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Maarten van Swaay / August 25, 2014

The Social Security Trust Funds Have Always Been ‘Dry’

Heritage Foundation: Social Security Trustees Report: Unfunded Liability Increased $1.1 Trillion and Projected Insolvency in 2033

Apropos the above article:

The Social Security Trust Funds (SSTF) are not ‘running dry’: they have always been dry. SSTF has no good place to park its assets: those assets would exceed anything the stock market could handle, and would thereby make SSTF a monopoly player in the market. For that reason, SSTF assets are kept in the form of non-marketable Treasury bonds. The Treasury has no place to park money either: it cannot invest idle funds (if those existed) in the open market, because that would make the government into a participant in the market. In a sports analog, the umpire (government) cannot be allowed to participate in the game (the market).

Because the Treasury has no place to park its assets, it does not keep its assets in any long-term form: all funds accruing to the Treasury have always been spent on current projects and transfers. In principle, the Treasury could use excess revenue by redeeming some of the National Debt. To my knowledge, that has rarely happened. Within limits, National Debt is defensible, just as residential mortgage and commercial debt are defensible as a means to finance investment in the expectation of future benefit.

Until fairly recently, and partly with the help of adjustments of the Old-Age-and-Survivors-Insurance and Disability-Insurance (OASDI) levies on payroll, the inflow to SSTF has comfortably exceeded the outflow of Social Security payments, and the difference has accumulated in what was misleadingly called a ‘lockbox’ during the 2004 presidential campaign. Then what does SSTF hold in this lockbox? It holds non-marketable Treasury bonds. And what supports the value of those bonds? The capability of the government to levy taxes. Nothing else.

As long as revenue exceeded distributions, SSTF was described as ‘solvent’. It had a net inflow of funds, and those funds were ‘invested’ in the form of Treasury bonds. But today, SSTF has almost reached a net outflow of funds; to cover that outflow, SSTF will have to start redeeming its bonds. In 2013, SSTF had an inflow of 1,065 billion, outflow of 1,033 billion; a net inflow of 32 billion. But only 6 years earlier, net inflow was 180 billion. The time of cross-over to net outflow is not far away, and may arrive as early as 2016. Because the Treasury does not hold assets for the bonds held by SSTF, the redemptions will have to be paid out of current account, i.e., they must be covered entirely by tax revenue. In other words, SSA distributions are transfer payments that are charged to the working population.

Treasury bonds held by SSTF are not counted in the National Debt. That viewpoint can be defended with the argument that SSA is a government entity, which makes accounting between SSA and the Treasury an internal affair: what is counted as debt by one is balanced by assets of the other. But if SSTF is seen as a Trust, then the beneficiary owner is not SSA, but future generations of eligible citizens. Under that view, assets in the SSTF do not belong to SSA, and can therefore not offset Treasury debt in the form of bonds issued to the Trust Fund. Then the debt owed to SSA should be included in the National Debt.

Both views have merit. Congress can make promises, but it cannot compel a future Congress to make good on such promises. The Supreme Court has indeed held that Social Security obligations to citizens are not protected by law. But if the promise is held sacred, then the debt to SSA must be included in the National Debt. It must be one or the other: One cannot hold the promise sacred without including its value in the debt. Nor can one ignore the debt without thereby admitting that the promise is empty.

If Social Security is treated as a non-negotiable promise, then not only must the current value of SSTF bonds be counted as National Debt; all future obligations of SSTF to distribute Social Security benefits must also be included in the National Debt as (unfunded) liability. Today, revenue from OASDI taxes barely covers distributions, but the balance will soon change to net outflow. That cross-over point - which could come as early as 2016 - should be labeled as the time when SSTF ‘becomes insolvent’. But in today’s discussions, the term ‘insolvency’ is used to refer to the time when SSTF has redeemed all of its bonds; a time that is now estimated to be in 2033. That is misleading, because in the absence of real assets that cover the holdings of SSTF, the fund has always been empty. Redemption of bonds by SSTF can only be covered by taxes or new debt.

Ironically, the low-interest policy of the Fed reduces the interest paid on the SSTF bonds, and thus worsens the cash flow of SSTF. But it also reduces the budget deficit, which is far more visible. The claimed justification for a low interest rate is that it encourages the economy. Almost certainly the real driver behind the low rate is a misguided attempt to camouflage the reality of unsustainable budget deficits.

The Dutch, with a penchant for nautical metaphor, say that the shore will turn the ship. In the absence of timely course correction, the ship will founder on the rocks or on the shoals.

Net cash flow for SSTF is the difference between two large quantities. Modest adjustments of either inflow or outflow can have very large effects on net cash flow, and thereby lead to disaster or long-term sustainability.

A timely course correction need not be large. But if it is not made in time, then - again in the terms of the nautical metaphor - avoiding the shoals or the rocks may require very drastic measures, and may even become impossible.

If the course is mis-corrected, the time to foundering on the nearest shoal can shrink drastically. Several such mis-corrections can be identified: a longer-living population will increase SSTF outflow; underemployment and lackluster economic growth both curtail inflow. The first is demographic, and beyond human intervention. The other two are consequences of economic policy, which can be - and must be - addressed. These mis-corrections lie at the core of the drastic worsening of SSTF forecasts.

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Data on SSTF were retrieved from

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Professor Maarten van Swaay retired from Kansas State University in 1995. He can be reached at [email protected]

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