                  Investments by the Social Security Trust Fund are a huge portion of that "quite a bit more", so huge that the fed owes it $1.7 Trillion -- but nobody is talking about the other $6 trillion the fed owes.

                  There has actually been a great deal of attention paid to it: ha

                  • Rather more than 20 years, but you're right about federal government spending.

                    Sure the fed has been running deficits forever. The national debt was $136B in 1943 - during WWII - it took the next 38 years to multiply that by 7 and we broke $1 trillion in '81 ... now we're at 2004, so only 23 years to go up 7x. I picked 20 years because that's when the majority of the damage was done.

                    Do you believe an explosion in the effective debt from $6 to $7.7 trillion

                    The current national debt [treas.gov] is 7.6 trillion

                    • The current national debt is 7.6 trillion - that includes the money owed to the trust fund.

                      *sigh* Yes. That's the official number on paper, which has remarkably little economic significance. Now look at the amount of money actually in the real bond market, which is more like $6tn. In terms of the economic significance, there is a very big difference between owing $6tn to other people and another $1.6tn to yourself and owing $7.6tn to other people, as I have already explained.

                      It's not an economic fiction

                    • Do you understand yet that money "owed" to yourself is very different in terms of your credit rating than money owed to other people?

                      Are you seriously saying that if the fed stopped redeeming special issue bonds that the bond market would continue to have any faith at all in it? Honestly - think about what you're saying. Yes, it's an internal debt - but people aren't stupid.

                    • Are you seriously saying that if the fed stopped redeeming special issue bonds that the bond market would continue to have any faith at all in it?

                      No, which is why I didn't say anything of the sort. I've been trying to explain to you that one part of an entity borrowing money from another part of the same entity has a very different effect on that entity than the entity borrowing externally, but it doesn't seem to be sinking in.

                      Yes, it's an internal debt - but people aren't stupid.

                      Sadly, they obviously

                    • No, which is why I didn't say anything of the sort. I've been trying to explain to you that one part of an entity borrowing money from another part of the same entity has a very different effect on that entity than the entity borrowing externally, but it doesn't seem to be sinking in.

                      I absolutely do understand what you're saying - I'm just not concerned with the effect that borrowing money from the SSA has on the rest of the govt. I know how the money flows, and while it might all be a big accounting tri

                    • The use of the term IOU implies that the benefits won't be paid because the bonds won't be redeemable or the amount paid at redemption will not be the full amount with the specified interest - and that's simply untrue.

                      But that is not what the term implies. That is only how you took it. I only meant it to imply the facts: that the government has borrowed from it and will need to repay it, and does not have the money to repay it, and will need to raise that money.
                • but nobody is talking about the other $6 trillion the fed owes.

                  Because there is no other big chunk within that $6 trillion that is coming due soon. I agree that this is just a part of the larger debt problem, but it wraps up a huge portion of that debt in one issue. Worse, it is -- if left unchanged -- only going to get a lot worse: unlike most of the rest of the debt, which only represents principal, interest, and future loans to pay for it all, SS represents the additional problem of further increased
            • these can never be sold on the open market and therefore their value is not influenced by market forces.

              But then doesn't that mean that the government is borowing from itself? That would be like me getting a mortgage for a house by borrowing money from myself and writing myself a nice big "I Owe You $130K to be paid by 2040".

              The money doesn't exist anywhere. If the SS trust were to buy foreign t-bills, then the money would be gone from the US. But since the money goes from one ledger to another in the
              • But then doesn't that mean that the government is borowing from itself?

                Of course it does - that's the law. The SSA requires that the Trust Fund be made up entirely of government backed securities. The money does not exist because it's money owed. When you buy a T-bill, you're loaning money to the government, they spend it and tell you that they'll pay it back at the maturity date. Same exact thing. Yes the right hand is borrowing from the left -- but they are different hands.

                That would be like me

                • I'd say that Social Security is in a "crisis" because supply side economics hasn't worked as expected/hoped/wished.

                  No, it is in crisis in 2018 only because the government decided to borrow from itself, with no real plan to pay it off. Supply-side economics made no promise of being able to pay off an infinite debt. There are limits to everything, and the most conservative people -- usually also the most ardent supply-siders -- have been opposed to things like unlimited government spending and borrowing f
        • But the point of whether they'll be *backed* isn't it.

          SS had this trust fund. A big wad o' cash.
          Our beloved gov't borrwed against that.
          Soon the trust fund will be depleted.

          So SS wants the $ to keep the trust fund up.
          Fine. Gov't needs to repay the bonds.

          Where's the $ going to come from to pay those bonds - essentially the $ we borrowed from SS, as Pudge says in the journal entry?

          It's gonna come from us - imho - in increased taxes. I don't see any other way to do it.

          Can anyone explain how borrowing again
          • I believe that at the time the trust was set up to be the most stable investment possible, which meant t-bills since the t-bills are backed by "the full faith of the US government" and have a fixed and guarenteed income.

            Of course, this led to the problem that once the t-bills were purchased, the gove now pretended it has access to all that ne wmoney so they spent it.

            jason
        • Huh? How does this change anything I said? All I said was the government has to raise revenue to pay for those IOUs. Are you saying this is not true? Because it is.
          • Of course the govt has to pay the bonds. And the govt will have a much harder time doing it if the privatization plan is successful. "Saving" the program by reducing its revenue is a dumb idea (Reagan did the opposite, raising payroll taxes, in 1983.)
            • And the govt will have a much harder time doing it if the privatization plan is successful.

              Why?

              It isn't the SSA that needs to repay the bonds. It is SSA that needs to be PAID. From the general treasury. I what way will privatization of (a portion of, at that) social security (which is "off budget") negatively impact the general government's (the part that needs to pay the IOUs) revenue stream?

              • Because some privitization means the fed has that much less comming in. This means that the income to spending ration would get worse, thought the future liability would decrease (because some amount of future paymenst were removed).

                jason
                • No, some privitization means that the SSA would have that much less coming in. (and that future obligations would likewiese decrease, but that is beside the point here.)

                  The federal government's general fund - the entity/account that needs to PAY the bonds held by the SSA - would not see a decrease in revenues.

                  There might (there isn't, but for the sake of arguement...) be a case to be made that some privitization would be bad for social security's long term solvency. This is not it, though.

                  Any decrease on f

            • "Saving" the program by reducing its revenue is a dumb idea

              While in the short term its unfunded liabilities will increase, in the long term they would drastically decrease. So yes, revenues would decrease, as would expenditures.

              The unanswered question is how to pay for the transition costs, which is not entirely dissimilar from the problem we will hit in 2018, except that it will cost a lot less to do it now than to put it off.
    • A slight difference you overlook with your question:
      1. Instutional investors: When the T-Bonds come due, the Gvt gives them their money.
      2. SSA: When the T-Bonds come due, the Gvt gives them their money.

      What? You say? No difference! The difference is the institutional investors DON'T CARE where the government gets the money. In the case of the SSA, the Gvt is paying itself. It matters mightily where it gets the money to do so.

  • Because even if you've got a damned good mutual fund, unless you're Warren Buffet, it probably underperforms social security(Hell you can't beat social security for ROI atm outside of being Gordon Gekko).

    If the Republicans are right about the economic forecast, then Social Security should be ok for another century or so. If the Democrats and Social Security itself is right, then we're going to start paying out of the trust(how's the defense budget btw? Oh... nicely bloated... good. Education? Ahh.. sip
    • Because even if you've got a damned good mutual fund, unless you're Warren Buffet, it probably underperforms social security

      Underperforms how? I've not seen any numbers that put SS ROI at anything above 3 percent, whereas almost any mutual fund will give you far better than that over a working lifetime. I think you're just making stuff up.

      If the Republicans are right about the economic forecast, then Social Security should be ok for another century or so.

      So you didn't read (or understand?) anything
      • I've not seen any numbers that put SS ROI at anything above 3 percent

        It's a bad way to look at it though. There is no return on investment for Social Security because taxes are not an investment. Internally the SSA is making about 8% per annum on its trust fund holdings, the S&P 500 edges that out iirc, but it's diffucult to find a fund that beats the S&P 500 year-to-year.

        Social Security needs reform badly - the tax is 6.2% (or 12.4% if you're self-employed) of your income from the first doll

        • It's a bad way to look at it though.

          Maybe. We don't know yet. I understand what you're saying, but we're talking about what the people get, and there are too many unanswered questions about what form these private accounts would be in for us to currently evaluate a comparison.

          For example, could I take out all the money when I retired? If I die, who gets the remaining money in my account?

          I know, the current SS problem is not a traditional financial investment or retirement fund, it's more like old age
          • For example, could I take out all the money when I retired? If I die, who gets the remaining money in my account

            It would seem to me to make sense and be very simple to just follow the distribution rules of tax-deferred retirement accounts like 401(k)s & IRAs. I guess I've been making some assumptions that they would be set up similarly--but it's probably unwise to just assume such things. You're right, at this point, who knows how they would actually be set up.

            My biggest fear in general is that eve

    • Because even if you've got a damned good mutual fund, unless you're Warren Buffet, it probably underperforms social security(Hell you can't beat social security for ROI atm outside of being Gordon Gekko).

      Yes, it sure does underperform. [libertyhaven.com] I'd hate to be in Galveston's position right now. I'm sure glad that in 1983 congress got in gear and closed that dangerous loophole.

  • In case anyone was curious - CPP (Canadian Pension Plan) is in a similarly rough boat here in Canada. It'll be interesting to see how the world looks in 30 years (Coal is in high demand again, elderly support issues, etc)

    The Employment Insurance surplus in Canada is massive - a few years ago, they were sitting on $30 billion CAD in the bank. It was growing and now they've cut back EI payments to around 2% (employee pays 2%, employer matches I believe) and raised CPP for obvious reasons.

    The only reason I
    • There's a HUGE difference between what you canadians did, and what we did in the US.

      We borrwed against that chunk of change we were sitting on.

      It seems the Canadians didn't.

      That's a huge, huge part of the US's problem. If the US Social Security trust fund sat intact, with any debt against it, it'd be an entirely different outlook for the US.
  • Back when the Social Security Act of 1935 [usconstitution.com] was started not as a "retirement plan" but as an assistance plan. The word "retire" does not appear at any location in the original text, nor does it hint that it is anything other than a mechanism for assistance. Furthermore the act was designed to provide grants to the states to be of assistance "as far as practicable under the conditions in such State".

    Now I'm not a politician (thank God for that) but it would seem that if taxes were gathered for a specific pu
    • You're coming along.

      That is all. ;->

    • Excellent points.

      One additional factor you may want to include is the reasons behind the 300% increase in price. Granted, some of it is coming from companies lining their pockets with profits, but a large chunk is coming from lawyers.

      Lawsuits that grind our government to a halt for trivial things like burning your thighs on hot coffee at McDonalds are worsened in the medical field. Its a high enough stress job, that is compounded by having to deal with lawsuits for whatever reason.

      Yes, I do believe the
  • As some of you may not know. THere is two programs that is closely associated with the SS Trust Fund.

    The common monikers amongst the receiptent community who sap the system for a SS payout. And its called:

    1. Gold Check (SSI)
    2. Green Check (SSA)

    Start with #2. Green check, or Social Security that we all thought we know about. I'm okay with this system... but read on...

    The Gold Check (Supplemental Security Income) is the biggest albatross around the SSI trust fund.

    Both programs are belitted and ridd
    • Family Value isn't always about the the goods, but the bad as well, too!

      The harsh reality:

      Since the days of yores, the head of the households have always taken harbor of the following:

      1. handicapped for life (all age)
      2. Unable to work (childrens of parents, parents of childrens)
      3. Senior citizens

      (Please, none of that Alaskan Inuit's fable of casting the demented elders out on ice-floes. It usually doesn't happen).

      Today, our society is about casting the family members out and leaving them in the han
  • I'm not a big fan of socialism, especially when we don't have a choice whether we want in or not. Let me decide how I want to invest my own money for the future.
  • The funny thing is that during the 80s it was the Democrats who thought SS reform was a good plank to have in their platform, claiming that the same 20-40 year "deadline" was a crisis, and it was the Republicans who somewhat poo-pooed drastic reform.

    My, how things have changed. Almost exact reversal of rhetoric from both sides.
    • The funny thing is that during the 80s it was the Democrats who thought SS reform was a good plank to have in their platform, claiming that the same 20-40 year "deadline" was a crisis, and it was the Republicans who somewhat poo-pooed drastic reform.

      Much more recent than that: Clinton was talking about that as recently as 1998, which rather wrong-footed one of his appointees pushing the new "no problem at all" party line in an interview a few days ago.

      My, how things have changed. Almost exact reversal o

  • is the one they least want to do - start calling in those IOUs. Put a plan in motion that will get every dime back into the trust account by 2018. Simple fix, but politically inconvenient.
    • That is no solution, no. It would be a good start, however.

      If we did that, then the Democrats would be correct, that the government in regards to Social Security is solvent until 2040-something, but we would still be facing indefinite massive deficits from sometime around that onward.
  • I don't know what to do about all of this either and I agree that the truth of the matter isn't being presented by either party. My gut feeling is that we're screwed. By "we" I mean anyone who is not at or quickly approaching retirement age.

    It doesn't appear that any of the proposals to "fix" things is going to make things better and some seem likely to make the worse.
  • ...is a problem that's not going to hit until 2040 a "crisis", but annual 400+ billion dollar deficits are not a crisis today?
    • by pudge (3605) *
      [why] is a problem that's not going to hit until 2040 a "crisis"

      So you didn't read my journal entry before responding? It's clear that we do not have the funds to pay social security benefits beginning in around 2018.

      but annual 400+ billion dollar deficits are not a crisis today?

      Beats me. Ask someone who thinks it is not a crisis.

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