The Maddening Trust Fund Lie

It’s sad to see very smart people get fooled into playing the government’s games. I hate to call him out on this one, because he’s a blogger that I respect, but Kip is using their terms when he’s smart enough to know how fraudulent they are.

To review: An IOU from myself to myself is worthless. An IOU from the federal government to the federal government is worthless. Calling that IOU a “Treasury security backed by the full faith and credit of the United States Government” does not change its worthlessness — any more than would calling it “zoop.”

When Social Security runs into deficit starting around 2017, those IOUs will be “cashed in,” which simply means that the federal government, which has already spent the money, will have to raise either taxes or the budget deficit (I’m guessing the latter).

We all can agree that the “trust fund” is a bunch of BS. The trust fund has no assets in it, as Kip points out quite correctly, and which I explain through the use of analogy here.

Some will tell you Social Security fails in 2041, because that will be the time that the fictional “trust fund” is empty. The people who tell you that are trying to deceive you. But it’s equally deceptive to claim that we’re doing just fine until 2017, because that’s when Social Security goes into deficit. Kip, throughout his post, references that 2017 date, but that obscures the problem. The problem won’t magically hide until 2017, and then appear. THE PROBLEM STARTS TODAY!

It’s very simple. Right now the government is spending every dollar that we provide in Social Security taxes, every dollar we spend in income taxes, and then borrowing money on top of it. Every year between now and 2017, the amount of money the government has to pay in Social Security benefits will rise, and will rise faster than tax receipts from the payroll tax. So unless they reduce spending elsewhere, every year total government spending will rise, and because each year the social security “surplus” gets smaller, they have to make up that money elsewhere, either with other taxation or more debt.

The 2017 date is a convenient fiction, much like the 2041 date. It’s used by people to make us think that we still have time to fix the programs in the future, but the problems exist today. The problem is that government spending is rising faster than government revenue. Unless we cut spending or raise revenue, we’re in a lot of trouble. Which pocket they take that revenue out of doesn’t matter.

FacebookGoogle+RedditStumbleUponEmailWordPressShare
  • Don Lloyd

    Brad,

    To understand where the Trust Fund fits in the financial future of Social Security, consider an auto lease.

    Making the last contracted monthly payment on an auto lease, in and of itself, makes a major improvement in your monthly cash flow. Of course, this improvement can only be useful if you no longer have a need for the use of an automobile. Normally, you would expect to contract for a new lease with more or less the same terms as before.

    When the Treasury redeems the last bond in the Social Security Trust Fund, exhausting it, it has relieved itself of a financial obligation just as much as you have when you pay off your auto lease. But, also like you, it is still going to have to make up the shortfall of current payroll taxes with respect to current outlays. Only the labels applied to the transactions will be different. Making up the shortfall one year by redeeming TF bonds will not be materially different from making up the shortfall the next year more directly. Even if current law does not require the Treasury to make up the shortfall after the TF is exhausted, it is politically inconceivable that Congress will allow the outlays to fall by 30% from one year to the next.

    Thus, the exhaustion of the TF is an economic non-event. Zeroing out the entire Trust Fund is no different economically than allowing it to arbitrarily grow without limit. Anyone who talks about the solvency or bankruptcy of Social Security is just blowing smoke. All that matters is the year by year balance of inflows and outflows.

    Regards, Don

  • happyjuggler0

    I just want to add a problem with the quoted article’s prescription:

    the federal government, which has already spent the money, will have to raise either taxes or the budget deficit

    This should also have a third option, namely: or cut spending. It is simply sad whenever someone assumes that government spending is uncuttable. Granted, it is not easy under the current atmosphere inside the beltway and in the mainstream media, but we ought to at least point out that third option. Out of sight, out of mind.

  • http://www.kipesquire.com KipEsquire

    “It is simply sad whenever someone assumes that government spending is uncuttable.”

    There’s nothing “sad” about my opting for a comparative statics framework and ignoring background noise.

    My blog is chock full of calls for reduced government spending — but only in relevant contexts, which this is not.

    Thanks for playing.

  • Ryan

    If the government owns some of its own debt, that means its interest payments will be lower in the future. In other words, it has pre-allocated some of the money it would have had to spend on debt payments towards social security. Yes, it still has to raise the money, but not as much as if it had to finance both the full debt and the social security.

    If you want to look at it another way, when the government holds its own debt instead of private entities holding it, it is basically wiped out. They’ve reduced the debt. If you have a problem with the government financing itself with debt instead of taxes, then that’s a different issue. But as long as the government meets its current obligations by selling bonds, it is valid for social security to keep a fund of those bonds for the future.

    While it may seems like silliness to you to keep accounting entries between different sections of government, different divisions of large organizations operate independently and so this accounting is important for the budgeting and operation of each.

  • http://www.kipesquire.com KipEsquire

    Huh?

    Where do I suggest in my post that “the problem magically hides until 2017″?

    In fact, I wrote: “That has been the great lie all these years — to call a promise to raise taxes or deficits in the future a “trust fund” today.”

    Indeed the very point that I am making is that 2017 is the point at which politicians can no longer lie about the crisis. Which would suggest that I am in fact accusing them of lying “TODAY,” to use your typeface.

    Equally baffling is happyjuggler0’s comment. What’s wrong with comparative statics?

    Finally, Ryan’s comment is just 100% wrong. Private companies are in fact required to eliminate intra-company transactions from the financial statements they present to outside parties, including regulators.

    Apologies acccepted…

  • http://unrepentantindividual.com/ Brad Warbiany

    Ryan,

    You’re completely missing the point, and your entire comment only further obfuscates the issue.

    To start, look at the federal government as a whole. It gets the bulk of its income from two places: the income tax and the payroll tax (which is an income tax). So government is funded out of the paychecks of workers. Right now, government in general is spending more money than they take in, and they have to finance that spending with debt. My point is that one outlay that the government in general has to pay (Social Security & Medicare) is rapidly increasing, so THE GOVERNMENT IN GENERAL needs more income, whether it gets it from higher taxes or increased public debt.

    While you’re entirely right that different divisions of a large organization may set things up differently based on budgeting, the overall inflow of revenue and outflow of payments is important. If General Electric were losing $10 billion dollars a year, but their healthcare division was booming, would you call General Electric a failing or succeeding company? Would you buy stock in it?

    Our government is the same. The cashflow of one division is positive, but the cashflow of the entire organization is negative. Thus, when the division with positive cash flow sees its surplus decrease, it hurts the entire organization, whether you consider that particular division solvent or not.

    But in the short term, they use this accounting trick to make people think that everything’s just fine. When in reality, the whole organization is failing, and adding one more failing division (as Social Security sees its “profit” decrease and go negative) just brings the whole house of cards nearer to crashing down.

  • http://unrepentantindividual.com/ Brad Warbiany

    Kip,

    My point is that when you start throwing out that 2017 figure, you’re giving the casual reader the impression that it’s actually meaningful. All I’m trying to say is that doing so gives it the appearance of a legitimacy which it does not deserve.

  • http://unrepentantindividual.com/ Brad Warbiany

    Kip,

    FYI, the two lines that I saw in your post that really had caught my ire were:

    “The all-important date is not 2041, when the fraudulent Social Security “trust fund” is nominally exhausted, but rather 2017 (only a decade away!) when the “trust fund” will finally and irrefutably be exposed as an accounting (and political) fraud in the first place.”

    and

    “When Social Security runs into deficit starting around 2017, those IOUs will be “cashed in,” which simply means that the federal government, which has already spent the money, will have to raise either taxes or the budget deficit (I’m guessing the latter).”

    The first quote refers to 2017 as an all-important date. You do obviously point out that it is the date that the lie gets exposed, but I think it’s important to point out that it’s a lie right now.

    The bigger issue is the second quote. We won’t wait until 2017 to start raising taxes or the budget deficit. Each year as we approach 2017, we’ll have to do that. Each year we will be spending more and more on SS benefits, and that means that the money we’re spending on those benefits– which is currently going to general fund programs– won’t be there. It doesn’t matter what year we go from surplus to deficit; as long as the surplus decreases each year that money has to be raised elsewhere to fund general spending.