Dec 19, 2017

The Social Security Trust Fund

Another great story from this recent episode of EconTalk (a):

John Cogan: So, an earned-right program, or a normal pension program – money would be collected and set aside and invested to finance the future benefits to those that are now paying the taxes. A tax-and-transfer program was one where there is no money set aside: the taxes that are collected today are used to finance the benefits to retirees today.

Russ Roberts: Or other things when there is a surplus – which is of course what has happened with Social Security.

John Cogan: ... Roosevelt's original idea was that the program be more like a pension program. And so, initially the taxes were set much higher to generate revenues that were much higher than the benefit outlays. And so, a fund would be built up – a big reserve fund would be built up in the Treasury. And that fund could be drawn upon in 1980, or 1985, when there was expected to be a large number of retirees and no large increase in the debt of the U.S. government would be incurred. And so, it was set up more or less like a pension program.

But, immediately, there were concerns that the money was being improperly used, that it was going to finance the general operations of government. Others, on the liberal side, said that this money that's being improperly used is being raised through a regressive tax, and therefore was unfair; and that we should use a progressive income tax to finance these types of expenditures. And eventually Congress said, 'The heck with it. We're going to eliminate this large surplus that we built up.' And they did so by immediately expanding the program to cover survivor benefits. The original law did not do so. And they sped up the date at which the first retirees would be able to collect their Social Security benefits. And, of course, they raised the benefit levels for those that were nearing retirement age. And so they had responded to the surplus of funds, just like every previous Congress from the Revolutionary War time to the present had responded to large surpluses: They spent it.

But since then, Congress has established what they think of as a pay-as-you-go policy. So, the taxes that come in today go to pay benefits for those that are receiving the benefits today. From time to time, we get spurts of economic growth as we did in the 1950s and in the 1960s and early 1970s, and surpluses have built up. And Congress has used those surpluses as they had with the earlier pension programs to expand benefits.

Russ Roberts: But there is an illusion. And there is a theatrical aspect to this illusion that I did not realize: that the government invests – I can't say it without laughing. And it sounds disrespectful, because there are people who will say with a straight face, very proudly and very adamantly that the government invests that money. But it's an accounting sham. So, explain how that sham works and the theatricality behind it...

John Cogan: It truly is. For years and years, all the Social Security Trust Fund was, was a ledger in the bowels of the Treasury Department. Revenues would come in to the Federal government. Income tax revenues would be combined with payroll tax revenues. And ... the accountants would just separate it out – put one pot of money, the payroll taxes that they thought had come in, they would put that into a line or a column labeled Social Security. And they would record the outgo for this program as, in another column. And that's all the Social Security Trust Fund was.

But, they established this, for the public, this elaborate system where they would list – every Social Security trustee's report published annually, they would list the so-called investments that the Trust Fund had made in Treasury securities. And the accounting is incredibly detailed. They will list, literally, dozens and dozens of securities that have been allegedly purchased with these funds. When, in fact, the securities that were quote-unquote "purchased," really never existed in the sense they were not marketable Treasury Bills.

The height of this folly, or this story, comes in the 1990s. We had large economic growth from 1983 through the early 1990s. And, as a consequence a trillion dollars of surpluses had built up into the Social Security Fund. And, of course, these were all just accounting surpluses. The money had been spent on other activities of government. In any event, Members would return to their districts; and as the trillion-dollar balance in the Fund became known to the public, they would be confronted by senior citizens in their districts, these Town Hall meetings, asking them, 'Well, where is the Trust Fund? You say there's a trillion dollars here. Where is it?'

And so Members came back to Washington and the leadership decided that they would create a Social Security Trust Fund. So they passed a law in 1994 that established the Social Security Trust Fund, and a Bureau of the Public Debt building in Parkersburg, West Virginia. And so, the Trust Fund consists of a – literally, of a file cabinet – where non-marketable securities are placed, each quarter, representing the holdings of the Social Security Trust Fund. Now, I want to emphasize that these securities are non-marketable. They cannot be sold in the market. They are not going to be traded in the market. They are basically worthless pieces of paper that are sitting in there...

Russ Roberts: Just to make it clear – these so-called securities, these notes, are pledges that the Federal government will pay back the principal and maybe even some interest at times, I think, to replenish and take care of the Fund. But, of course, it's all just government money. It's not anything real that's set aside. It's just, as you say, a ledger, a transaction ledger that says, 'Oh, yeah, that money is there because the government has promised to pay it.' But, of course, if the government doesn't have the taxable capability to pay it, those promises are not enforceable in any real way.

John Cogan: I think that's right. And I think the important thing you said there, Russ, was that there is a Pledge, and all Members of Congress have taken that pledge, that they will replenish the Trust Fund by quote-unquote "exchanging these securities for general revenues of the government." But, as you also said, there's no real economic asset there. The money has been spent. And, so, all we have is a pledge. When people ask, 'Where would we get the money that would be used to replenish the Trust Fund?' the answer is, 'We'd have to go out and we'd have to borrow it in the open, public markets...'

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