Asymmetrical Information

"[I]f a company issued bonds like those, it would at least have to record the size of the liability on the financial statements it issues to its shareholders..."

Actually the accounting term is "intra-company eliminations." And guess what -- the Treasury does exactly that.

No, Kip, that's not right. You're right that the balance sheet picture doesn't changed because an asset of one subdivision is a liability of the other, but I'm talking about the original pension liability which the asset is supposed to cover, which is recorded nowhwere, even though the subsidiary has debt "assets" to cover it. Any private company that did such a thing would have the PBGC and the SEC knocking at the boardroom door very quickly.

Why we don't demand that sort of accounting from our government, I'll never know.

Because then the govt. would not be able to hide the true size of the deficit.

But really the solution to the SS problem is easy. :)

Okay, look at it like this (forget economics for a second, go to my area, law). If GM ran a pension fund like social security, GM executives would go to prison.

What's good for GM is good for America, right?

Oh, and how does Congress run its own retirement plan? Hint-not like social security.

I'm 35. The only rational assumption I can make is to party like its...strike that...is to plan on receiving no social security benefits. The only thing that scares me is saving enough to plan for tax increases on what I've saved.

Sure they cannot "confiscate" my 401(K), but they can tax the crap out of my withdrawls.

Hey, I think I've got a plan...

Lets have the Government issue special bonds to the Government to pay off the National Debt.

YAAAH, we paid off the National Debt in one day. Now we can all go fishing...

Whatd'ya mean it won't work?

For my next trick, I'll stand in a bucket and lift it by the handle...

So you're saying if I take five dollars out of one pocket and put it in another, I DON'T have ten dollars!?!

Darn.

"I'm talking about the original pension liability which the asset is supposed to cover, which is recorded nowhwere..."

It is recorded in the Treasury's presentation of its liabilities using accrual accounting (.pdf, page 11).

It's just that the Treasury gives this number very little publicity and nobody wants to talk about it.

After all, the Treasury says that the deficit for just 2004, when measured using accrual accounting as the private sector uses, wasn't the officially reported $412 billion but rather $11.1 trillion with (with a "t").

Who in the government, or in either party, stands to gain by talking about that?

Why is a budget shortfall and deficent spending bad for Social Security, but no problem for the military? What's the problem if Social Security doesn't have enough money? The government will just print more money, like they do for the current war overruns.

Anyway, if the government plans to default on the OASI Treasury bills, we have way bigger problems than Social Security. You can basically say goodbye to the American economy, and no amount of private accounts, short of stuffing your matresses full of gold bars, will help you then.

Basically, treating the Trust Fund as if it's an asset is . . . well, it's not like Enron; it is Enron. Hiding your liabilities in an off the books entity whose only assets are the parent company's debts is exactly what Enron got in trouble for.

The balance of the federal debt is somewhere around $7-8 trillion. Included in that is intra-governmental debt of $2-3trillion, which is mostly comprised of the SS trust fund. (numbers are obviously approximate)

Do you believe that the $7-8 trillion in US gov't debt isn't real? Of course not... if you did, your opinion would differ from every institutional investor and finance textbook which routinely uses the yield on treasury securites as its 'risk-free return' in all capital asset pricing models.

Since the $7-$8 trillion is considered risk-free by investors, the portion of the federal debt that is owed to the trust fund is risk-free as well.

You can all rest easy now.

"If some conservative jackass proposed a plan to, say, let companies top up their underfunded pension plans by stuffing them with their own bonds, liberals would be justifiably outraged, because that's not funding the pension plan; it's promising to fund it at some later date, provided there's money around to do so. "

If a company had an underfunded pension and printed its own bonds to fulfill the liability it would appear to be outrageous.

But what if the pension fund had assets via contributions, and instead of investing in treasuries or stocks or corporate bonds the funds would be used to buy bonds issued by the company itself, which would have been issued to third party investors if the pension fund did not purchase them? Would this be as outrageous?

Presumably this would be acceptable (though not truly prudent from an asset concentration point of view) if the coupon on the bonds purchased by the pension fund were equivalent to that which would have necessary to issue the debt on the market.

This is exactly how the trust fund works. Instead of investing the excess of ss contributions less benefits in stocks or corporate or foreign bonds, the excess has been invested in US treasuries. These treasuries would have been issued to third-party investors if they were not purchased by the trust fund.

If the trust fund had instead been filled with equity in public companies or corporate debt or Japanese or European securities, would you still be asking if it is "real"?

I work in insurance, and an insurer with its entire portfolio comprised of treasury securities is a heck of a lot more likely to get top grades from rating agencies than a company that has a portfolio of 1/2 corporate bonds, 1/2 equity securities.

Here are my issues with your post

1) It takes as a given that SS is part of the government fully like the DoD or the DoJ. If you don't agree with that view and think of SS as controlled by the government but financially separate your argument loses much of its appeal.

2) Many of those telling us there is no SS fund are the same that a few years ago told us we couldn't cut SS taxes when we cut income tax rates, even though SS was running a surplus and even though most Americans pay more in payroll taxes than income taxes, because the surplus was needed to fund the Trust Fund. Can we expect an apology or explanation from the GOP and conservatives on this?

3) Even if it is true, and I agree it is true, that on a consolidated basis the US Govt has no Trust Fund if we accept SS is a separate self-financing agency then the Trust Fund plays an important political role. It limits the government's adjustment options if the debt owed to the SSA is treated the same way as debt owed to China.

Wallster, the bonds in the trust fund aren't external securities; the trust fund can't sell them, first of all because they're special non-tradeable instruments issued only to the SSA and second of all, because the SSA isn't allowed to hold another asset.

More importantly, damn straight companies aren't allowed to fill the pension plan with their own stock and/or bonds, because regulators rightly recognise that doing so makes the pension plan effectively unfunded. Would an IBM pension fund filled only with IBM bonds be a "real" pension fund? Not according to our government, it isn't.

Saying that a bond fund filled with treasuries is a good investment makes the same mistake I'm talking about--it confuses an obligation to a third party with an obligation to oneself. I can fund my retirement by buying corporate bonds and living off the proceeds. Conversely, a credit card company can make money by lending me money and getting interest in return. But I can't fund my retirement by eliminating the middleman and "lending" myself money that I'll later repay with interest. Nor can the government fund its future needs that way.

But GT, the SSA isn't fiscally separate. It has no control over either inflows or outflows, which is a requirement for a financially independant entity. I could fiscally separate out parts of my budget, call it a separate entity, and "prove" that my retirement is in fine shape, but at the end of the day, the fiscal picture hasn't changed; there's no more money coming in, or out, of my household because I've created a "Trust fund".

Second, debt owed the SSA isn't the same as debt owed China. If it wanted to, the govenrment could abolish the SSA tomorrow and tell it to make a gift of its bonds to congress. Can't do that to China--they're feisty. Moreover, it's not clear that the government could legally be in default on its SSA bonds, since its not clear that anyone would have standing to sue.

Finally, as you may know, I support hte abolition of FICA and the funding of SS out of general revenue. But the reasons for not abolishing FICA are not that evil Republicans hate the poor; it's that the AARP goes ballistic whenever the subject is mentioned, because they (rightly) believe that structuring SS as the welfare program it is, rather than the pension program it pretends to be, will undercut support for it.

In 1983, Congress brokered a deal. For the next 25 years (although it looks now like that will be 35 years), those whose taxes are primarily the payroll tax will pay excess taxes to be used by the rest of the government (in particular, the excess was supposed to be used to pay off the national debt). For the 25 years after that, those whose taxes are primarily the income tax will pay excess taxes to be used to deal with the Boomers' retirement. The Treasury bonds are simply a mechanism to make that agreement concrete.

The people at the bottom have held up their end of the bargain, but now that the second period is within the planning horizon of the people at the top, they want to renege.

Jane,

I agree with a lot of what you say but I don't think the issue of SSA being separate or not is as clear-cut as you present it. There are thousands of entities, both in the public and private sector, that are independent to some extent from a parent that controls them. In structured finance, for example, a lot of entities are created that have no control whatsoever over their inflows or outflows, yet are fiscally separate from the parent that created them. SSA is a strange beast with neither-here-nor-there characteristics but it is not like the DoJ.

As for the GOP if they really think there is no Trust Fund why didn't they say that 4 years ago, when we had the income tax cut debate? Why don't they propose to cut rates today and eliminate the surplus? You can't have it both ways. If they think there is no Trust Fund then the payroll taxes are simply an income tax surcharge.

At any point that the political cost of raising additional general revenue funds exceeds the political cost for lowering benefits then it will be obvious that what is in the "trust fund" doesn't matter at all. Talking about whether the trust fund is real or not misses the real point of the discussion. What really matters is that from a policy perspective moving forward the trust fund is entirely irrelevant.

"... if the government plans to default on the OASI Treasury bills, we have way bigger problems than Social Security. You can basically say goodbye to the American economy ..."

This argument is brain dead.

The gov't is *already* defaulting on these bonds. They are 15-year bonds and the gov't hasn't paid one off in 30 years!

Default!!! America is already ruined!!

Oh, wait, these bonds are unique among T-bonds -- very unlike those owned by Japan and China -- in that the Treasury decides when to pay them off. So if decides not to pay off these 15-year bonds for 30, 45, 100, 1,000 years, there's no default!

(Hey, as a lender you can negotiate really great terms when you lend to yourself!)

OK, so come 2030 the SS actuaries say a 35% income tax increase from today's level will be needed just to cover trust fund operations, with an addtional 30% and rising perpetually thereafter needed to cover Medicare.

So let's imagine Congress then does the very same thing it did the last time it found it lacked the funds to pay promised benefits -- it cuts benefits.

Then fewer if any of the bonds will be needed to pay for benefits. So the 15-year bonds which have already been rolled over for 47 years without any default will continue to be rolled over as they have been since the prior century ... and default will be where???

"Reducing future SS benefits will be a ruinious default on Treasury bonds" is just a totally brain dead argument. It's sad that liberal thinking has declined to this level. Conservatives need to face better than this for everyone's good.

BTW, anyone who thinks that defaulting on a debt to oneself will impair one's credit rating should try it and see what happens.

Seriously -- write up a legally binding note for $100k or whatever, secure it by your house and property, then make it payable to yourself ... and then don't pay yourself. Default on it!

See if anybody in the world cares. Try to get the credit agencies to report it! Hey, that debt is secured, so look for a lawyer who will sue you for yourself to collect on it -- and see if you can find one who doesn't laugh out loud.

China will care just as much if Congress reduces Social Security benefits in 2030.

Jim,

You too keep insisting that debt owed to the SSA is like debt owed to oneself. If an oil company sets up a separate entity that has rights to oil revenues (like Mexico did with Pemex to pay the US Treasury loans in 1995) it does not woe money to itself even if it controls the entity.

Admittedly SSA is in a bit of a nether zone but it's simply wrong to say that it's debt owed to oneself.

GT, admittedly it's been a few years since my last accounting class, but I'm pretty sure that:

a) If you substantially control an entity (as the government inarguably controls the SSA), you have to consolidate it on your books, where

b) Any assets and liabilities swapped between consolidated entities are wiped off the financial statements

That's why Enron played all those games with the limited partnerships -- to move organisations it actually controlled off the books and thereby book assets that would have disappeared as liabilities of the same entity had the financial statements been consolidated. Indeed, that's what the government has done with the SSA, as another commenter pointed out.

Jane,

SPVs are not consolidated (although I think it can vary depending on the type of SPV).

Generally I don't think the accounting comparison with the private sector is very useful since the government has a leeway no private industry has. There are plenty of special purpose entities that are separate in the public secotr. Most states and many local governments have them.

To me the disticntion is between the General Fund and the SSA. SSA is separate from the General Fund and SSA'a assets show up as General Fund liabilities, no different from an accounting point of vuew than debt owed to China. Yes, the government has more control over debt owed to the SSA but with great power comes great responsibility!

I'd accept there is no Trust Fund if those on the Right that told us we couldn't cut payroll taxes while we cut income tax rates admitted they conned us.

And to be clear, unlike Enron, SS liabilities do not disappear from govt accounts. In fact they show up clearly in the General Fund accounts and are a big part of the US Public Debt.

In 1983, Congress brokered a deal. For the next 25 years (although it looks now like that will be 35 years), those whose taxes are primarily the payroll tax will pay excess taxes to be used by the rest of the government (in particular, the excess was supposed to be used to pay off the national debt). For the 25 years after that, those whose taxes are primarily the income tax will pay excess taxes to be used to deal with the Boomers' retirement. The Treasury bonds are simply a mechanism to make that agreement concrete.

The people at the bottom have held up their end of the bargain, but now that the second period is within the planning horizon of the people at the top, they want to renege.

The funny thing about this argument is how it screws over everyone other than the baby boomers. This occurs becuase 'the people' paying high FICA taxes for 35 years aren't the same people paying higher income taxes later. In the pre-'deal' years the baby boomers were earning low wages that would mostly show up under FICA with its (at that time low rates). By the time of the 'deal' far more baby boomers were earning the kind of money that would make it very attractive to have income taxes lower and FICA taxes higher. As baby boomers retire, the FICA taxes decrease again in proportion to the income tax. What a deal.

But, Jane, the political arugment proves far too much.

Suppose we had Social Security just as we do today, except instead of investing in US government bonds the SSA invested in foreign (or corporate) bonds. Those are real assets sitting in that trust fund, right?

But let 2018 come around and let taxes not be sufficient to fund all of the spending Congress wants. Just as they could pass a law reducing Social Security benefits to avoid redeeming the Treasuries in the trust fund, they could pass a law reducing benefits so they could sell the trust fund bonds to finance other government spending.

Or, heck, let's stick those bonds (and let's throw in some stock) in a "personal account". Then those assets are safe, right? But they aren't... Congress has the power to tax - they can always levy a special surcharge on your "personal account" whenever they like. That is why a lot of financial planners do NOT recommend Roth IRAs - since the tax benefit is in the future, they fear Congress will take it away when it comes time to pay the piper.

If you're going to invoke Congress's law-making power to prove that the trust fund isn't real, I can use it to prove that your IRA and your 401(k) and, heck, any asset you own isn't real.

Jane - we could just as easily default on our debt to China as we could default on the debt owed to the SS Trust fund.

Default on Chinese securities, never get another loan from another country.

Tell SS recipients that they're not receiving benefits because the trust fund has been gifted to the treasury, never get the vote of anyone over 50 years old again.

And Ravi is correct - if the trust fund held marketable securities, there is nothing keeping congress from legislating that those are confiscated as well. So, you would have to argue that any asset held by a government-affiliated entity for the benefit of yourself or other social security participant isn't truly real, not just treasury securities.

If we followed the implicit suggestion here, that is, reduce the Soc. Sec. payments so we do not have to raise income taxes, the accounting will show an ever rising General Fund debt/GDP ratio and an ever rising Trust Fund asset/GDP ratio. But the defenders of this policy will tell retiring workers - the Trust Fund assets are not YOUR retirement funds at all. Oh no, we have 'spent' them already so we don't have to raise income taxes. If that ain't a massive form of theft (excuse me, I meant redistribution), I don't know what is.

amb34: so well said. You have the shorter version of my long rant. And isn't interesting our host is arguing with GT but leaving your very well defined objection alone. Hmmm ....

I saw part of an episode of The Sopranos the other day. Chris Moltisanti, as the youngest soldier, always had to pay for dinner. He didn't like this, especially when Paulie Walnuts ran up the bills deliberately just to piss him off. Chris complained to Tony, who told him that when he was Chris's age, he had to pick up the tabs too, so Chris should shut up and deal with it. The bright side was that Chris would someday have some other kid paying for his dinners.

The Trust Fund is a debt.

It represents the amount of money the government must raise to pay Social Security benefits in the future. The only way this can be done is through raising taxes.

Jane,

I know that you just refuse to believe that Republicans might possibly have it in for the poor, but I suggest you check out the illustrious career of Matt Blunt (son of Roy Blunt) as governor of Missouri since January of this year to find why I don't agree. Of course I do expect you to find a multitude of ways to apologize for his sins, but I think he's just a spoiled brat born with a silver spoon who doesn't give a damn about anyone who isn't just like him.

"Jim, You too keep insisting that debt owed to the SSA is like debt owed to oneself..."

GT, you confuse me with the Treasury. It is the Treasury that reports the trust fund bonds at zip ($0) on its balance sheet as an obligation that it owes to itself ... as it explains in the notes to its financial statements, link previously provided by me, and also partly quoted by KipEsquire.

If you wish to correct the Treasury on the construction of its balance sheet feel free but your argument then is with it, not with the likes of me.

"If the trust fund had instead been filled with equity in public companies or corporate debt or Japanese or European securities, would you still be asking if it is 'real'?"

Of course not, because it wouldn't be both an asset and liability of the same government.

Similarly if the SS Admin had used excess taxes all these years to buy gold bars and store them at Ft. Knox. SS could sell those assets on the open market and thus get the funds to pay promised Boomer retirement benefits.

The difference between those kinds of assets and the ersatz bonds SS holds is that they CAN'T SELL THEM on the open market. They can only lobby congress to come up with the funds from taxpayers. And that puts them in competition with every other interest group scrounging for funds.

The Federal govt has never been able to sustain revenues over aboout 18.5% of GDP, no matter what tax rates were. It isn't going to be any different in 2018 either. They're going to have to cut benefits.

And this will become apparent in four or five years when the Boomers start to retire and the SS surplus begins to shrink. At that point, congress will to replace the SS surplus revenues, or cut spending somewhere.

Whining about what someone said in 2000 about not cutting payroll taxes will be, as it is now, completely irrelevant.

"And to be clear, unlike Enron, SS liabilities do not disappear from govt accounts. In fact they show up clearly in the General Fund accounts and are a big part of the US Public Debt."

Which are computed on a cash basis, which is strictly illegal in private sector accounting, because accrued liabilities do disappear from the accounts. Which is indeed what Enron did, albeit on microscopic scale comparatively.

Note how the Treasury itself reports that the government's 2004 deficit computed on an accrual basis, as everyone else must use, was $11.1 trillion, rather than $400 billion.

That's $10.7 trillion of new liabilities that do not show up in the General Fund account or the reported Public Debt. For just one year -- in which total national income was only $10.3 trillion.

Fastow couldn't even dream of making accrued liabilities disappear off the books like that.

"But let 2018 come around and let taxes not be sufficient to fund all of the spending Congress wants. Just as they could pass a law reducing Social Security benefits to avoid redeeming the Treasuries in the trust fund, they could pass a law reducing benefits so they could sell the trust fund bonds to finance other government spending."

The difference being, of course, that if the government had $5 trillion of real savings in 2018 to finance its expenditures (rather than that amount of T-bonds) it would be $5 trillion less likely to be unable to afford its desired spending.

And any shortfall it did face would be $5 trillion less than otherwise.
~~~~

"And Ravi is correct - if the trust fund held marketable securities, there is nothing keeping congress from legislating that those are confiscated as well."

So you are supposing that the government in 2018 will hold $5 trillion of marketable securities (instead of SS T-bonds) via the trust fund that it then plans to use to pay $5 trillion of its expenses.

But the risk is it may "confiscate" this $5 trillion from itself and instead use it to pay $5 trillion of its expenses.

Hello?

"If we followed the implicit suggestion here, that is, reduce the Soc. Sec. payments so we do not have to raise income taxes, the accounting will show an ever rising General Fund debt/GDP ratio and an ever rising Trust Fund asset/GDP ratio. But the defenders of this policy will tell retiring workers - the Trust Fund assets are not YOUR retirement funds at all.."

But the government is saying this right now, as Democrats and liberals insist.

If the Trust Fund assets were in fact YOUR retirement funds, then there would be no problem whatsoever in distributing the T-bonds from the Trust Fund to private accounts in proportion to their needed use to fund benefits, including YOURS. And since the assets then would indeed become YOURS, you could voluntarily exchange them for other market investments, or not, as you wish.

Which is indeed a proposal for structuring private accounts put forward by AEI. (And as it wouldn't change the government's finances by a penny, nobody could even pretend there'd be a transition cost to it).

The Democratic response to which has been, 'No, no, no, when we say these trust fund assets are yours, we mean the are not yours in any literal sense of the word, of course'.

"Many of those telling us there is no SS fund are the same that a few years ago told us we couldn't cut SS taxes when we cut income tax rates, even though SS was running a surplus and even though most Americans pay more in payroll taxes than income taxes, because the surplus was needed to fund the Trust Fund. Can we expect an apology or explanation from the GOP and conservatives on this?"

The explanation is that they were willfully deceiving the public about the trust fund, as both parties have done for decades. I don't recall Democrats arguing for cuts in the payroll tax, which I would have enthusiatically supported. In fact we should abolish the payroll tax entirely, both to get rid of a regressive tax and end the fiction that you're paying into an SS account with your name on it. (Existing taxes should be raised as necessary to pay SS benefits, which should also be means-tested).

"I don't recall Democrats arguing for cuts in the payroll tax"

Moynihan did. His reward was to have Krugman call him "Orwellian" for denying that the trust fund was really and truly going to finance future benefits.

To follow up on your analogy: Suppose a company invested its pension accounts in its own bonds, as follows: payments made by employees into the retirement system were used to buy company bonds, and the resulting cash was used to buy inventory, build factories, do R&D or marketing, whatever. This would not be wise, because of diversification, and might well not be legal. But it would be incorrect to say that the investments were a fantasy from an economic point of view. Investments held by the retirement fund for company "A" employees in the form of company "A" bonds are just are "real" as if they were in the form of company "B" bonds.

The difference between this scenario and the SS trust fund is not economic, but political: In the corporate scenario, the employees would have (or at least should have) a contractually enforceably right to their benefits. No such right exists for today's social security program.

Dave, again, I don't deny that there is some legal thing there, but it would not be a funded pension plan. It would be an old-style unfunded pension, in which a company promises to pay its retired workers out of future revenues. These are now illegal, for good reason.

My point is that Social Security is an unfunded pension plan, just like that company putting bonds into its own pension plan, and for the same reason: the plan has no assets, only promises to pay the workers out of the government's future revenue. Unfunded private plans are illegal because they leave workers' retirements entirely dependant on the financial condition of a single entity. So too has our Social Security plan. Again, I concede that the government is less likely to go bankrupt than a private entity, but it's already having big fiscal problems, which will only get worse as the boomers start to retire.

Jim,

Did you think that the Trust Fund did not exist back in 2001? If so were you outraged at the time that the Bushies and the GOP conned Americans on which taxes could or could not be cut?

Jane and others,

Many have said that SS is like IBM giving IOUs to its pension plan, which is supposedly illegal. But IIRC that is allowed. Pension plans can invest up to 10% in own-company secuirities. Is that correct?

Brian #2,

Social Security benefits are already "means tested", in that 85% of the benefit is subject to taxation if AGI exceeds a threshhold. I suppose you are suggesting that benefits be withheld from those who don't "need" them. NICE! I suspect Social Security would have lost support a long time ago if those who also saved privately for their retirements had known that they would receive no benefit despite a career of "contributions". I suspect it would lose all support from highly compensated workers in the future, if they realized that they would receive no benefit because they didn't "need" it.

To expand the discussio slightly, 2007 will mark the first payments under Medicare to people who have worked under and "contributed" to Medicare for their entire careers. We could probably save a lot by "cutting off" those who don't "need" their Medicare benefits as well.

And we wonder why citizens' opinions of government and politicians are so low? Get real!

In 1983, Congress brokered a deal. For the next 25 years (although it looks now like that will be 35 years), those whose taxes are primarily the payroll tax will pay excess taxes to be used by the rest of the government (in particular, the excess was supposed to be used to pay off the national debt). For the 25 years after that, those whose taxes are primarily the income tax will pay excess taxes to be used to deal with the Boomers' retirement. The Treasury bonds are simply a mechanism to make that agreement concrete.

The people at the bottom have held up their end of the bargain, but now that the second period is within the planning horizon of the people at the top, they want to renege.

If you want to argue that there was some sort of implicit “deal” that enables you to expect the rest of us to pay higher income taxes for your welfare check from OASDI, how do you square that against the fact that most of the people you’re expecting to pay higher income taxes probably weren’t old enough to consent to any such “deal” in 1983?

AT’s “Sopranos’” metaphor is looking more apt all of the time.

Thorley,

There was nothing "implicit" about the deal. It was very explicit.

I suppose you are suggesting that benefits be withheld from those who don't "need" them. NICE! I suspect Social Security would have lost support a long time ago if those who also saved privately for their retirements had known that they would receive no benefit despite a career of "contributions".

Contributions are taxes right? This is the 'we must bribe them' theory of paying huge amounts of money to rich people concept. I hope you aren't one of those people who thinks that money corrupts the political system if you think a bribe in the tens of billions of dollars is appropriate.

Lets solve the trust fund issue by moving the bonds into the hands of independent trustees and giving the present and future payors of social secutity taxes the rights of a beneficiary of a trust fund to have the bonds sold for use in paying social security payments.
Bush's privatization plan will require borrowing from the public over 4 million million million ( 4 trillion I belive) to fund the private accounts. No question whether those bonds will be repaid.

I believe the correct amount should be 4 thousand thousand million.

There was nothing "implicit" about the deal. It was very explicit.

You mean newspaper accounts? Greenspans exmplaining this in newsconferences? The actual law that enabled this?

Megan..but why is it "unfunded" (or "funded out of future revenues") if company A invests pension $ in its own bonds and "funded" if it invests in the bonds of company B? After all, company B must also pay the principal & interest on its bonds out of future revenues.

And what if company A is 3M and company B is Joe & Sally's Cat-Food-Via-The-Internet company?

"Did you think that the Trust Fund did not exist back in 2001?"

It isn't that the Trust Fund doesn't exist, it's that it contains nothing of value because its 'assets' are exactly offset by a liability. And Larry Summers Treasury Dept. made that clear back then.

'but why is it "unfunded" (or "funded out of future revenues") if company A invests pension $ in its own bonds'

What exactly do you think a company would be accomplishing by taking care to write on a piece of paper labeled 'bond' IOMe exactly the amount of money the company is about to spend?

Why are we pursuing this on the Fed level. Why not have private plans come out of the States investing only in the individual states economy with about 4% of pretax dollars. Then local residents would profit dirrectly from their efforts and local government directives. Those that do well will do very well as they get an influx of immigrants from other states. those who do poorly, well we know who you will be.

David Foster,

I think you will find it's illegal for a company to invest its funded pension in the stocks or bonds of just one company, regardless of what company that is. It's also illegal to invest pension money in Joe and Sally's internet cat food company unless it meets certain tests of financial wherewithal. Funded pensions must be invested in a well-diversified portfolio of financially strong companies.

The problem with the concept of a social security "trust fund" is that the government's formal obligation to pay sovereign debt (i.e. redeem the Treasury bonds in the fund) is between one branch of the government and another. There is no formal sovereign debt obligation between the government and the people who are supposed to be the beneficiaries of the fund. There is only the government's assurance that it will make welfare payments to old people unless it changes its mind.

DRB...you are correct about the sovereign debt aspect..if the govt were to renege on evern one treasury bond, it would set off an international financial crisis. Deciding to reduce payments to some class of social securities beneficiaries, however, would have no such aspect.

I'm not so sure about your statement that it is illegal to invest pension money in Joe & Sally's internet cat food company. Pension money is certainly being invested in venture capital firms (both directly and via mutual funds that invest in VC funds) and the VC firms in turn invest it in both equities and convertible bonds for companies which are known to be high risk.

DRB,

I think pensions can invest in their own company's securities, no?

why is it "unfunded" (or "funded out of future revenues") if company A invests pension $ in its own bonds and "funded" if it invests in the bonds of company B? After all, company B must also pay the principal & interest on its bonds out of future revenues.
~~~~~~~~~~

Why do you have "savings" available to finance $X of your future expenditures if you don't spend $X of your income currently but instead deposit it in a bank, but NOT if you consume every penny of your income currently and write yourself an IOU promising yourself to pay yourself $X in the future?

A private retirement plan being "funded" simply means it has savings set aside to pay future plan benefits. (The wisdom and safety of the investments that the savings are placed in is another issue).

With no savings a firm would have to pay all future pension benefits out of its future business operating income, which it may or may not be able to do.

Just like if you have no retirement savings you will have to fund your retirement years living expenses with income from some other source -- like continuing to work -- which you may or may not be able to do.

The to-do about the SS trust fund results from the fact that millions of people really believe it consists of governmental savings that the government will be able to draw on to pay future SS benefits -- while the message is now just getting out to them that the savings value of the trust fund to the government is $0.

Something, by the way, that neither the government nor the SSA has ever denied since the creation of the trust fund in 1937 (not 1983).

Just wait until people find out that the real value of the trust fund in terms of national savings, as Smetters has documented, is in fact negative to the tune of about a cool trillion dollars.

David, I believe legislation has allowed pension funds to put some percentage of their money into "alternative" investments beyond the so-called "investment grade" companies. However, the pension funds are still bound by their fiduciary obligations under ERISA to act as prudent investors. A small investment in some internet companies as part of a broadly diversified portfolio would probably be acceptable to regulators, especially if it took the form of investing in a VC that put $1 million into 100 internet companies rather than $100 million into 1 internet company. But betting the farm on flybynight.com would definitely not pass the prudence test.

GT, I'm not aware of any hard and fast restrictions on companies investing in their own securities in small amounts as part of a diversified portfolio.

"Jim, Did you think that the Trust Fund did not exist back in 2001? If so were you outraged at the time that the Bushies and the GOP conned Americans on which taxes could or could not be cut?"

Actually I first got interested in the issue back in the days of the 1994 Advisory Commission and formed the opinion then that ...

1) The surplus should be invested as real economic savings in real assets, (a) preferably in private accounts, but if not then (b) by the trust fund making real investments itself; or, if both these proved impossible, as a second best option...

2) The surplus should be eliminated by cutting the payroll tax to put SS on a true paygo basis, as per Moynihan's proposals.

Either course would have eliminated Congress's "not theft but embezzlement", in Moynihan's words, of funds labelled on paychecks as "FICA" for other use as general revenue, keeping them in fact for use as FICA ... would have forced Congress to use general revenue for general revenue spending ... and would have made the financing of SS on the whole much more transparent, so people would have had to face up to the reality of what was coming a lot earlier.

Of course, Congress and Presidents and 99% of other politicians, both parties, wanted none of these things, so starting when the surpluses arrived back in the Clinton years we instead got much meaningless political blather about lockboxes and such.

My preferences are still 1a, 1b, and 2, the difference today being that there are 11 less years for 1a and 1b to make a difference (when they once could have made a big difference) and 11 less years for workers to enjoy lower tax rates while people generally face up to reality with 2.

And of course, precious few people have faced up to a dang thing, Democrats being religiously opposed to doing so and Republicans being expediently scared to do so.

Now, my personal opinion about what is most likely to happen in the real world in the future is that Congress won't do a damn thing of substance about SS until mountainous future income tax hikes come into view around 2025 or so.

At that point it will again do exactly what is has done in the past: slash benefits for the young workers of the day, up means testing on the old, and raise taxes to cover the balance -- the same political incentives will apply so it will respond the same way as before. 1983 again on a much larger scale.

But, hey, when in an era a major rising deficits SS goes into serious competition for general revenue against Medicare, the military, agricultural subsidies, the education department, welfare programs that help the truly poor, etc. and so on, how the heck is it going to avoid serious means testing?

In that world, what will be the progressive argument that Paul Krugman, Max Sawicki, & Co. will make to raise taxes on working people and run up the deficit to assure full benefit payments to Bill Gates and the other 20+% of seniors who are millionaires?

So SS will be means tested further, sure thing, openly, not disguisedly so as in 1983.

Then the benefit cuts and tax hikes for the young -- starting from a point where there returns from SS are already negative, thanks to the "deal" of 1983 -- will drive their returns from the program so far negative, with even those returns being uncertain due to the means testing, that the young will despise SS with complete rationality.

It will be the exact reciprical of SS growing so popular back back in the 60s to 80s, back when, as Samuelson described it...

"Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!"

... the exact same political process, in reverse.

And when those young grow a little older, they will take SS as we know it and kill it. Finis.

And as SS goes down politically in the 2030s, in the face of those massive tax hikes and big benefit cuts, it may well take the Democrats with them -- as so many people then remember that Democratic promise mantra of today that "SS is fully safe and sure until 2050 even if we do nothing at all!"

The Democrats may go the way of the Whigs.

All of which could have been easily avoided by setting up private accounts in the 1990s, so SS participants would continue to get positive returns from it on net, and it would be independently funded in a way to avoid contributing to the income tax crisis of the 2030s.

But hey, they have private SS accounts in Sweden -- and Swedish social policy is too right-wing for US Democrats.

So what can we do?

Sebastian,

"This is the 'we must bribe them' theory of paying huge amounts of money to rich people concept."

If providing a "promised" (but not guaranteed) benefit to those to whom it was "promised", regardless of their income and assets, is a "bribe", then taking the money from them with a "promise" of a benefit was a fraud. Your description of the payments as a bribe demonstrates that you countenance the fraud. You should be proud!

Do I believe our federal government is capable of and willing to defraud taxpayers? You bet your sweet bippy I do! Too bad Charles Ponzi did not live to see the greatest schemes ever reach its natural conclusion.

P. T. Barnum was right: "There's a sucker born every minute."

DRB,

So maybe we can the end the argument that SSA has no assets becasue a private pension that invested in its own company would have none.

GT, I can say with certainty that no pension fund would be allowed to invest solely in the assets of its parent company, or even be allowed to invest more than say 5% of its funds in the assets of its parent company. Investing any more money in a single company would likely not meet the ERISA requirements for "prudent investment."

But that's irrelevant because I'm not making the claim that SSA has no assets. It does -- it has US Treasury bonds, which are basically as good as gold. There's no chance in hell that the US government will ever default on its sovereign debt obligations. So I don't know who it is you're arguing with on that front, but it ain't me buddy.

What I am saying is that just because the SSA has assets in no way means that the people who paid social security taxes will ever see a dime of that money. The federal government's sovereign debt obligations are to the SSA -- they are most definitely *not* to the people who paid the money that funds the SSA.

All that the people who funded the SSA have to rely on is the government's assurance that it will make welfare payments to old people as long as it doesn't change its mind.

You want to bank on that for your retirement? Be my guest. We've got a President who's already talking in vague generalities about means testing, and this is in an age when SS inflows are still greater than SS outflows. Ten years from now? Fuhgeddaboutit. I'll make sure I put some of my retirement money somewhere the US government can't get a hold of it -- I'd planned to move to the Cayman Islands in my retirement anyway, guess I might as well start banking there now.

This doesn't seem to be a discussion about the SS Trust Fund. It's a discussion of whether corporate accounting (accrual-based) is better than government accounting (cash-based).

This started with the assumption that you can compare how companies operate pension funds to how the government operates an insurance program. This may seem innocent, but leads to all kinds of odd tunnels. Talking about assets and liabilities within a cash-based accounting system is just one of them.

There can be good questions about using cash-based or accrual-based accounting for government. (Cash-based is simpler, accrual is more accurate long term, accrual can be riskier, cash-based leads to cash-flow tricks)

Comparing how the corporate sector does things to how the government does things and then saying, "See they do it differently, the government is wrong", does not make a persuasive argument about future SS problems.

GT, I will argue that they aren't assets.

The SSA is a subsidiary of the government; in the private sector, it would be forced to consolidate its balances sheets, because the government has substantial control.

An asset is something which can be reasonably expected to generate future revenue for the larger entity to which it belongs.The bonds can't be sold
(and even if they could be, could be sold only for the present value of future payments, making the transaction neutral in a low-inflation environment.) They do not, in any other way, produce actual income. Thus, they are not assets of the pension fund.

But beyond that, you don't seem to understand the difference between IBM having a portfolio of investments that contains, say 1 percent IBM stock, and IBM having a pension that is composed 100 percent of IBM bonds. I promise you, the regulators do understand this. Moreover, the bonds in the trust fund would not be legal assets of a private pension fund, because they are not tradeable on a secondary market. ERISA forbids companies to issue "special" securities to their pension funds. Furthermore, when employers have their own securities in their pension plan, if the securities lose value -- either the company becomes less likely to pay, or inflation gets out of control, or whatever--the companies legally have to immediately top up their pension plans. If we hit double digit inflation, the feds have to do exactly nothing to the SS trust fund. Finally, company stock is different from company bonds, in that company stock conveys a real ownership interest in the company, while bonds are merely a promise to pay in the future. In effect, the company is just borrowing money from its pension plan--a BIG no-no.

So, to sum up, I'd argue that:

1) The bonds are not assets, because SSA is not a standalone entity

2) None of the Social security bonds would be legally allowed in a private pension plan

3) Even if they were allowed, they would not be allowed to hold more than a fraction of them as assets; failing to observe the fundamental difference between a plan with a little company stock, and a plan that consists of nothing but company bonds, is playing stupid for the sake of argument.

4) That a company holding more than a few percent of their own stock (or any of their bonds)in their pension plan would be in clear breach of fiduciary duty regardless of whether or not it was legal.

Mike, as Wikipedia says, "Companies that have extended or used credit more expansively will use (and in the United States may be required by the Internal Revenue Service to use) the accrual-basis method of accounting. The Securities and Exchange Commission requires that all publicly traded company to follow GAAP, thus all publicly traded company publish their financial statements using accrual-basis method." Once you've got material assets and liabilities (such as, oh, a pension plan) you have to use accrual accounting.

Jane, the Wikipedia starts that statement with "Companies that..." Currently the U.S. government is not a company. Some countries have switched to using accrual-based accounting (the U.K. is a notable example). There are advantages and disadvantages to both.

You make a good point about material assets and liabilities, but is that a reason for the government to switch accounting methods? Should they switch across the board?

Besides being forced by SEC and GAAP, companies use accrual accounting because it gives a more accurate picture of financials for a profit-making entity (yes, I know many non-profits use it too). The annual cash outflows for a company related to capital expenditures can be distributed over multiple years since those expenditures are expected to bring in more money in years to come.

With the exception of investments in the IRS, most government spending is not designed to bring in more revenues in the future. For the U.S. government we get a say in whether creating more revenues is a goal or not. We can push for tax increases to get more goverment revenue or we can push for tax decreases to push government revenue down. A company wouldn't be able to get away with decreasing revenues on purpose (at least not for long).

DRB,

Well Jane thinks they are not assets. So I guess you disagree with her. And I fully agree that SSA having assets does not mean SS beneficiaries are entitled to any specific amount.

As for your (and Jane's point) that a pension fund would only be allowed to have a small percentage of own-company securities (and so is different from the SSA) I agree with that but it is not relevant to whether they are assets. Limits on concentration are done for risk management purposes, something that (arguably) doesn't apply when you are talking of US Treasuries, considered riskless assets. So when Jane says that I'm playing stupid it seems she doesn't understand the point. I know IBM's pension fund can't have 100% of its investment in IBM debt but if it did they would still be assets. It simply would be a very risky and illegal way to invest the money but they would be perfectly real assets.

And that's also why I don't agree with Jane's arguments that as 'special securities" the Treasuries the SSA holds are not real assets. The prohibition on special securities is, like the concentration issue, for risk management which I think doesn't apply to the SSA, or at least not in the same way. That's a separate thread on itself.

Jane also makes the point that SSA can't be treated separately becasue it is controlled by the government. This is only half-true. There are many entities, both public and private, that are considered separate even if there is some level of parent control. I suspect that an entity identical to the SSA in the private sector WOULD be consolidated but that can be easily changed. Suppose that Congress changed the SSA to a securitization-type vehicle, where payroll taxes go automatically to a Trust that then invests the surplus on Treasuries (like thousands of such vehicles in the private sector). Such an entity would not be consolidated in the private sector. Yet nothing changed economically, only from a legal/accounting point of view. The difference is that in the private sector such a securitization vehicle cannot be undone by the company that set it up wheras the governmnet can more or less do whatever it pleases in this area. In this sense everything is under tha control of the government.

And that's why I said that SSA is not really directly comparable to the private sector and is a special beast. In the end the issues of assets is more political in nature, meaning that if you accept SSA has assets any fiscal correction must be done elsewhere.

And, to me, it's also an issue of fairness. Because if we know accepot there is no Trust Fund then the GOP and Bush and conservatives conned us in 2001 when they cut income but not payroll taxes. At the very least thye should admit that.

But luckily it seems Bush's terrible plan is collapsing. With any luck it will do so.

A lot is made of the SS Trust Fund--which is sort of a misnomer. But in a way it's right-on: we are TRUSTing the U.S. government not to default on any financial obligation (which it never has in history).

This whole liberal/conservative nonsense is just that--nonsense. The "Trust Fund" does consist of IOU's. "Liberals" consider it more "real" than that--and they are wrong. But "conservatives" fail to acknowledge that the U.S. government has never defaulted on a financial obligation, so the IOUs do have at least some value. Hell, when you think about it, everything in this country is based upon faith...I mean...nothing really supports our currency in the way gold and silver used to. It's just our faith that a person at, say, a news stand, will take our dollar and give us a NY Times. And that the taker of said dollar will get some value for it (about $1 worth) at a bank...etc.

I must say that I hadn't seen terms like inter-company eliminations in years. It nearly gave me a woody. :)

GT, I believe Jane is approaching this from a perspective of accounting definitions and is making the argument that for accounting purposes the bonds would not be considered assets, that if the government were a company SSA would be consolidated and the "assets" would wash out to zero, etc. Jane is I believe technically correct, but I'm not sure her argument is useful. As a Chicago MBA Jane knows very well that accounting treatment should not drive economic decision-making, although accounts can help inform that decision if used correctly.

So rather than get lost in the morass of whether the bonds held by the SSA would meet the technical definition of an "asset" and whether SSA would be consolidated if the government was a company, I will instead suggest we discuss the situation in clear terms as it actually exists and make our decisions accordingly. I will stipulate the following:

1. The SSA holds US Treasury bonds.
2. The federal government will not default on those bonds.
3. The SSA will not actually redeem those bonds for cash and then distribute that cash to old people except to the extent the federal government tells them to.
4. It is within the powers of the federal government to tell the SSA to forget about making cash payments to old people, redeem the bonds for cash, then order the SSA to give all that cash back to the government as a direct transfer rather than a loan. Or to make the bonds a perpetual loan that never, ever gets repaid.

Based on the above, there is no "Trust Fund" except to the extent the federal government says so, and the federal government is entirely capable of changing its mind. In fact, with talk of means testing and raising the retirement age, the federal government is already sending indications that it will change its mind at some point.

As for your last point about what terrible liars and awful people the Bushies are -- well, okay. They're big liars. I'll even stipulate that Bush is the anti-Christ. That doesn't change the nature of the "Trust Fund." Hopefully you can now get over your obsessive partisan hatred and deal with the situation as it exists.

Bush's plan is collapsing, but I'm not sure it could have done much to "fix" SS anyway. The problem with SS is that it isn't really an insurance policy or pension fund at all. It is an additional income tax plus welfare payments to seniors that shouldn't really have any substantial relation to one another.

DRB,

I think I agree with your points.

But I don't think that my point about Bush lying has anything to do with hatred. It's pretty straightforward IMO. 4 years ago conservatives told us we couldn't cut SS taxes (despite a surplus) because we needed the money for the Trust Fund. Now they tell us there is no Trust Fund.

The reason I think it changes the nature of the Trust Fund is that I think, in the end, this is a political discussion. I just don't trust Bush with SS and what he did 4 years ago is part of the reason.

IMO we have fiscal problems but they are not due to SS.

GT, I guess the question is what you mean when you say you don't "trust" Bush with Social Security. What I "trust" is that by using his political invulnerability as a second-term President to start raising questions about SS, Bush has laid some of the groundwork for its dismantlement. I am wholeheartedly opposed to making transfer payments to one of the wealthiest demographics in our society, old people (I'm pretty much opposed to transfer payments period, but that's a different discussion).

I think entitlements like Social Security and Medicare are certainly our biggest fiscal problems. Saving a little here and a little there by cutting discretionary spending is not going to achieve much as far as I can tell.

It seems like a very flexible bookkeeping interpretation to me to both insist that the IOU's are real assets, and that any privatization scheme would lead to a massive increase in debt.

But we aren't really talking about accounting here, just trying to justify partisan rhetoric.

Mindles,

Why is that? You are talking about two different things.

the SSA assets are not the same as the payroll taxes that would get diverted in Bush's plan, leading to more debt.

The 'surplus' represents a reserve against the accrued value of future SSA liabilities. Imagine, for a moment, that the surplus in fact equals the present value of SSA's future liabilities. To the extent the system is privatized, the need for an accrual or surplus inside the system is reduced. The IOUs are are gradually replaced by external debt as the surplus is placed in private hands. Net debt would not change.

If one considers the IOUs extant government debt, privatization only creates new debt to the extent we are a) under-accrued at present or b) the privatization system incurs new frictional costs.

P.S., we *are* under-accrued at present, but most financial people would call this an "unfunded liability", which has many of the same characteristics as debt from a creditor's perspective. Actually, I'd say from a creditor's perspective it IS debt, just like being the obligor on a whole bunch of letters of credit.

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