Asymmetrical Information

Now I understand! Using yourself as an example, you, Mindles Dreck, are not responsible for any promises, obligations, or contractural committments you have made or may make in the future. Because they are just IOU's, and you have proven yourself untrustworthy, without integrity, a bad credit-risk, without honor or any intention of keeping your word, and in fact the stated intention of defaulting.

As of today and everyday, FICA tax surpluses are borrowed for use in general fund expenditures, with the written committment to repay the loan. You are among those, with our President, who every day takes that money and makes that promise while simultaneously saying...."Suckers"

Congratulations. I now understand economics.

Bob McManus,
You are correct. our president Franklin "In the long run we're all dead anyway" Roosevelt and our president Harry Truman did indeed consider the American people to be a bunch of suckers when they put their little Ponzi scheme into play. But in fairness to them thinking beyond lunch was never a Liberal skill. ^_~

My mistake, not simply FICA surpluses, but all of FICA revenues are transferred to the general fund under cover of specific legal language in writing. And not just Franklin and Truman, but Bush and this Republican Congress, this year, as every year for decades have looked at and approved and signed that specific written committment in the budget process.

If Bush and the Republicans have no intention of replacing that FICA transfer from the general fund, as they promise every year to do, in writing, they have ample opportunity to let us know, and every means to make changes to the process.

Transfers and replacements make no difference. The net effect is the same: external debt has to be raised to pay off future beneficiaries. The consolidated government has to raise the money and pay SSA beneficiaries, whether the Trust Fund exists or not.

Why is this so difficult to grasp?

"Why is this so difficult to grasp?"

It is not difficult to grasp at all. Massive general fund tax increases or entitlement benefit cuts will become necessary. I absolutely agree.

But why is there current language denoting a difference in the way current revenue streams are viewed in the ongoing budget process if in fact, there is no difference? Is this language, which is instantly available and transparent, a deliberate deception? Why is there the "fiction" of a SS Trust Fund at all?

The best analogy is of a corporation looting its pension committments to pay dividends of bonuses. The fact that there are different types of assets within a corporations books is a matter of law. No, the corporations, Bush, or the Republican party cannot be trusted to honor promises without coercion.

The trust fund matters because the source of the original funds and the source of the payback funds is different. The original surplus came from payroll taxes, while the payback will come from general fund taxes.

In other words, for many years the middle class overpaid payroll taxes in order to keep down income taxes, which are paid largely by the better off. In return, income taxes will eventually be raised in order to keep payroll taxes low. Surely you understand why the middle class would be unhappy at breaking this bargain halfway through?

I am actually glad this came up again.

I feel discussion of the trust fund tends to produce a lot more heat than light. Here's my perspective:

1. We all agree that the Federal government faces a large and growing long-term deficit

2. The dispute about the trust fund really is how much of that deficit social security has to make up and how much the rest of the government has to make up. This has real distributional issues because social securities funding base is quite different from the income tax. Likewise the benefits are different than the rest of government spending.

I believe that social security should improve its finances until its long-run (including its history) taxes match its long-run benefits. This is $3-4 trillion over 75 years figure.

I interpret (perhaps falsely) the no-trsut-fund crowd as believing that social security needs to make a bigger adjustment to cover shortfalls elsewhere. Am I reading you right?

In the extreme, some argue that social security taxes must exceed benefits in each and every single year, and that that excess can not be applied to future years. Would any of you go this far? If so, then you have a much larger gap to make up.

cheers,
Tom

Here's something that I think illuminates the nature of the Social Security Trust Fund:

Investors Business Daily reports that one possible variant on private accounts would require the money in those accounts to be invested only in Treasury securities. So, suppose that this happened.

The flow of funds would be basically the same as it is today: SS contributions would be spent to fund the general operations of government, and would have to be repaid, with interest, at a future time. So, it could be argued that *economically* this form of private accounts would be the same as the Trust Fund system.

Legally and politically, however, it would be totally different..because the obligations would be fixed, definite, and contractual, and the government could not get out of them without destroying the entire international financial system.

"without destroying the entire international financial system"

Well, I suspect the actual economic consequences of the intended default will not be as trivial as some might think, living expenses must come from somewhere, and I would predict a decline in asset values as the elderly are required to sell off in order to survive etc.

"because the obligations would be fixed, definite, and contractual,"

Would the current Congress and President please add language to the special SS Trust Fund T-Bills they issue on a regular basis, below the words "Full Faith and Credit" the addition "Not!"

It's actually far simpler than shown here. Yes, there is a trust fund and it's backed by the government. Specifically, the government promises that when the time comes to make good on these IOUs so that SS can pay benefits, the government will extract the needed funds from the American taxpayer, just like it does for all other needed revenues. Government will tax you and I to pay you and I our benefits. If this seems like a rotten idea, then you have grasped the plan completely.

Kevin, you have simply repeated the error: that there is a specific tax to pay a specific benefit. The point of Mindles' demonstration is that by virture of the guarantee it's all consolidated.

Also should point out that the idea that the amount a person "pays" in taxes can be measured by the amount withheld is economically irrelevant. And even if that point were granted, since the overall tax payments/tax benefits ratio is mildly progressive, the idea that one stream of taxes "subsidizes" the another is kinda silly; as if having two taxes that net to one outcome is different that having one tax with an identical outcome.

Kevin - in other words, as Arnold Kling points out, borrowing to fund a transition to private accounts is more progressive than the current system.

Is the middle class that paid ("to keep payroll taxes low") in in your comment largely the same one claiming benefits by the time this has gone full circle? Are you implying they all have a high income at this point and are now paying again? Or that the government didn't use the money they paid in for their benefit? Or is the middle class a non-aging static population?

Don't mean to be flip, I can see many demographic inequities in how this is going to play out if the system doesn't change. But I just don't know where you are going with that comment - savings plan, safety net or wealth transfer?

"No, the corporations, Bush, or the Republican party cannot be trusted to honor promises without coercion."

That's where you jump the shark. The Trust Fund accounting fiction was created a long time ago by non-Bush, non-corporate actors, and has been exploited by the government ever since.

The Bush Administration owns it now, but they are the first to actually try to do something about it. Democrats are just being reactionary "not invented here" obstructionists in their refusal to come up with ideas of their own or acknowledge that the plan had significant faults to begin with.

Here's a simple test to determine whether the bonds held by the SSA are real or meaningless.

The Treasury currently pays interest to the SSA, to the tune of about $90 billion per year.

If those bonds were really "worthless IOU's" or "of no consequence," then there would be no need to continue paying interest on them. The Bush Adminsitration could reduce the deficit by about one-fifth with a snap of the fingers and with no consequences whatever. Why don't they do this?

Because the bonds held by the SSA are, of course, geniune. To fail to pay interest on them would be just as real a default as if the Treasury failed to pay interest on dept held by the public.

What would be the effect of paying 1000% interest on them? Nothing.

Besides, as others have pointed out, they are paid back at the pleasure of the government. Which, again, doesn't matter to anyone outside of government because they are an intragovernment loan.

Your argument begs the question - the government acts like they mean something therefore they do.

Do you suppose the government would sue itself to collect? Jeez. Willfully obtuse, like Jane said.

Mark, you pay that interest to the SSA on those bonds, along with me and everyone else who pays taxes. You pay into the system allegedly buying a future benefit, you pay again to keep the system flush now, you will pay again down the road when the SSA needs to turn those IOUs into cash and the government adds to your tax burden to pay off those debts. Not just you, of course, but everyone else, including your kids and their kids, and on and on. If SS had been built differently, those funds could come from somewhere else, instead of taxes on Americans. But because of the fake trust fund, we've paid, we will pay more, and we'll pay ruinous amounts in the future. Unless the system is changed, it's inevitable. You'll be wishing the 'full faith and credit' of the FedGov wasn't so damn inviolate one day, when the burden on all of us and our kids to keep that promise really begins to crush us.

Look, if the government had in fact kept massive reserves on hand in a trust fund, Reagan would have given it to the Savings & Loan people, or used it to bail out Chrysler, or found some other way to give it to the rich so it could trickle down to the poor.

Or Bush Sr. would have handed it out to the Investment Bankers in the early 90s in the name of "privatization" and it all would have been gone by now anyway.

Best to start with the assumption it's an obligation, rather than have it become "an obligation we can't meet anymore" once the conservatives gave it all to the rich.

That's what ultimately drives conservatives crazy -- that for all their squirming and manipulating, somehow the poor actually still have some security that hasn't been stolen from them, and can't be stolen from them despite corporate America's best efforts. If we could just privatize it, all that money would finally be up for grabs and they could get their sticky hands on it.

Apparently the DU folks have come over to see AI.

Kevin,

You said

"In other words, for many years the middle class overpaid payroll taxes in order to keep down income taxes, which are paid largely by the better off. In return, income taxes will eventually be raised in order to keep payroll taxes low. Surely you understand why the middle class would be unhappy at breaking this bargain halfway through?"

I call Bulls--t and would appreciate a cite. I can't recall making that bargain or hearing anything about. If social security was sold as being paid out of income taxes there would have been no need for social security witholding and employee contribution. This sounds like after the fact justification for continuing a broken system. Your argument is further evidence that social security is not a retirement system. It is a generational wealth transfer entitlement program.

The Chrysler bailout is a perfect example of just how sneaky and underhanded conservatives can be: if President Carter had caught Reagan sneaking into the White House and approving the bailout before he was even elected, Reagan would never have gotten away with it.

Despite your claims to the contrary, it's quite obvious that IOU's are real. Here's why:

1. Social Security is not a retirement system, as the Republicans would have you think. It's an insurance program for people that have unfortunate events occur in their lives. Those IOU's will be used by people who are now fine, but will at some point be in an unfortunate situation. We don't know who these people will be, but they exist, and the fact that we can't identify them right now does not change that. Likewise for the Social Security trust fund.

2. Social Security has been around for a long time, and not until Bush tried to loot Social Security did I hear anyone claim that the Social Security trust fund wasn't real.

3. Bush and the Republicans are certified liars. Weapons of Mass Destruction????

4. The lie that the trust fund doesn't exist is just another Republican attempt to kill off the working class and give more power to their rich cronies. It's just like the Republicans who want to get rid of the FDA (who cares if poor people die) and the Department of Education (education is only for the privledged few).

5. We always hear about the U.S. having strategic oil reserves. Nobody disputes its existance. Why is the social security trust fund any less believable than that?

"Social Security is not a retirement system, as the Republicans would have you think..... the fact that we can't identify them right now does not change that. Likewise for the Social Security trust fund....not until Bush tried to loot Social Security did I hear anyone claim that the Social Security trust fund wasn't real....We always hear about the U.S. having strategic oil reserves. Nobody disputes its existance. Why is the social security trust fund any less believable than that?"

QED! I thought Paul's comment was funny, but this is Sheer Comic Brilliance!

A very simple solution to the problem of Social Security exists; SSA declares bankruptcy and, like United Airlines, hands its pensioners over to the PBGC...

"Social Security is not a retirement system, as the Republicans would have you think. It's an insurance program for people that have unfortunate events occur in their lives."

Apparently turning 65 is an unfortunate event.

Ammonium wrote:

2. Social Security has been around for a long time, and not until Bush tried to loot Social Security did I hear anyone claim that the Social Security trust fund wasn't real.

Sorry, solipsism is not a form of logical argument.

Back in 1983 it was clear to many people that the "trust funds" were accounting fictions. The Heroic Democrats "fixed Social Security for all time", according to Claude Pepper, by jacking up the FICA taxes and raising the age of retirement. That "worked" (as well as anything else in a Ponzi scheme 'works') for a while, but the demographics are no longer favorable.

Suppose that Ammonium had not heard that fire burns; would that have any meaning for the rest of us?

Great post, Mindles. Unfortunately, because we necessarily trust government to be stable, somewhat out of necessity lest much of the present currency structure go to pot, said trust -- in some cases, siblinged by blatant partisanship -- leads to a lot of cognitive dissonance.

"Yeah, it's an IOU, but it's a guv'mint IOU" -- well, the government too can go bankrupt. I really hope nobody is hanging their hat on the idea that it won't, without being at least willing to consider reasonable alternatives to the status quo.

"The Chrysler bailout is a perfect example of just how sneaky and underhanded conservatives can be"

Doh ... that'll teach me to rely on my memory about stuff that happened before I could read.

However, regardless of the party that did it, the bailout illustrates that government is way too eager to give away money to the rich to be trusted as a trustee for the poor. Better that government be a collector and deliverer than to trust it with our money for long periods of time.

Therefor if you want social security, giving the government an *obligation* to pay is better than giving it duty to hold in trust. It's less complicated.

If you think the government is a bunch of thieves, then don't make them become trustees -- limit them to being pickup and delivery boys. That way they can only rip you off for the amount they're delivering TODAY, not the amount they're holding for the next 25 years.

Since I think the private sector is ALSO ramapant with thieves, I'm against privatizing the trust fund and letting THOSE theives hold the money in their stinky little hands for the next 25 years.

Yes, social security does only obligate this government to pay this year's social security bills. But that could very well be a good thing, because if any particular year's government screws us, we throw them out of office and start over.

If we make any one government responsible for the next 25 years of social security, when they screw us we can't just start over next year.

anony-mouse laid this on us:
Unfortunately, because we necessarily trust government to be stable, somewhat out of necessity lest much of the present currency structure go to pot..

Yeah, we sure better trust the Feds, if we don't then maybe they'd print so much money that the value of the dollar would decline to a mere 5% of what it was worth in 1913...

But, of course, as Richard Nixon would have said, "That Would Be Wrong"...

"In other words, for many years the middle class overpaid payroll taxes in order to keep down income taxes, which are paid largely by the better off. In return, income taxes will eventually be raised in order to keep payroll taxes low.

"Surely you understand why the middle class would be unhappy at breaking this bargain halfway through?"

Kevin Drum is a disciple of Milton Friedman! Who'd have thunk it??

Let's put aside the fact that his (Drum's) description of such a 1983 "bargain" is one of the most amusingly anti-historical, made up long-after the fact rationalizations for the status quo I've ever heard ... and that to embrace that bargain as "liberal" -- as it upped workers' taxes and slashed their benefits to drive their returns from contributions from the heights into ever deeper negative territory forever more -- requires a form of doublethink. Both of which surely demonstrate the equivalent a Ministry of Truth operating within the DNC.

Ignoring all that, the functional point that SS should be financed with income taxes because they are more progressive is exactly Milton Friedman's.

Of course, Friedman explains it with much more clarity, cogency and substance. To wit:

All of Social Security's problems -- its insolvency, and its miserable negative returns that will make even low-income workers poorer over their lifetimes (something that doesn't bother liberals anymore!) -- derive from its financing a backwards transfer (benefits exceeding taxes) of $11 trillion to workers to date, and its insistance that this $11 trillion be financed through regressive payroll taxes.

Since it is now politically impossible to increase payroll taxes enough to carry this freight, the result is negative returns for today's workers that will make them poorer on a lifetime basis (something liberals now embrace!) and insolvency on top of it.

But Friedman points out that the $11 trillion backward transfer is simply a sunk cost national expediture -- and that in the past all such sunk cost national expeditures (WWI, Depression relief, WWII, the Vietnam War, the Space Race, etc.) have been paid off by the nation through income taxes.

He notes that doing this with the SS $11 trillion is by the same measure the only sensible, progressive thing to do -- we didn't pay off WWII with payroll taxes! -- and that the failure of so many to see this is some sort of aberrant "deer in the headlights" psycho-political paralysis.

If the $11 trillion was paid off through recognition bonds financed with income taxes, then workers starting from tomorrow forward would only have to finance their own retirements -- and not those of millions of preceeding retirees.

Then every worker could have a private account with real economic savings, and since positive returns of about 4% (or more) compound to considerablly more than negative returns over 40 years, the result is that they would be better off at retirement with more funds then, and better off today too by having to make only a much smaller contribution (say 3% to 6%, rather than 12.4%) to fund such future benefits.

And, of course, there is exactly $0 transition cost to the govt, since its liability for accrued SS benefits is totally unchanged, and be paid off in exactly the same manner -- taxes, only different taxes.

All of which is a progressive win-win-win -- the only losers being the hated "rich" who pay the bulk of income taxes. Surely a plan liberals should rush to embrace!! Is it not a puzzle that they don't??

But all Mr. Drum and his friends need do to do so is realize and admit the fact that that their current argument that "income taxes are better than payroll taxes for funding SS" doesn't end where they want it to.

Then the can show that they care for the working man as much as Milton Friedman does.

I have no doubt that the future payments required of SSA will be met. Alan Greenspan himself said that could be done.

Of course, he also mentioned in passing that the value of said payments might not be guaranteed...or, to put it another way, being a millionare might not be such a big deal in a few years. After all, towards the end of the Weimar hyperinflation, everyone was a multi-billionare...

So SSA payments will be met. Whether the check will be worth cashing or not is another issue...

We should start a pool on when the 'trust funds' really get tapped. I know the SSA 'trustees' claim that everything is hunk-dory until 2018 or so, but the leading edge of the Baby Boom is going to be 62 in, what, 4 years or so? I read in the WSJ sometime back that every year for the last 10 or so the number of people electing to start taking Social Security money as early as possible has increased. Given the Boomers well known problem with delayed gratification, it seems likely they'll take the money and run...which leaves me wondering if we won't see the event in question not in 2018, but in 2010...

"Using yourself as an example, you, Mindles Dreck, are not responsible for any promises, obligations, or contractural committments you have made or may make in the future. Because they are just IOU's, and you have proven yourself untrustworthy, without integrity, a bad credit-risk..."

Yup!

That's exactly why a bank would require security before giving a loan to Mindles, whatever he promised; and why if Mindles starts a business with a retirement plan the gov't will require him to contribute real economic assets to it finance its future benefits, whatever he promises -- so that in each case his promises are funded.

Too bad the gov't hasn't imposed this funding obligation that it imposes on everyone else on itself, eh?

Because if it had, it wouldn't have to increase income taxes by 35% just to cover trust fund operations at the same time as it has to raise income taxes 60%-and-rising to cover Medicare and Medicaid.

Also because, for all that some people now like to talk about a "deal" or "bargain" that was made in 1983 to require this 35% income tax hike by 2030, the people who will actually be called upon to pay these tax hikes will most certainly NOT have been a party to that deal or bargain -- being that most were not born in 1983, much less of voting age.

And having not been a party to whatever promises were made made in 1983, they may feel themselves much less obligated by them than even untrustworthy, bad-credit risk Mindles is by his.

Hey, how bad a guy can I be? I sent a bunch of kids to the most expensive school district in the world!

Maybe that's why you can't afford to pay off on your IOUs.

Let's have public schools and all the good value we get for money spent on them as the next thread!

Mindles H. Dreck objected:
Hey, how bad a guy can I be? I sent a bunch of kids to the most expensive school district in the world!

So, are they gonna pay off that billion dollar note with the jobs they get from their publik skool edjookayshun?

The Bush plan is going nowhere. It doesn't address solvency. The fix is going to eventually be higher payroll taxes and means testing.

This is a subthread: someone referred to the "Chrysler bailout" but that was not a payment to anyone, it was a loan guarantee. The government earned substantial income from the guarantee when Chrysler stock recovered.

The government controls both sides of the "trust fund" (what is paid in and what is paid out). This leads to another problem for the status quo proponents.

If there is not enough money paid into the "trust fund" the government can just change the rules for what is paid out. Hello increasing retirement age and reduced benefits.

When the votes and negative tax impact on those paying into social security exceed the votes and positive income benefit of those receiving social security, social security will disappear in a puff of legislative smoke.

While I appreciate the recognition and the accompanying flow chart...you can beat these apples and oranges all you like...and you'll still get nothing more than fruit juice.

Trying to compare an individual checking account to the Treasury Bill system is meaningless.

Treasury Bills are IOUs the same way that cash in your pocket is an IOU. The cash is just paper or little metal coins. What makes it negotiable is the backing of the US government. Tbills are exactly the same way.

It's not like a personal check at all. You can keep writing that if it gets you through the day..but it's still wrong.

If you have some sort of actual evidence that TBills aren't going to be backed by the government and that they won't be paid..please post it. Otherwise this entire exchange is worth even less than the bandwidth it costs to post it.

Creating private accounts not only doesn't solve the problem..it creates an even more shaky reserve than the Trust Fund. Unless of course we all invest in that thing the President mentioned the other night: Treasury Bills...backed by the full faith and credit of the US government.

Mark: The Treasury does not pay interest to the SSTF. The SSTF holds a special series of non-negotiable bonds that do not receive coupon payments. Think about it. Where would the money go? The Treasury is NOT paying $90 billion in interest to the SSTF every year. It's quite the opposite. Interest on all Treasury debt securities in 2004 was $322B . From that, $68B of interest received by on-budget trust funds and $86B of interest received by off-budget trust funds was subtracted. After a couple other minor adjustments, NET interest was $160B. That is, the Treasury only paid $160B in cash to service its debt. This is what is counted in the federal budget.

Jim Glass: The government has never paid off a "sunk cost national expenditure" since the Great War. National debt in the modern era is not meant to be paid off. It's meant to be carried along until economic growth gradually reduces it relative to GDP. Example: Gross federal debt in 1940 was $50B. By 1946 it was $270B. It fell to $252B in 1948 and then started increasing again. From then on, it has only increased or remained roughly steady for short periods.

So Fabulous: Umm, yeah it does. Heard of price indexing?

Carla: They are NOT marketable Treasury securities. Frickin' duh. Need a golden ticket to the clue factory?

It's not a Ponzi scheme if we fix the retirement age relative to the average lifespan. Of course there were 22 workers for every retiree in 1940, nobody lived to 65 then. It was insurance for people too old/infirmed/injured to work. If people can afford to just quit working 20 years before their death, we don't have an insurance program, we have a welfare program.

Bush's private accounts program isn't meant to 'fix' the cash flow problem of 2017/2043, it's meant to 1) provide guaranteed capital for wall street in a time when as many people as now won't have the money to invest, 2) earn money for investment folks, 3) muddy the picture when benefit cutting time comes. It doesn't fix the problem, it obscures it.

It's an interesting question.

Let's do a thought experiment. Suppose the government transferred, over night, all those t bills in the 'trust fund' to private accounts (let's ignore, for the moment, the problem of actually deciding who gets them).

What difference does this make?

Not that much as far as I can see - at one level it is simply another book keeping transaction. The bonds still exist, there is still a liability etc, payments are still made on the bonds. It is just that people are much clearer about what they own and don't own.

So how does the fact that the accounts are now private solve the SS problem? It doesn't - people are still relying on the US government to pay its debts. In terms of the share of future government revenues that have to be set aside to meet bond payments, there is no difference.

To put it another way, I see not a lot of (macroeconomic) difference between private accounts in which people accumulate t bills and a ring fenced government account that accumulates t bills to pay future contingent liabilities.

My conclusion? Sure the SS trust fund is a book keeping operation. But an important one. It ring fences a certain amount of the t bills in circulation as assets held against future liabilities. It is a effectively a proxy for private ownership.

It is just that the ring fencing is less transparent than if the bonds were held by the public.

Mindles,

As I recall in the previous thread you and others accepted that if IBM's pension fund held IBM stocks or bonds those were real, actual assets for the pension plan. Did you change your mind since then?

If I can just add to my post immediately above - the point is that the bonds held in the 'trust fund' represent a contractual call on future government tax revenues that is earmarked to meet specific future liabilities.

There is no great conceptual difference between this and a private system in which those government bonds are held by individuals. In the private case too the bonds represent a call on future tax revenues to meet specific liabilities.

So - the point of the 'trust fund' is that it ring fences assets. Just as would be the case (though less transparently) if the bonds were held in private accounts. In both cases the security of the system depends on the US govt honouring those bonds from future tax revenues.

So yes - it is book keeping. But not irrelevant or meaningless book keeping. The effect of the trust fund book keeping is to establish a kind of (imperfect) proxy for private ownership.

Of course - in a private system one might choose to hold other assets, not bonds, which adds another dimension to the debate, and allows the individual to increase potential risk/return, with all the pros and cons.

But that is another issue.

AT,

You may want to use that ticket to the clue factory yourself. Treasury most certainly does pay interest on the SS bonds, in the form of other Treasury debt.

And let's not forget that this inexistent Trust Fund was used to pay for SS benefits about 10 times in SS's history.

GT: Did you not read what I wrote? There are no coupon payments on the bonds held by the SSTF. That is, the Treasury makes no cash payments on them. They accrue interest as zero-coupon bonds do: you borrow P and pay back some variant of P(1+r)^t later. The Treasury does not issue public debt to make these interest payments, as there are no payments made. What happens is that the value of the SSTF, or "off-budget trust funds," increases by the amount of the interest accrued. This increases gross federal debt. Try actually looking at the budget historical tables if you don't believe me. It's not a difficult concept.

For everyone else, it really is simple. The bonds held by the SSTF are a claim by one particular government program on general revenues received by the Treasury. This claim is senior to discretionary programs (obviously, by definition), but junior to the claims of public debt. Ask the treasuries markets. Note also that while Congress has by statute pledged to satisfy its obligation to the SSTF, it can determine the timing and manner of its repayments simply by changing payroll taxes or benefits payments.

Understand now?

A debt instrument has a holder and an obligor. Since the SSA is the government as well, the holder and the obligor are the same entity. Therefore they make no difference to the government's credit from an external perspective.

Carla, if you can't tell the difference between an IOU and an I-O-ME, regardless of who is owing, I cannot help you.

PS - don't try to get a job as a credit analyst.

I still think we are talking about this the wrong way.

What's the practical implications of your belief or lack of belief in the trust fund?

I think the implication is this:
Say the 75 (or infinite) SS shortfall is $X (including the current trust fund). And the current trust fund is $Y.

I think the trust fund doubters want SS to come up with X+Y in benefits cuts/tax increases. I think the trust fund believers want SS to come up with X in benefits cuts/tax increases.

Is that right? And for the doubters, do we actually need even more money because we should not count the next 13 years of surplus, as we have not counted the last twenty or so?

Cheers,
Tom

OK. The actuarial;y calculated present value of future obligations through 2079, according to the Trustees, is $4.4 Trillion. So that's what the government has to come up with, whether it loaned itself $1.7 Trillion or not.

You can either set aside reserves for this (which would have to appear on the asset side of the consolidated balance sheet and be invested in something other than your own obligations) or hand it over in satisfaction of the the shortfall. This requires issuing external debt of $4.4 Trillion or collecting the same in taxes.

Once again, the size of the Trust Fund is immaterial to government's solution.

PS - I added three more scenarios above.

1. What if the Trust Fund were $170 Trillion?
2. What if the Notes were handed over to the beneficiaries in exchange for reduced benefits of the exact present value of the Notes.
3. What if the government had a funded reserve?

"It ring fences a certain amount of the t bills in circulation as assets held against future liabilities. It is a effectively a proxy for private ownership."

WRONG! They are not in circulation. Not in circulation! Issued by one arm of the government to another arm of the government and stuck in a drawer. They are held 100% by the SSA. Here is the president looking at your 'bills in circulation' in a file cabinet.

If the reserve were set aside, the books would look like my 'funded reserve' example above. If the T-Bills were 'in circulation', it would look like the handover slide, except the SSA's liabilities would *still* be $4.4 Trillion.

Like arguing with scientologists, this is.

GT - "Used to pay for"?

I'm guessing they used cash. How they pushed sround the intra-government bookkeeping means nothing. Once again, imagine the Fund didn't exist. Any difference? No. The Government would write a check as always, borrowing as necessary externally.

More scientology.

Mindless,

Thank you. If I understand your perspective than, if we sharply cut benefits for the next ten years, it would do nothing to improve long-run solvency. Our 75 numbers from today would look better, the reported trust fund ten years from now would look better, but in 2015, you would again dismiss the trust fund and demand that Social Security be balanced for the next seventy-five years. Is that correct?

Tom

How one characterizes the SS trust fund "debt" is rather besides the point. The real problem is the identity of the "debtor" and "creditor."

They are the same, and, worse, they are the government. There is no outside body that can enforce the bonds even on the most optimistic reading of their "legal" validity. And if you really worry about the awful illegality of default, Congress can simply instruct the SSA administration to cancel the bonds of its own free will. It's not a default if the SSA decides not to collect, even if the ultimate decision is made by Congress.

That's the real problem, and why Mindles' example of a loan from him to his wife is a poor one - he can sue his wife on the $1 billion, and he can get someone to enforce that judgment. A better example is to say we've got two entities: Mindles H. Dreck in his personal capacity, and Piggy Bank, Inc., a corporation solely owned by Mindles whose sole asset is a piggy bank with $10. Mindles takes the $10, puts it in his pocket, and writes a legally valid, notarized debt instrument from himself payable to Piggy Bank, Inc.

If Mindles, as sole owner instructs Piggy Bank to cancel the debt, who can complain? Outside creditors of Piggy Bank, you insist!

And that's the real problem - the SSA has no creditors. You have no legally enforceable claim on your SSA benefits. They are the governments to give you or take away at its whim. The fact Mindles backed up his unenforceable promise to pay you back with a $10 note in Piggy Bank, Inc. matters not at all, because at the end of the day all you are holding is an empty promise.

Nope. Let's look at it: If you simply cut benefits, the $4.4 Trillion liability decreases and the position of the government improves by the amount of the reduction. Let's say you cut benefits sufficiently to cut the liability $4.4 Trillion to $3.4 Trillion. Now the consolidated net worth of the government has improved by $1 Trillion and the claim on the government by SSA beneficiaries has decreased from $4.4 Trillion to $3.4 Trillion.

I do not make a "call for balance" whatever that means. I would only favor the elimination of the Trust Fund because it certainly causes confusion. I merely say that it is financially irrelevant to discussions of the liability SS represents to the government or of government's external creditworthiness to bondholders or SSA beneficiaries.

Mindless,

Another question - I think from the above you would treat the trust fund more seriously if it was not invested in the US government debt. Is that right?

If the US government did begin doing this, and invested in assets, would this help matters (leaving aside the increased return)? I thought the point of the no-trust-fund position was that the government's finances must be looked at as a whole. Does the US increasing its assets and liabilities by the same ammount help?

My apologies if you have already addressed this elsewhere.

Tom

Mindless,

Just to be sure - you believe that government finances should only be looked as a whole. Is that right?

Tom

Just a note of thanks: Mindles, I appreciate you tackling this point. It was a good explanation.

Mindles by name, mindless by nature...

What is the point of this post? To demonstrate that, after many arduous hours, you've mastered PowerPoint? That you so badly misunderstand the nature of American democracy that you think of the government as single entity, acting by fiat and without response to its constituents? That a purpose of referencing the Trust Fund is that it's rhetorically effective, as indicated by the fact that you're writing against it?

What?

The "trust fund" is neither economically nor legally more important a "promise" than any other government benfit, whether it be ethanol subsidies or steel tariffs. That's the point, Tim. It's just politics and naked self interest, and shouldn't be debated on any other grounds.

If that's not his point, it should be.

Mindles,

SO IBM's pension dund holdings of IBM securities are not real assets?

Really?

GT: Look up "marketable security." If that doesn't answer your question, repeat.

Please tell me you just play one on TV.

AT,

What has that got to do with anything? Suppose, for argument's sake and for a more apt analogy, that IBM's pension fund only buys and holds to maturity. The question is whether they are assets not if they can be cashed in prior to maturity.

Mindles,

On a more general note I think if you are going to post on this it would be useful if you addressed at least one of the many counterarguments that jhave been made in the past, one of whicy is my IBM point but there are others. For example why those telling us today there is no Trust Fund are many of the same people telling us 4 years ago we couldn't cut payroll taxes, only income taxes, because we needed the surplus to fund the SS Trust Fund.

Tim - Boy you really get me all three hundred times you've made the Mindless pun. It's not as if I ever thought of it.

The answer is yes, I view the governments assets and liabilities on a consolidated basis, as any sovereign creditor would. The idea that it has any effect at all on the ability of government to finance/pay future benefits is ridiculous fiction used by both sides of the political aisle whenever it is convenient.

But thanks for the gratuitous stupid comments.

GT - not to an IBM pensioner, which is the perspective we take here. If IBM goes bust it can't pay it pension obligations (it has to pay them regardless of what's in the funded account, just like Government and the SSA). The assets in the pension fund will be held for pensioners (as opposed to general creditors) but the IBM stock will be worthless. So, no, it does not increase the security of the pension funding to the pensioner. Just as the government's obligations to itself in the form of SSA Notes/IOUs are worthless to the SSA pensioner.

Dylan makes a reasonable distinction.

This is rich. I just read the Times article that Mindles mocked up front. And no the Times did not get it wrong; Mindles did.

Mindles believes there has been double-counting because he (?) does not understand that the projected Social Security shortfall of $4.3 trillion is the going-forward shortfall _minus_ the trust fund. See for example: http://www.socialsecurity.gov/OACT/TR/TR05/IV_LRest.html#wp276411 table IV.B5.

Say Social Security will owe $5 for the future and will receive $0 in revenue. The trust fund is at $2, the reported shortfall is $3. In summing the government's obligations, you need to add the $3 shortfall to the $2 trust fund to get the total obligation of $5. That is the calculation the Times did correctly.

Apologies?

Tom

Mindles,

Are you realy saying that IBM's pension fund holdings of IBM securities are not assets for pensioners? I'm sorry but where could you possibly get that from? If IBM's pension fund has, say, $100 million in IBM stock and bonds you are saying they can't be counted as part of the assets?

Mindles:

Fine, it's essentially a rhetorical trick used to remind people that money that had previously been paid in for Purpose A was used for Purpose B, as Kevin said. So now you know that the reason people reference the Trust Fund is to win an argument about the structuring of SS. What do you think people are confused about?

I think what people object to is your claim that "an IOU is different from an I-Owe-Me." The government can promise itself (or really, its future beneficiaries) or anyone else anything it wants, and then reneg on the promise if it has the will; ask the Kurds. So in what way is a promise to itself different from a promise to some external entity that lacks the ability to enforce the promise?

GT - How can I be clearer? IBM's pension claims are the general obligation of IBM, just like social security is the general obligation of the government. The pensioner looks to the company to pay those pension benefits. The point of a separate account is to segregate assets against which the pensioner will have seniority as compared to other creditors of the company in the event of a liquidation. If the company puts its own obligations into the pension fund, it does nothing to add to the security already promised to the pensioner. When it comes time to liquidate, the pensioner already has a claim on the company whether those instruments are in there or not.

There are only three ways it could make a difference, one of them related to P&L effects, the other two related to debt restructuring and seniority:

1) the instrument pays income to the pension in the form of non-IBM obligations (unlike the SSA notes).

2) The instruments re-order the liquidation seniority of the pensioners in IBM liquidation. For instance, if the notes put into the pension were secured by segregated and pledged hard receivables (ie obligations of something other than IBM or assets that do not derive their value from IBM's credit- neat how that works, isn't it?). The government doesn't issue junior or senior secured debt, so this is NA for SSA.

3) the financing undertaken to put the securities into the trust alters the consolidated balance sheet (ie the stock is retired through treasury purchases, which would be bad for all IBM creditors, including the pensioners).

This is why you cannot fund a pension entirely with your own assets and why the PBGC takes a dim view of the practice in any amount.

Tim - I think the thing that is bothering you is that your last comment is very nearly right - the government can promise anything and it is very difficult to enforce. Which is why we should be careful to save the term 'trust fund' or 'reserve' for assets that actually back up the promise rather than simply repeat the same promise. The latter is an I-O-Me.

If it makes you angry, consider the virtues of transitioning to a private or public funded system - it backs up the promise.

"The question is whether they are assets not if they can be cashed in prior to maturity."

In this case (of IBM bonds) they are both an asset and a liability of IBM, hence they net to $0. So, they are worthless for paying promised pension benefits (or paper clips for the office).

IBM could, of course, sell IBM bonds to the public to raise funds, but if it damages its balance sheet (as it most surely would) by swapping one liability (pension benefits payable) for another (outstanding bonds) it would be ridiculous to think of this as an 'asset' of IBM.

IBM stock, on the other hand, could be sold at the market price, with the proceeds used to pay pension benefits. However, on a large scale and for a long time, they would dilute the value of stock held by other owners of IBM stock. That would threaten IBM's existence (and its ability to meet future pension benefits). Again, IBM's 'asset' is redundant to the pension benefits.

The SS Trust Fund, by law, can't sell its 'assets' on the market, it can only redeem them if Congress raises taxes (or cuts other spending to free up money). Which is exactly what would have to happen if there was NO TRUST FUND.

Meaning the Trust Fund is, as Paul Krugman used to say of it before W got elected, 'kind of a joke'.

And whether Kevin Drum or anyone else is 'happy' about that is also irrelevant.

Dylan,

Good post. The proponents of the status quo should read the last part of your post. It neatly summarizes the problem with the existing system.

"And that's the real problem - the SSA has no creditors. You have no legally enforceable claim on your SSA benefits. They are the governments to give you or take away at its whim. The fact Mindles backed up his unenforceable promise to pay you back with a $10 note in Piggy Bank, Inc. matters not at all, because at the end of the day all you are holding is an empty promise."

Tom - without double checking, you may be right. So pre-emptively, I apologize!! - happy?

It makes no difference to the analysis above. Add $1.7 Trillion to the SSA liabilities on the right side of their ledger and adjust net worth accordingly - it decreases by $1.7 Trillion in every case.

As for the Times article, I can still quibble. If that's the case, the external liabilities of the government are the total SS shortfall. The debt securities are consolidated away.

Why are so many willing to throw away a convention (consolidating entries) that has existed in Generally Accepted Accounting Principles since the very beginning?

You'll also notice that I didn't include Medicare liabilities.

Mindles:

"the thing that is bothering you is that your last comment is very nearly right - the government can promise anything and it is very difficult to enforce....If it makes you angry, consider the virtues of transitioning to a private or public funded system - it backs up the promise."

I think, at base, you're misunderstanding the real problem. The real problem is that the government, as sovereign, can do whatever the hell it wants. If we transition to a privately funded system, the government can turn around in 50 years and tax the hell out of the results. For example, there's nothing preventing it, ultimately, from deciding to tax IRA distributions.

Ah, you say, but the People would be in an uproar. Ah, I say, they're already in uproar about preventing changes to SS, and it's not the least bit clear that they'd be in less of an uproar down the road. One hopes that in all cases we'll live under a government that is responsible to those uproars.

The only real response to my previous point, so far, has been the claim by a couple of people that the Treasury does not pay interest to the SSA--a claim that is simply factually false. As I noted before, the Treasury pays nearly $90 billion annually to the SSA in interest. Starting in about 2017, or whenever tax collections become inadequate to fully fund benefits, the interest payments will be used to make up the shortfall (this means the Trust Fund bonds will not have to start being rolled over themselves for another decade after that).

Anyone who really thinks that the Treasury could effectively default on the bonds held by the SSA without consequence has just flunked basic macroeconomics. Government debt is secured only by the government's credibility. Any government which defaults on its debt will suffer a tremendous blow to its credibility. Consequences would definitely include sharp rises in interest rates--if not complete loss of the ability to borrow--along with severe currency depreciation.

The US government's crebility is behind the bonds held by the SSA, just as it is behind all other Treasury bonds. That is what makes those bonds genuine assets, not "worthless IOU's."

"Anyone who really thinks that the Treasury could effectively default on the bonds held by the SSA without consequence has just flunked basic macroeconomics."

I give you a grade of, "F". Defaulting on the special SS bonds would IMPROVE the government's credit rating. The government has been 'defaulting' on them for many years, as they are 15 year bonds, first issued in the early 1980s.

Here's the 'basic macroeconomics'; the Federal government takes in between 17% and 19% of GDP every year since the end of WWII, with very few exceptions. No matter what tax laws we have.

There simply isn't going to be the money to pay for SS, Medicare, and Medicaid as the Boomers retire. The government can't sustain revenues over 19% of GDP. It's going to have to cut benefits if it wants to have a military, for instance.

My good buddy J Bradford, says it would need between 25% and 30% of GDP to meet its promises for those three programs AND current spending on other things. Ain't gonna happen.

Well Mindles, that is pretty strange since pension ARE allowed to invest in own-company securities and those securities ARE considered assets of the pension funds. You seem to disagree with current law and accounting practices.

[Mindles responds - read what I said: "This is why you cannot fund a pension entirely with your own assets and why the PBGC takes a dim view of the practice in any amount." Even if they did, that doesn't make it worth any more to the pensioner, I have amply shown in several different ways. Try to read and think next time]

Ditto. "Defaulting" on SSA obligations isn't a real default. As above, it's like defaulting to your piggy bank. My credit card company doesn't give a shit whether I ever repay money I move from my savings account to my checking account, and neither will private bond holders.

If a "default" on SSA obligations happens, it's because the government has decided to similarly "default" on its currently promised level of social security benefits, which can only improve the total budget and make private bonds that much safer.

The SSA is not an independent party that would or could object to not being paid. It's not at all the same as not paying the Bank of China or John Q. Public.

GT:

The private pension comparison doesn't help us because (1) pension funds are at least in part independent of the parent company and are obliged to look out for their beneficiaries interests, (2) private pension obligations are legally enforceable contracts and/or property rights, (3) private pension companies could sell that company stock/bond and put it into a "real" asset that is money in hand, not solely a duplicative promise.

The SSA need only answer to Congress, SS benefits (and all similar government programs) are not property, and SSA obligations in the "trust fund" cannot be sold.

Dylan,

No comparison is perfect. The point I'm trying to focus on is whether SSA has assets in the way a pension fund has them, not whether it has the same level of autonomy or not.

A simple question for certain simple minds:

What is the fair market value of the Treasury 'bonds' held in the SSA 'Trust Fund'?

Anyone?

Anyone?

Bueller?

Mindles,

Yes, I am more or less happy - I appreciate your noting your error (although note quite in those terms) up front.

Tom

Let's make a simple mental exercise:

1. Suppose the trust fund is real. How does Gov. pay cash SS benefits (or the unfunded part of them) in the year 20xx ? Out of the trust fund. Fine. Where does it get money to convert those trust fund bonds to cash ? From taxes and debt.

2. Suppose the trust fund does NOT exist. How does Gov. pay cash SS benefits in the year 20xx ? By raising money from taxes and debt.

What's the difference between case 1 and case 2 ? Nill.

(Jane Galt made this point in one of her old posts)

So, maybe the trust fund exists, and maybe not. In both cases the economic outcome is the same, therefore the trust fund has no economic existence.
Maybe it has political or propaganda existence.

The existance of the trust fund allows my senator to give a speech and claim that social security is fully funded for another 38 years, so there is no need to worry about it. (This speech was made in a college town in front of a bunch of kids who are 18-22... 22+37=59, I think they should worry.)

Looking at the trust fund ignores the fact that we're going to have to significantly raise taxes or cut spending in order to have revenue to fund the trust fund.

But some people say that this is fine because there is a bargain where the middle class has until now paid too much in payroll tax, so it's time for the wealthy to pay their share. This is total nonsense. The wealthy people aren't going to be around long. The new wealthy come out of the middle class. Did they make a bargain with themselves to pay huges taxes for the rest of their lives in exchange for allowing wealthy boomers and Greatest Generation folks to pay little in tax their entire lives?

It may be argued that the trust fund has a political purpose -- it earmarks a certain amount of money that must be used by social security and makes it extremely difficult not to pay out on those future liabilities. This is probably true, but it really scares me. What happens when the trust fund runs out and there is no longer any money earmarked for social security? I'm going to be a couple years from retirement when the government says, "Sorry, the trust fund ran out, we can't pay these obligations any longer."

But the government couldn't possibly do that, could they?!? I quote the senator who told us not to worry: "When the year 2042 rolls around it's not like Social Security disappears. There would still be enough money in the system to pay a large percentage of the benefits due."

No more trust fund means there is no reason to pay 100% of what retirees are due.

As somebody who currently makes little money, but hopes to make a lot in the future, and as somebody who will retire after 2042 and stay retired for a long time after that, I say that this bargain stinks.

The basic problem with SS is that it has been a transfer of wealth from the young and the unborn to the working, retired, and dead in the amount of $11 trillion. It's gone. They lived it up on measly 2% payroll taxes, and we're left with the bill. They f*cked us good.

"We are all suckers".

The wquestion is, how to we crash in a nice fashion?"

Bush & co. know the answers: doners, who keep them in power.

A cookie for the next Randian who steps up and says, "this is how things ought to happen".

Or a beer, in NYC. Let's toast.

AT:

They are exactly that. MARKETABLE. That's why we get all sorts of neato foreign countries to BUY THEM.

Carla, your presence makes my brain shrink.

I wrote above, "The SSTF holds a special series of non-negotiable bonds that do not receive coupon payments."

"Negotiable," from the dictionary: Transferable from one person to another by delivery or by delivery and endorsement: negotiable securities.

Can you simply not comprehend what has been said here? The bonds that the SSTF holds ARE NOT NEGOTIABLE, MARKETABLE SECURITIES LIKE THE TREASURY BILLS, NOTES, AND BONDS ISSUED TO THE PUBLIC.

Why, Lord, why?

Carla is too emotionally attached to her demolished semantics. Give it up.

Class, class, class, please pay attention, my question will be on the final exam.

What is the fair market value of the Social Security Trust Fund bonds?

They could be swapped for marketable securities (bills/notes/bonds that could be re-registered). My point would still stand.

It seems we can't get past several obvious falsehoods to which our more obstinate commenters are clinging desparately. I think I can summarize them below:

Falsehood 1) An entity's creditworthiness is not affected by who holds their securities, it doesn't matter if the owner is the issuer. related: it doesn't matter if securities are non-transferable.

Falsehood 2) Intra-entity borrowing or transfers are somehow meaningful to someone who has a claim on the entity as a whole-at least if the intra-entity borrowing iswithin government and is touted by politicians.

Falsehood 3) If someone said it was meaningful to make an intra-entity transfer, or if such a transfer is allowed (within bounds) to private sector entities, such a transfer must ipso facto increase the net worth of the entity as a whole. (related - if you haven't heard it from a politician before this administration it must be a lie)

They've dug in their heels to preserve the status quo against a plan that actually will make the system more progressive - even more so with the President's announced means-testing. The cognitive dissonance created by holding the partisan line is causing reasoning problems.

The government could not simply swap the SSTF bonds for negotiable bonds. Do you really think the bond markets would see the substitution of negotiable Treasury debt for over $3 trillion of debt held by government agencies as meaningless, since "debt is debt?" You're kidding, right?

"Could", not "would". Actually, I don't think the markets would take it as a big deal unless they saw it as the SSA's intention was to dump them for other assets and massively increase the external supply of Govenment debt. Which would be similar to redeeming them all (then the Treasury would have to issue the new debt).

But as long as the SSA holds them, they are still consolidated from an accounting and credit point of view- transferable instruments or not.

A sucker wrote:
"We are all suckers".

The wquestion is, how to we crash in a nice fashion?"

Bush & co. know the answers: doners, who keep them in power.

The answer to "how to crash nicely" is "doners
who keep them in power"?

Non sequitur is not a form of logical debate.

A cookie for the next Randian who steps up and says, "this is how things ought to happen".

Or a beer, in NYC. Let's toast.

The most likely solution, based upon history and the actions of the Greenspan Fed, is depreciation of the currency, leading to monetary inflation, thereby reducing the value of the debt to effectively zero. Of course, this is the 'solution' that Argentina has used multiple times, and we can all see how that's worked out...

Ok, I'll ask the question a different way. Suppose I write a check for one billion dollars, and present it to someone else. They are free to keep this check as long as they like, but are prohibited from taking it to any bank or otherwise attempting to cash it, prohibited from selling it, trading it, swapping it or borrowing against it. They can give it back to me, or hold it.

Question: What is the fair market value of my 1 billion dollar check?

Mindles,

You seem to be confusing the risk of the asset or the allocation of assets with the discussion of whether the instrumnets are assets or not.

These are two separate discussions.

If you want to say that IBM's pension fund can't, for risk and diversification reasons, invest 100% of its money in IBM securities that's fine. But that's not what your post is about and it's not what I responded to.

What I responded to is your claim (and that of many others on the Right) that because SSA is controlled by the government its claims on the General Fund are not real assets. That's why I asked you whether you thought holdings of IBM securities by IBM's pension funds are assets of the pension fund or not. You claimed they are not and that's just strange since that means you disagree with the law and accepted accounting practices.

Once again, this is not about the risk of the asset but about whether the claim is an asset or not. I'm sure you know that even very risky securities are still assets.

If IBM's pension manger decided, illegally, to invest 10% of the pension fund's money in IBM securities it would be a very risky move. But they would still be real assets, both in accounting and economic terms. The pension manager could go to prison for all I know but the assets would be very real.

I'm a bit surprised you don't know all this already.

er, I meant to write 100% in IBM securities not 10%.

GT - just because something is allowed or done, doesn't mean it makes a practical difference. And you keep asserting I should "know" that a company can add its own liabilities to a pension. I know it but I keep saying IT IS NOT RELEVANT TO MY POINT!

WHICH IS: The presence of IBM liabilities/equity in the IBM pension fund adds NOTHING to the financial security of the pensioner, simply because the pension liabilities are already a liability of IBM. If IBM is solvent, the securities don't matter; if IBM is insolvent, IBM-issued securities add no value to the pension promise. This is what I am saying. Accounting rules have absolutely nothing to do with these simple credit facts.

Your logic is astounding, too: If it is allowed to put them in they must be real in economic terms. Give me a break. I suppose any allowed accounting entry, intracompany or not, is 'real in economic terms'. Accelerated depreciation - must be ''real in economic terms'! Goodwill amortization (or not) - must be 'real in economic terms'. That's just moronic.

Announcing The Ellipsis Fund

The Ellipsis fund shall consist of billions and billions of dollars in the form of checks written by the fund to the fund. Thus it can never go broke. GT and others are invited to buy in ASAP.

Cash only, in unmarked bills...

What, no takers? I wonder why....

LOL.

Even better (these are people who don't like risk, remember)- you too can become a Dreck pensioner, with 100% of pay guaranteed for life. I've got a fully funded pension With $1 Zillion of Dreck Inc. stock I just issued to the fund, so you don't have to worry about it going broke.

Well Mindles all I can say is that your opinion is not shared by either the law or analysts who cover this area. I know of no one who adjusts pension assets to take out own-company securities.

I'd still love to hear your explanation why those on the Right were telling us the Trust Fund was real 4 years ago (when it made sense to get income tax cuts). Any ideas?

Mindles:

Let's clarify something. You say, "An entity's creditworthiness is not affected by who holds their securities, it doesn't matter if the owner is the issuer. related: it doesn't matter if securities are non-transferable."

So let's assume that Govt. A borrows money both from itself by using revenues from a pension tax for other things(B) and from a consortium of private entities (C). As I understand you, you are saying that, in every case, A is more likely to default on it's obligations to B than it is to C. It would seem that there are a lot of real world examples of this. Is this how it plays out? Do govts. simply default on their pensions rather than also restructuring their debt to private entities? Or do the private entities negotiate a new structure for the debt, in which the end result is a function of many factors, including the govt's apparent need to pay pensioners to, for example, forestall civil unrest? I suspect the latter, but maybe I'm wrong.

Sorry. That should really read: "You say, 'False: An entity's creditworthiness is not....'"

GT

You had a question (in quotes below).

"I'd still love to hear your explanation why those on the Right were telling us the Trust Fund was real 4 years ago (when it made sense to get income tax cuts). Any ideas?"

Answer the republicans were doing the same thing the democrats have done when it comes to social security. Lie, obfuscate, and generally mislead on what social security is and its solvency. Not excusing either parties behavior but that has been the way both of them have approached the issue when it was convenient to them.

If politicians were honest social security would not even be mentioned with income taxes because payroll (not income) taxes are for social security. Using social security while arguing about income taxes is just another cheap political lie for both parties

This is all so amusing.

Those who keep insisting that the trust fund bonds have some real asset value to the government have left the planet that the creators and trustees of the Social Security trust fund have lived on. Cognitive dissonance drives people to strange destinations indeed!

For the very creators and trustees of SS trust fund itself -- since its inception in 1937 (not 1983) -- have never ever been so dim as to make the bogus claim that it holds actual assets that the government can use to finance Social Security benefits.(And, of course, the Treasury has never ever in 68 years reported them as assets -- 'nuff said, or should be!).

What the creators of the trust fund did say was that the SS surplus consisted of an addition to national savings -- and that the bonds in the trust fund, though NOT assets that the government could use to fund SS benefits, were a tally, or running count, of the increase in national savings due to SS, which thus could fairly be tapped through income taxes in the future for the benefit of SS.

One can here read the words of some of the founders on this -- plus the obvious refutation noted even in 1937, and quantified recently by Kent Smetters, NBER, that this would be true only if Congress actually saved the SS surplus, rather than consuming it.

But back in 1937 we already had Senators noting that they were already spending the surplus -- and today we have Smetters empirically reporting that, far from contributing to national savings ...

"each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76."

So the reality is that the SS trust fund bonds:

a) aren't an asset to the gov't available to finance SS -- and nobody associated with SS has ever claimed they are, only political hacks do that, while

b) as far as representing an addition to national savings -- which always has been the argument of SS's creators, managers, and competent, economically literate defenders -- the value they represent is negative $2.5 trillion or so.

It is very interesting that the defenders of the SS trust fund today never invoke the actual thinking and analysis used by the creators of SS, and by the managers of the trust fund over 68 years.

Though I guess one can see why they would feel the urgent need to come up with something else. ;-)

Mr Dreck:

I was speaking of a case in which the Treasury actually issues $3 trillion in public debt and replaces the SSTF bonds with cash. The Treasury could issue something called Treasury bonds to the SSTF, but if they don't collect coupon payments and can't be traded, they aren't exactly publicly-held Treasury bonds. I'm sure you'll agree that if the Treasury tried to turn the entire gross federal debt into debt held by the public, interest rates would rise a tad.

"In other words, for many years the middle class overpaid payroll taxes in order to keep down income taxes, which are paid largely by the better off. In return, income taxes will eventually be raised in order to keep payroll taxes low. Surely you understand why the middle class would be unhappy at breaking this bargain halfway through?"

These aren't the same people over the years. This is just a generation warfare game. Baby boomers get the best deal by earning in their early years under the old system when they earned little and mostly under income which would be subject to the payroll tax. The system shifted to higher payroll taxes and lower income taxes for the period when baby boomers earned the most. They shift back to higher income taxes as baby boomers drop out of the high income-taxable incomes as they retire.

GT, it is only by misrepresenting the meaning of my 'opinion' that you would obtain any expert agreement with your comments here at all. Once again, the fact that something is allowed, doesn't mean it is of value. I know you big-government types have a hard time getting your mind around such things.

As you can see, it clearly made these people more secure to own company stock! (that's not even a DB plan). Robert Kuttner seems to agree with me, although that's not much of an endorsement.

But let's go right to the heart of your idiotic tangent:

In a defined benefit plan, the employer bears the investment risk of the plan[like IBM's pension plan, or Social Security -ed.] , while in a defined contribution plan the employee bears the investment risk...

ERISA limits the amount of employer
stock that can be held in a defined benefit plan to 10% of plan assets to ensure that the
assets of pension trust funds are diversified beyond the assets of the company itself.1 Such
diversification reduces the risk that a pension fund would become insolvent as a result of
the company that sponsors the plan going bankrupt.

How many times shall I slay your fictitious dragon? Are your pretending to be stupid? Who knows.

Carla above, had a valid question: what's the difference between those Treasury notes in the SSTF and banknotes - i.e. greenbacks ?
Suppose we replace the TN in the SSTF with greenbacks - it can be done. What then ? Would the trust fund be real ?

The answer is: of course, not. The banknotes are valuable as long as their supply is limited. If you print a zillion banknotes their value converges to zero. Paper money has no intrinsic value, and in this, indeed there is no difference between banknotes and Treasury bills.

You still don't get it, do you Mindles? At first I thought you were being evasive but know it seems you simply don't undertstand what you are saying.

You keep bringing up the issue of allocation as if that meant something. Whether IBM is allowed to put 1%, 10% or 100% of its securities in its pension plan is irrelevant to the question we are debating, which is ARE THEY ASSETS? You say they are not. The law, and the analysts covering this sector disagree with you.

Can you point to analysts writing about the health of pension funds that adjust the total assets by taking out any own-company stock?

Can you?

But I'll make it even simpler, since complicated questions seem to confuse you. Let's focus on what you just posted, and nothing else. You post that ERISA limits own company stock to 10%. OK. So here goes the question.

Is that 10% that ERISA allows considered assets of the pension fund, yes or no? If IBM's pension pland has a total of $1 billion in assets of which $100 million are IBM bonds do you think the $100 million are assets? You say no but ERISA and the analysts covering this say yes. Forgive me if I trust them more than I do you.

IOUs for dummies indeed.

GT, what's your point? The bonds in the SSTF are not negotiable and are otherwise in their terms unlike publicly-held Treasury debt. Whether Dreck is wrong about the value of negotiable, publicly-owned securities held by pension funds is irrelevant.

GT 's point is entirely irrelevant to mine.

GT's point: Employers may use up to 10% of qualifying employer securities to determine the statement value of a Defined Benefit Plan Trust Account. That makes them 'real'.

My Point: The presence of employer securities in a defined benefit plan adds no real value to the security of the pensioner, as they represent a redundant general claim on the company. The DB pensioner, like the SSA pensioner, already has a general unsecured claim on the company, the value of which is determined by his benefit calculation. Adding another unsecured claim on the company on top of his existing unsecured claim does not increase his security by one penny if and until that security is sold for the obligation of another company/entity*.

GT seems to believe these two statements are contradictory. They are not. I am allowed to put goodwill on my balance sheet, by law and by GAAP. Does that make goodwill real? Does it improve my condition to my creditors? No on both counts. An allowed accounting treatment does not make something 'real' from a credit/security perspective. That's why we consolidate accounts and deal with accounting intangibles.

In a DC plan, analogous to private accounts, this is not entirely the case, because the amount due the pensioner is described by the assets in the account, not the benefit obligation. More assets in account=more value for pensioner.

The CFA-holding securities analysts and credit analysts all around me agree with the above, and find this thread hysterical. But since that's my training as well, I could have told you that before seeing them today.

Finally - you knew this was coming - Here's the situation laid out as in the post with an employer note in the DB plan, and here's the situation without the Note. The total resources available to pay the pensioner's claim remain the same.

*(which is what any pension committee I've ever worked for has immediately done, taking advantage of the tax-exempt status of the pension fund relative to company treasury stock.

Its simple really; the workers who paid for the bonds in the trust fund, don't own them. The government owns them.

Will we get paid back? It depends on whether you believe the government acts primarily in all our interests, in some of our interests, or in its own interest. Personally, I am somewhere between the middle and latter categories. I find that I am very seldom included in the group whose interests are served, and very often in the group paying to serve.

"The Ellipsis fund shall consist of billions and billions of dollars in the form of checks written by the fund to the fund. Thus it can never go broke. GT and others are invited to buy in ASAP."

Isn't the Ellipsis fund rather like the basis of American currency?

I'm neither an accountant nor an economist, but I see two key differences between GM bonds held in a GM pension fund and government bonds in the SS "trust fund":

1) GM's trust fund can't have more than 10% invested in GM or companies too closely tied to GM. I don't think GM (alone) going bankrupt would cause pensions to shrink, because the fund should have enough extra to cover the entirely predictable case of some investments going bad. The SS trust fund is 100% government bonds.

2) GM's bonds would be marketable, which means they have a market value, and a pension fund must value it's assets at market value. That is, if investors come to think that GM is likely to default on it's bonds, the price of GM bonds will go down - and the pension fund managers have to cover this with more money invested in something else. The bonds in the SS trust fund are not marketable, and therefore have no market value.

Finally, how much difference would it make if the bonds were real, marketable gov't bonds? I think what we can learn from history is that governments don't default on bonds written in their own currency - because they can devalue the currency if paying the bonds gets too hard. (There are also cases of a government being overthrown, and its successors repudiating the earlier government's debt, but I don't see that happening to the USA.)

IIRC, in the 1920's most Frenchmen had privately held pension funds containing mostly bonds issued by the French government. WWI was followed by wild spending on social programs, and eventually the government discovered that it couldn't raise enough taxes to even pay the interest on it's debt. So they devalued the Franc severely, then issued a New Franc at 10:1. That is, if you're pension fund had bonds for 100,000 old Francs, now it had 10,000 new Francs. The government had no trouble making payments, but the pensioners were screwed.

If you think the men in charge of this change could never have won another election, you are correct. But they and their predecessors had put them in a situation where there were only two alternatives: drastically reduce the real amount owed by currency or other manipulations, or just stop making payments. Devaluing the currency at least kept them from being hung from the lamp posts outside the Senat building by an angry mob...

Is there any reason at all to think our politicians aren't equally shortsighted?

well, hmm. It's true the notes in the SSA Trust Fund are not marked to market, and that at least provides some early warning and an opportunity to top-up funding in the private co. pension scenario. If credit deterioration were slow, pensioners might benefit from any topping-upto the detriment of unsecured creditors- but not if it were more company debt.

[the following assumes SSA Note transferability for the sake of argument]Hypothetically, the SSA Notes would already be worth a bit less than face value because they pay a below-market rate of interest and they are PIK securities. But, they too would deteriorate with the general credit of the U.S., if the market demanded a higher rate of interest. The SSA would not mark them to market, I suspect. But we're already massively underfunded, and there's no regulator telling the govt. to top-up.

The Ellipsis Fund
shall also be backed by the finest tulip bulbs in Amsterdam, and we all know that the price of tulips can only go up...

Mindles H. Dreck observed:
It's true the notes in the SSA Trust Fund are not marked to market,

Exactly so, but neither are they marked to model...

What was it Federal Reserve Bank Governor Ben Bernanke said about liquidity, printing presses, helicopters and computers? What was it Federal Reserve Chief Greenspan said about ability to pay Federal debts vs. the worth of the medium of exchange used to pay?

ellipsis: We can certainly reduce the value of external debt by inflating the currency/monetizing debt.

But Social Security benefits are currently indexed to wage increases, which have in most periods tracked or exceed inflation. So their real value would keep up unless benefit formulae were revised, Right? On the other hand, if replaced with bonds, they can be inflated away....

Mindles H. Dreck observed:

But Social Security benefits are currently indexed to wage increases, which have in most periods tracked or exceed inflation..

Hence the manipulation of the CPI starting in the 1990's, with 'substitution', 'hedonics' and other means of understating price increases, coupled with proposals to link SSA COLA increases to the CPI rather than wages...

Couple that with increasing the age for retirement and the problem can be eroded away nicely...

...or alternatively, we could convert the "bonds" in the SSA's "Trust Fund" to Assignats, backed by land...what could possibly go wrong with that?

"proposals to link SSA COLA increases to the CPI rather than wages."

Linking SSA COLA to wages means that if the current workers get richer (before taxes, in real terms), the retirees also get richer. Off the backs of the current workers. I don't think it's something we can sustain while allowing the worker/retiree ratio to fall to the neighborhood of two.

Markm,

Re; "Is there any reason at all to think our politicians aren't equally shortsighted?"

Or perhaps farsighted. The question in my mind has always been whether the creators of Social Security were con men, or simply stupid. I've always given them the benefit of the doubt and assumed they were stupid, but the alternative is still a possibility.

It will be interesting to watch the Europeans wrestle with their own pay-as-you-go-downhill pension systems. IIRC the demographics in western Europe in general, and in countries such as Italy and Sweden in particular, are such that they'll descend below a worker/pensioner ratio of 2:1 before these United States do.

Not too many years after that, at the very least, we'll likely know one or two bad ideas that don't solve the problem...

Incidentally, for many years my liberal friends were scandalized at the fact that Japan basically offers no government-run pension system equivalent to Social Security. Private systems abound, and the Japanese government no doubt has something for civil servants and military personnel, but there isn't any big 'social safety net' equivalent to Social Security, to the best of my knowledge.

Thus the Japanese have always saved a whole lot more money than citizens of many other industrial socieities. As Japan slides into negative population growth, that nation may be better situated than many, or any, other country to manage the situation, d