Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“"All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.”     Thomas Jefferson,    First Inaugural Address, 4 March 1801

July 27, 2011

Social Security Trust Fund: Accounting Kabuki

by Brad Warbiany

The looming government debt ceiling crisis has cause Obama to threaten inability to pay Social Security checks. It’s renewed the debate, which I’ve hashed out many times (here, here, here and here, for posterity’s sake), whether the Social Security “Trust Fund” is a veritable asset or merely a convenient accounting fiction used to hide deficits.

I, of course, believe it to be the latter. But M.S., writing for The Economist’s Democracy in America blog, tries to make some analogies about the trust fund’s “accounting kabuki”:

I mean, look, our bank accounts are an accounting fiction. Everyone knows exactly how much money is in anyone else’s bank account: none. There is no money “in” our bank accounts; our banks have already spent it. Our so-called bank account is just an IOU, a promise from our bank to pay us up to the amount specified in our balance.

There are two things here. The first is that the bank account is merely a promise, which is true. This is clearly analogous to the Social Security Trust Fund. The second part, though, is the problem. Making good on the promise is the bank’s responsibility, NOT MINE.

If I want to withdraw money from the bank, they have a legal and moral responsibility to give it to me. It doesn’t matter to me where they get it, but it creates no obligation on me to get that money back.

If they told me that they’d give me my money, but they’d have to garnish my wages for the next year in return, however, I’d be a little pissed off. That’s what the Social Security Trust Fund is.

The key is that American taxpayers are the ones who are being “paid back” out of the Social Security Trust Fund, while American taxpayers are also the ones doing the paying. It’s not an accounting fiction because we have two different line items on the bill, it’s an accounting fiction because the revenues ultimately come from the same place!

From the point of view of the Social Security Administration, of course, the IOU’s are an asset. They are a claim on future government revenue that is essentially on par with the debt that China or institutional investors buy from the US. I.e. from an accounting standpoint, it is a “promise” that carries some heft. However, from the point of view of the American taxpayer, it is additional debt that must be repaid through higher taxation. They’re going to get it from our paychecks, it’ll just come from the line that says “FED INC TAX” rather than the lines that says “SOC SEC TAX” or “MEDICARE TAX”. It still comes out of the same paycheck, which means whether it’s an accounting kabuki or not, it still costs us more money.

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5 Comments

  1. I sent an email to the SSA asking how the SS system can be solvent to 2037, if OB say we can’t pay checks for next month?

    Here is their response:

    Thank you for contacting the Social Security Administration.

    The issue at hand is not the solvency of the Social Security Administration. The issue is that the US Treasury will not have money to pay the bills.

    The United States Government borrows some money (with interest) from the Social Security Administration Trust Fund to pay some of its bills. If the debt limit is not raised come Aug. 2, the government will have to pay its bills solely using incoming cash flows. Social Security Administration constantly has an incoming cash flow because of workers who pay into the system. The reason the Social Security Administration is still solvent is because of the incoming cash flows.

    I read this as they are broke and can’t make payments without the tresurys IOUs and ability to raise the debt. They have lied for years.

    Comment by Stevem — July 27, 2011 @ 4:55 pm
  2. The FDIC will be SOL when the Fed and the Banks go
    broke, read this:

    http://seekingalpha.com/article/136368-where-does-the-fdic-get-its-money

    Comment by Stevem — July 27, 2011 @ 5:09 pm
  3. [...] …Social Security not a trust fundChicago TribuneTough choices for U.S. cutsThe Seattle TimesSocial Security Trust Fund: Accounting KabukiLiberty PapersDaily Caller -Huffington Post -Tampabay.comall 13 news articles » [...]

    Pingback by Letter: Let’s look at Social Security – Rockford Register Star « SSA — July 29, 2011 @ 2:25 am
  4. Here is a whacky idea. Repudiate the SS Trust Fund treasuries. They’re nothing but an accounting gimmick anyway.
    Of course you’ll then have to explain to seniors how close to $3 trillion in funds that was supposed to go to their welfare got spent on something else.

    While you’re at it, repudiate the Treasuries that the Federal Reserve holds. I know, I know, the Fed is independent. Anyone who believes that please exit for the nearest sanitarium.

    Comment by tkc — July 29, 2011 @ 12:41 pm
  5. When the bank pays your money out someone actually pays back the loan, with interest. There is a real and virtuous circle of lending, investment and return.

    When when SS trust fund notes mature the Tresasury just writes more worthless notes. Nothing is ever paid back and made available for withdrawal or investment in productive enterprise. Huge liquidity and leverage differences result. The closed loops and completed circles make the bank process much more secure.

    Comment by Let's Be Free — July 30, 2011 @ 1:14 pm

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