More on the ‘Trust-Fund’ Fraud

by Don Boudreaux on March 16, 2011

in Budget Issues, Debt and Deficits, Myths and Fallacies, Other People's Money, Reality Is Not Optional, Social Security

Here’s a letter to the Washington Post:

Don McDaniel writes about the U.S. Treasury bonds held in the Social Security ‘trust fund’ that “Far from being ‘worthless IOUs’ [as claimed by Charles Krauthammer], the investments held by the trust funds are backed by the full faith and credit of the U.S. government.  The government has always repaid Social Security, with interest.  The special-issue securities are, therefore, just as safe as U.S. savings bonds or other financial instruments of the federal government” (Letters, March 15).

The question is whether or not Uncle Sam will have enough assets in the future to pay all of his obligations under Social Security.  When sensible people such as Charles Krauthammer and Robert Samuelson note that these obligations are so massive that honoring them in full will require drastic tax hikes or spending reductions, accounting-challenged defenders of the status quo exclaim “Not to worry!  The Social Security trust fund holds lots of U.S. Treasury bonds.  Those bonds are assets.  So Social Security’s obligations are covered!”

But those bonds are held by the same party that issued them, namely, Uncle Sam; the creditor here is one with the debtor.  If Uncle Sam’s future stream of tax receipts falls short of his future spending obligations, meeting those obligations will require tax hikes or spending cuts.  The bonds in the ‘trust fund’ are no independent source of revenue for Uncle Sam to tap into to meet his Social Security obligations as these bonds would be if they were issued instead by, say, Microsoft or by Her Majesty’s government in the U.K.  Revenues used to redeem the bonds held in the ‘trust fund’ must be raised through Uncle Sam’s power to tax – the very same power that Mr. Krauthammer and others warn will have to be exercised in a much more Draconian manner if Uncle Sam doesn’t rein in the growth of entitlements.

Donald J. Boudreaux

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jjoxman March 16, 2011 at 10:59 am

Far be it from me to question you, Don, but I think you missed one way of raising the money necessary – el Federal Reservo of el debauched currency-o.

Don Boudreaux March 16, 2011 at 11:19 am

Indeed – but inflation is just another form of taxation, only more pernicious because it is so hidden.

jjoxman March 16, 2011 at 11:59 am

Agreed. Stealthy buggers.

W.E. Heasley March 16, 2011 at 11:39 am

“But those bonds are held by the same party that issued them, namely, Uncle Sam; the creditor here is one with the debtor“. – Dr. Boudreaux

Exactly. Value, as in asset or reserve, is totally different than the taxing “value” or taxing authority of some entity. Besides, the creditor entity is the debtor.

However, there are reports that magical mountaineers in Parkersburg, WV have taken the lock box to Cheat Mountain to refill the box with cheat sheets. All is well!

Dan S March 16, 2011 at 11:41 am

The shell game nature of this crazytown circular scheme will also be its cover for the misguided collectivists who try to perpetuate it when it starts to seriously unravel.

The questions are not how to fund it or how to save it, but rather they are: how do we keep from destroying our economy when it does unravel and how do we hurt the fewest number of people in the transition to something sustainable?

Krishnan March 16, 2011 at 11:48 am

I do not what is more scary – the fact that they think that the Social Security Trust fund is somehow separate from Uncle Sam’s revenue/expenditure streams OR that they know it and are in complete denial and utterly delusional – There ways to start fixing this Ponzi scheme – but we have to start NOW

Guest March 16, 2011 at 11:53 am

There is another way for the federal government to raise money besides taxes or inflation– selling hard assets (land, highways, military hardware, etc).

Maybe they can’t really sell $2T worth of this stuff, but everybody always seems to act like the federal government just has a whole bunch of liabilities and zero assets, which is not true.

Don Boudreaux March 16, 2011 at 11:57 am

Fair point. I emphasize, though, that the chief point of my letter is that the U.S. Treasury bonds (“special issue” though they are) are NOT among the assets that Uncle Sam owns.

W.E. Heasley March 16, 2011 at 1:23 pm

Dr. B.

Re: government assets.

If the Social Security Trust Fund has a claim against fixed assets of the US federal government, say The Great Smoky National Park, then wouldn’t the “lock box” include such asset. Wouldn’t there be exact wording saying such assets are collateral of the Social Security Trust Fund?

To elude that “full faith and credit” is encompassing enough to include the said asset is an assumption. That is, given the assumption, then why wouldn’t other government entities that are in debt make claim against the Great Smoky Mountain National Park as collateral?

Further, lets say the Great Smoky National Park is in fact collateral of the Social Security Trust Fund, it’s a highly illiquid asset. If you are broke and want to sell an illiquid asset few bidders will come forward. Why? Potential buyers would merely wait until you were in complete default, completely bankrupt, and buy the asset at a fire sale price.

Moreover, parks are mammoth in size and the mere size makes them difficult to sell. Many government buildings are built for a specific purpose and would be difficult to market for other uses. Finally, what would the market for such items look like at any point in time e.g. would you like to sell the entire US Government motor fleet the day after the Lehman collapse?

Hence given an empty lock box and trillions of unfunded Social Security liabilities, are government “assets” illusionary assets?

John Dewey March 16, 2011 at 12:05 pm


The federal government does have some assets which could be sold. Relative to the financial obligations facing the taxpayers, I’m not sure those assets are significant. The current federal debt held by the public is now at $9 trillion and growing. The unfunded liabilities of Social Security and Medicare have been estimated to be $109 trillion.

Methinks1776 March 16, 2011 at 12:09 pm

Wonderful. I’m willing to assume that these assets can generate positive cash flow. Let’s start selling them off to private operators. Not only will they be better run, but I’d much rather the SS “trust fund” contain the rights to future cash flows of a privately run Yosemite National Park than to some rather vague and empty promise by politicians.

Here’s why: It’s a lot less politically feasible to sell Yosemite to a private operator (God forbid, the Chinese!) than it is to simply debase the currency. I agree with JJoxman. Inflation is the easiest tax to enact – once global de-leveraging stops messing up Bernanke’s efforts, that is – and politicians always have and always will seek the path or least resistance.

Methinks1776 March 16, 2011 at 12:13 pm


insert after first sentence of second paragraph: So, unless we see the government start selling these assets sometime around now, I have little faith that politicians will suddenly have the impulse to do so when the poo finally hits the fan.

Sam Grove March 16, 2011 at 12:01 pm

Collectivism: where everyone is slave to everyone else.

jjoxman March 16, 2011 at 12:04 pm

To see the same point, consider this:

A firm has a pension fund. It borrows money from the pension fund during a recession because of some cash shortfalls. In the place of the money, the firm puts some IOUs. To match exactly the case of SS, those IOUs would be the firm’s own bonds. Now the pension fund has lent the firm money and has been promised to repay from the firm’s future earnings. But the pension fund continues to depend partially on contributions from the firm anyway. It is a double-whammy. If the firm has cash flow shortfalls again, it can’t make pension contributions nor can it meet interest payments.

The only difference is the firm can’t force you to buy its product.

Trapper_John March 16, 2011 at 2:11 pm

This is no more a double-whammy than any other debt the firm has. Your sentence “If the firm has cash flow shortfalls again, it can’t make pension contributions nor can it meet interest payments” is true regardless of who holds the debt notes.

The crucial point is that the debt is recorded on the company’s balance sheet, and lenders can decide (in a capitalist system) the amount and interest rate of any future lending offered to the firm. The question as to whether a particular firm has too much debt to be trusted with additional loans can only be answered by lenders.

If your point is that, in this case, the people with claims in the pension fund are being taken advantage of by offering too favorable loan terms to the company, that’s interesting. Uncle Sam’s credit rating is still pretty good, so I don’t think the analogy holds if you want to stretch it there.

jjoxman March 16, 2011 at 2:33 pm

It’s a double-whammy for the pension fund, not for the firm.

Ike March 16, 2011 at 12:37 pm

The use of government IOUs to back government bonds makes perfect sense, as long as you have an understanding of circular logic:

ettubloge March 16, 2011 at 12:44 pm

There is actually no fiscal crisis, rampant deficits, or massive federal debt. That is all subterfuge.

It’s just the New Robber Barons controlling the politicians:

“All of them – all parties. Everyone is in the hands of the super wealthy.”

“It’s pretty clear there’s an agenda nationwide: Republican governors backed by the Koch Brothers [and] extreme right wing money want to crush the unions,” says Columbia Professor Jeffrey Sachs. “The public is against it, but public opinion doesn’t count much in this country these days.”

Methinks1776 March 16, 2011 at 12:47 pm

The only Robber Barrons this country has ever had is politicians.

Methinks1776 March 16, 2011 at 12:48 pm


chuck martel March 16, 2011 at 1:38 pm

The public that’s opposed to state fiscal responsibility is the membership of the public employee unions. The average taxpayer now knows that supporting a huge and growing public employee payroll and their health and pension benefits is an impossibility. Confiscating all the wealth of the “rich” won’t keep the DMV vets and their comrades happy in their golden years.

MattChicago March 16, 2011 at 12:49 pm

Replacing a liability with another liability… People with no financial background shouldn’t be writing about these topics.

Trapper_John March 16, 2011 at 1:45 pm

Question: aren’t these bonds accounted for in the current national debt figures (i.e., “intragovernmental holdings”)? If so, I don’t see any insidious accounting trick here that will result in a surprise/massive spike in debt when we go to open the “lock box”.

As the government pays benefits out, it will have to borrow money (or raise revenues). If the government borrows $1 from a creditor to pay benefits, it will take that $1 and pay off $1 of the Social Security IOU (already a part of the national debt), having a net impact of $0 on the total national debt.

Is this a stupid way to do things designed to fool the public? Yes (debt is debt is debt). Is there potential for growing unfunded social security liabilities beyond what is already accounted for in the national debt? Yes. Will our current method of accounting have a massive impact on national debt as we find the cookie jar empty? No.

Cedric Weehunt March 16, 2011 at 2:00 pm

I think the best example of the stupidity of the lockbox argument is found
in the movid “Dumb and Dumber”. When the two broke dummies find a briefcase filled with cash they proceed to spend it with abandon but leave a paper IOU each time they remove cash. When the crook-owner of the briefcase confronts them, somehow he doesn’t believe their protestations that they are good for every cent of those IOUs.

Gil March 17, 2011 at 2:56 am

The difference is that the U.S. Government can choose between raising taxes, close some departments and fire people to free up those taxes dollars to pay S.S., declare that they going tp engage in some sort of partial payments of S.S. in a way that people will have work part-time when they “retire”, use inflation, etc.

Rugby1 March 16, 2011 at 2:22 pm

Question for people smarter than myself.

As of right now SS takes in more money than it pays out in benefits. Because SS funds are utilized to purchase US treasuries isn’t that also saying that SS funds are allowing us to spend more than we otherwise could? When SS is no longer self sustaining are we not in for the dual shock of SS now trying to redeem US treasuries, and because the fund is no longer able to purchase treasuries, we are going to be scrambling for another ginormous buyer that will purchase treasuries in order to continue our debt financed government spending. I completely admit my ignorance of SS operation and if anyone can explain this or help me understand it better than I do, I would be most appreciative. Thanks!

Trapper_John March 16, 2011 at 2:57 pm

Cannot claim to be smarter than you, but here’s my understanding (also see my post above)… Are SS “funds… allowing us to spend more than we otherwise could?” My guess is no. If we took SS tax receipts and put them in shares of GE (or something other than gov’t bonds), we would have to borrow more money to meet our buget. The total amount of national debt, however, would not change, it would merely shift from intragovernment holdings (as it is today) to the portion of the debt owed to non-government entitties (individuals, countries, etc.).

As to the “dual shock”, I do not think this is a function of/exacerbated by gov’t accounting policy. Let’s say the gov’t didn’t have a lock box at all. There are receipts, R, expenses (include interest), E, the difference, D, and national debt, ND. E – R = D, on an annual basis. Last year’s ND + D from this year = next year’s ND. As E rises (more outlays for SS) or R falls (fewer workers paying into SS), D increases. SS as a cash outlay is no different from Medicare, school lunches, or anything else the government pays for. Just because they have a special tax collected for SS and right now that tax exceeds what we’re spending in benefits doesn’t change the fundamental equation above. That money IS spent elsewhere, reducing D each year. If we didn’t spend it and borrowed more from other sources instead, ND would be exactly the same. Hope this helps.

Methinks1776 March 16, 2011 at 3:25 pm


The time has come. This is the first year that SS has taken in less in taxes than it has paid out. As the SS cashes in these IOU’s, where do you suppose the money will come from?


Taxes (in whatever form they take – including increasing deficit spending, inflation and income tax increases) will have to be raised. That is the point and that means that the special issue “assets” the government is holding are not assets in any meaningful sense.

Trapper_John March 16, 2011 at 8:17 pm

If you want to argue that SS is a reckless program and will create liabilities beyond what has already been added to the national debt (the “trust fund”), I agree 100%. That said, up to the amount in the “trust fund”, borrowing money to fund benefits for SS will not add one cent to the national debt–it’s already included in the current total. Once we exceed that amount, the debt will go up as SS taxes do not cover SS expenses.

Methinks1776 March 17, 2011 at 12:29 pm

Well, I’m actually saying that I think the accounting is fraudulent, but that’s not the main point.

The main point is that this booking of expenses as “assets” results in exactly the scenario you describe – an increase in taxes (whether you call taxes “national debt” or “inflation” or “income taxes” irrelevant). I may not agree with your that the accounting is above board, but we agree on the ultimate outcome.

Methinks1776 March 16, 2011 at 3:26 pm

Incidentally, I don’t think the argument is that taxes will suddenly spike. Choking to death slowly is at least as unpleasant.

Rugby1 March 16, 2011 at 4:30 pm

Thank you for responding. In reading your reply I guess I am still a bit confused about the 2nd part, the first part makes total sense.

“If we took SS tax receipts and put them in shares of GE (or something other than gov’t bonds), we would have to borrow more money to meet our buget.”

Ok that makes sense to me and I understand what you are saying. However what I also I guess understand but am frustrated by is why was that extra money, paid for with my taxes, not invested or saved. Instead it was transferred to general revenue and I am ostensibly being taxed twice to support general revenue because politicians always spend. That is a bigger issue of course just my frustration on the matter since I am already fighting larger state taxes.

“As to the “dual shock”, I do not think this is a function of/exacerbated by gov’t accounting policy. Let’s say the gov’t didn’t have a lock box at all. .”

But that is where we disagree. To use excessively simply numbers if total government spending was 10. And funds from the Social Securiry covered 1.5 of the 10, what is going to happen when the 1.5 for social security it taken away and instead spending is now 11, because we are forced to pay into the SS fund in order to cover our benefit obligations. If the funds had been saved this spending, or invested in a strong asset class this spending would not have to happen, instead once of the main revenue sources for the government has been snatched away and instead turned into a liability. That I think is a problem that will of course have politicians and leftists stating that we need to “pay our fair share” and put more money into the leviathan.

John Dewey March 16, 2011 at 6:12 pm

I think it was Greenspan who argued in the 1990s that the then-surplus receipts of social security would distort financial markets if invested in publicly traded bonds or equities. Not sure I agree. I think those SS surpluses totaled $2 trillion over the last 15 years.

Greenspan did recommend to Congress that the SS surpluses be used to retire debt to the public. Congress just spent the money.

Rugby1 March 16, 2011 at 6:19 pm

” think it was Greenspan who argued in the 1990s that the then-surplus receipts of social security would distort financial markets if invested in publicly traded bonds or equities.”

Actually I believe you are correct and I did not agree with him then, nor do I now. Also I never understood why he said it was bad to pay off debt then but not when we had vaguely defined “supluses” in 99 and 2000.

Methinks1776 March 16, 2011 at 8:03 pm

….surplus receipts of social security would distort financial markets if invested in publicly traded bonds or equities

I can’t think how. In the absence of SS, if every person were to decide to save for retirement, would that distort the financial markets? How does that even begin to make sense?

vikingvista March 17, 2011 at 12:28 am

It would distort the financial markets, because the likes of Barney Frank and Nancy Pelosi would be deciding how the money would be invested. This is ENTIRELY different than each individual investing and risking his own money.

Trapper_John March 16, 2011 at 8:41 pm

Yeah, my second point was not well-executed. What I was trying to say was that when expenditures (whatever they are) exceed receipts (however they are collected), the government must fund the difference with debt. Separating SS out is a mental exercise where government wants to point to a program as “self-funding” (which it isn’t).

The point I think you’re missing, is that when SS “covered 1.5 of the 10” that 1.5 was added straightaway to our national debt, just as if we borrowed the money from China or Bill Gates (except it was classified as “intragovernment holdings” on the balance sheet). Up to the amount we “borrowed” from SS, borrowing additional money to fund benefits will not add to our current debt number. Once SS “uses up” the debt already on the books, every dollar spent by SS that is not covered by SS tax will add to debt or require additional revenues, as you say.

Rugby1 March 16, 2011 at 9:41 pm

Got it. Thanks for the replies, it is appreciated.

Brian March 16, 2011 at 4:18 pm

Won’t the governments of western countries just keep printing money, essentially taxing by inflation, in order to pay back retirees and others with devalued currency? Wouldn’t it be more honest to simply legislate a form of government bankruptcy?

Methinks1776 March 16, 2011 at 4:39 pm

Why not just stop spending?

vikingvista March 17, 2011 at 12:30 am

There is no limit to how much money can be counterfeited. But there is a limit to how much the central bank will want to counterfeit. At some point, nobody wants to accept the money any more, so the central bank has no more incentive to use it either.

Do you think the Fed could print $100 trillion before dollars become worthless?

Gil March 17, 2011 at 3:01 am

It works for Zimbabwe.

Methinks1776 March 17, 2011 at 12:31 pm

Gideon Gono is Bernanke’s hero.

vikingvista March 18, 2011 at 1:10 am

Zimbabwe works?

Matt March 16, 2011 at 5:51 pm

You make an excellent point in assailing these phony “assets”. I think that much of the debate about social security is framed in the wrong terms, and your perspective helps to clarify things. I have no doubt that the SSA will pay on it’s claims. What I’m concerned about is what the rest of the government will have to do to pay on it’s claims to the SS “trust fund.”

Andy March 16, 2011 at 6:31 pm

The fact that people (invariably on the left) seem to misunderstand or deliberately mislead about the trust fund leaves little hope for improved public policy.

Joanne March 16, 2011 at 7:27 pm

Trapper hits a homerun: “Let’s say the gov’t didn’t have a lock box at all.”
Oh let’s! Or as the Monty Pythoners might say, let’s belabour the bleedin’ obvious.

Ron H. March 16, 2011 at 7:38 pm

“However what I also I guess understand but am frustrated by is why was that extra money, paid for with my taxes, not invested or saved. Instead it was transferred to general revenue and I am ostensibly being taxed twice to support general revenue because politicians always spend. That is a bigger issue of course just my frustration on the matter since I am already fighting larger state taxes.”

Your understanding of this is crystal clear.

Ron H. March 16, 2011 at 7:40 pm

The above should be a reply to Rugby1 @ 4:30pm, sorry.

Rugby1 March 16, 2011 at 9:45 pm

Thanks. It is frustrating as I am still learning (through self-education) a lot about macro-economics and SS is something I have literally just immersed myself into. And the more I read about it, the more frustrating it is as for someone who is in his prime earning years I am going to pay up the wazoo in taxes for benefits that will be long gone before I ever see them. Moreover if this were a business arrangement I would be able to sue the company for a breach of contract, but instead I get to grin and bear it. Fabulous.

Methinks1776 March 17, 2011 at 12:32 pm

Well, I don’t think you’r required to grin :)

Mary - MI March 16, 2011 at 8:56 pm

“Full faith and credit of the U.S. government.” What does that mean? Blip!!! Our money is not backed by anything of intrinsic value such as gold and silver. There never was a Trust fund and all the fiat money that went into Social Security has been borrowed by the gov’t and left with IOU’s. All the money the fed’s collect from us now goes towards minimally paying the tremendous debt.

Gil March 17, 2011 at 3:03 am

What backs the gold and silver? What makes them valuable other than people value them?

rhhardin March 16, 2011 at 9:38 pm

The government can sell the IOU in the trust fund to raise cash money, so it’s not worthless even though it’s money owed to itself. It can sell who it’s owed to.

So it’s still a general creditworthiness question, which requires the same analysis of what level of debt is unsustainable.

Huge numbers suggest that it’s over that point.

It’s so simple to solve, though, that it’s not really a crisis. Just raise the retirement age to whatever age balances income and outgo (if you want it to be self-paying).

John Dewey March 17, 2011 at 2:19 pm

Social Security funding can be easily solved mathematically – but not politically. All the government needs to do is reduce benefits to the level where income and outgo are balanced. I’m not positive, but I think the funding issue goes away if all benefits were reduced to the social security minimum benefit levels. In other words, if those who paid much more into the system during working years receive no more in retirement benefits than those who paid the minimum amounts.

Medicare funding cannot be solved either mathematically or politcally.

John Dewey March 17, 2011 at 5:00 pm

“The government can sell the IOU in the trust fund to raise cash money”

I don’t believe that is exactly correct. What I’ve read is that the special-issue Treasuries in the Social Security Trust Fund are not legally marketable.

The government can – and has recently – sold debt to the public in order to make up for Social Security’s funding shortfalls. But those sales are not the special-issue securities held by the trus Fund.

Daniel Kuehn March 17, 2011 at 9:29 am

It’s just like an internal transfer, it’s not a big deal. If you think the government is going to be insolvent, that would be cause to worry – but it’s not the accounting that’s the problem in that situation, it’s the insolvency. We don’t complain about these things in corporate America. In corporate America we just call this a bond redemption. The market for Treasuries is liquid enough, though, that literal redemption is unnecessary. But it amounts to the same thing. What’s completely normal in the private sector has people up in arms when it goes on in the public sector – I don’t know why.

Methinks1776 March 17, 2011 at 1:11 pm

No, it’s not like an internal transfer nor a corporate bond redemption and insolvency is not the issue. You are torturing corporate finance in new and interesting ways in what seems to be an almost deliberate effort to miss the point.

Take your bond redemption scenario. The special issue bond is a puttable bond which will be put to the issuer to obtain the cash to meet its obligations to us. To what entity is it put? Treasury. Where does Treasury get the money to redeem the bond? Us. If I owe myself money, is it an asset or a liability?

If I own a puttable bond issued by Microsoft, when I put the bond to Microsoft, the company will pay me from the its revenue stream (it may have a sinking fund for redemptions, it may not, but what’s important is that it comes from the wealth generated by the company not from taxing me). Solvency is an issue for Microsoft, but not for government. Microsoft can’t print money and government can. But, if government prints money, then we expect inflation to rise which is…a tax.

John Dewey March 17, 2011 at 1:56 pm

“What’s completely normal in the private sector has people up in arms when it goes on in the public sector – I don’t know why.”

If a corporation had unfunded pension liabilities of more than $10 trillion (and unfunded Medicare liabilities of many times that), someone would definitely be “up in arms”.

If a corporation tried to claim it’s pension plan was funded by debt issued to itself, someone would definitely be “up in arms”.

Yes, we do complain – and government does force corrective action – “about these things in corporate America.”

Don Boudreaux March 17, 2011 at 5:24 pm

Thanks Methinks and John Dewey. I am totally, utterly baffled by what is either Daniel Kuehn’s (1) inability, in this case, to see the obvious, or (2) his incomprehensible wish to excuse such dupery – dupery obvious to anyone with open eyes.

No amount of tortured logic can transform bonds written by A and then put in A’s ‘lock box’ into net assets for A. Daniel, however, apparently believes in such a possibility. Mysterious.

ajlenze March 17, 2011 at 10:25 am

Professor Boudreaux’s letter stimulated me to think of a solution to any potential Social Security problems. All we have to do is raise the tax rate on Social Security income. For instance, if the money being paid into Social Security is only enough to satisfy half the benefits, set the tax rate on benefits at 50%. This solution will make Social Security solvent forever, plus we’ll always maintain the trust fund that we can dig into in case of emergencies.

In case it’s not obvious, I’m joking. However, I see many proponents of tax increases to shrink budget deficits, and this solution is just being specific about who’s getting taxed and at what rate.

ajlenze March 17, 2011 at 10:38 am

It seems to me the the impending Social Security crisis is equivalent to the mortgage crisis, albeit more predictable. For years, people without the means to make their mortgage payments temporarily staved off forclosure by refinancing their mortage when their house went up in value. As a result, they owed more and more on their house. In the same way, Social Security has made benefit payments to current seniors by borrowing from future seniors, and thus, building up more and more debt.

How did that mortgage situation turn out?

D. F. Linton March 17, 2011 at 10:46 am

Kuehn is on the right track. Yes the SS bonds are “non-marketable” and that does have the advantage of “hiding” them in the intergovernmental bucket, but the most likely why they get redeemed is a simple swap. The treasury will sell (or try to sell) a marketable bond for every SS bond redeemed. The real question is at what price will the purchasers of treasury bonds be willing to buy? Surely there is an upper limit on annual sales, but we don’t know what it is. I for one would never have believed that as much could be sold as has been in the last couple of years at the rates we have seen. Maybe some of this is Fed monetization, but I’m still surprised.

Also ajlenze’s joke is very probable. Highly graduated taxes on SS benefits would implement means-testing without “taking away anyone’s hard-earned and paid-for benefits”.

John Dewey March 17, 2011 at 2:10 pm

The 2009 Social Security and Medicare Trustees reports show the unfunded liabilities of these two programs to be $107 trillion in today’s dollars. (Social Security and Medicare Projections: 2009) The debt which has been sold the last couple of years is nothing compared to what will be required down the road – and not really that far down the road.

The U.S. Treasury bonds held by the Social Security Trust Fund are meaningless. There is no schedule for redemption. Congress can alter the benefits for the two programs at any time. Benefits to future retirees are not guaranteed, and have already been reduced for my generation and those which follow. The only purpose for the accounting gimmick of those Treeasury bonds is to fool the uneducated into believing a “trust fund” exists. That seemingly intelligent people such as you and Daniel Kuehn can apparently remain fooled by this gimmick is both amazing and sad.

Methinks1776 March 17, 2011 at 2:45 pm

Well said.

Daniel Kuehn March 17, 2011 at 3:21 pm

Keep in mind, though, the vast majority of those unfunded liabilities are for Medicare, which is a different beast entirely.

I am not very hopeful about Medicare. That is very likely to be a train wreck. Social Security is not in nearly as dire straits. You’ll find a lot of people worried about Medicare but not all that worried about Social Security. It’s misleading of you to quote the combined figure in a discussion of Social Security.

And yet again, the problems that do exist have nothing to do with the fact that the trust fund holds Treasuries. The situation would be even worse if they weren’t holding Treasuries.

John Dewey March 17, 2011 at 3:51 pm

“It’s misleading of you to quote the combined figure in a discussion of Social Security.”

I disagree. Both programs will demand some very large portion of the taxes collected. The funding shortfall of one cannot be resolved in isolation.

“The situation would be even worse if they weren’t holding Treasuries.”

The Treasuries held by the Social Security Trust Fund are meaningless.

One may believe that those Treasuries guarantee Social Security beneficiaries are placed at the front of the line when federal tax revenues are disbursed. That is not true. Congress can legally reduce Social Security benefit levels in order to continue funding defense or agricultural price supports or highways or whatever use it has for taxes.

One may also believe that political considerations will place Social Security beneficiaries at the front of the line when federal tax revenues are disbursed. If seniors have such clout, then the Treasuries make no difference. Social Security would be funded regardless of whether the Treasuries exist.

The Treasuries held by Social Security are meaningless, Daniel. Why do you believe otherwise?

John Dewey March 17, 2011 at 4:42 pm

The federal government has already explained how the Treasuries in the Social Security Trust Fund are meaningless. From the FY 1996 federal budget document entitled Analytical Perspectives, p 251:

“The Federal budget meaning of the term trust differs significantly from its private sector usage. In the private sector, the beneficiary of a trust owns the income generated by the trust and usually its assets. A trustee, acting as a fiduciary, manages the trust assets on behalf of the beneficiary. The trustee is required to follow the stipulations of the trust, which he cannot change unilaterally. In contrast, the federal government owns the assets and earning of federal trust funds, and it can raise or lower future trust fund collections and payments, or change the purpose for which the collections are used by changing existing law.”

From p 258 of the same document:

““These balances are available to finance future benefit payments and other trust fund expenditures – but only in a bookkeeping sense. Unlike the assets of private pension plans, they do not consist of real economic assets that can be drawn down in the future to fund benefits.”

John Arkwright March 19, 2011 at 5:53 pm

Dewey, that was a thing of beauty.

Don Boudreaux March 18, 2011 at 11:58 am

What can you POSSIBLY mean by your final sentence, Daniel?

Remove those Treasuries – burn them or eat them or ship ‘em to Neptune – how would that make things worse? $X.WYZ gazillion of government “assets” disappear, while $X.WYZ gazillion of government debt disappears. Social Security’s (and Medicare’s) obligations don’t change one bit as a result and nor does Uncle Sam’s ability (or inability) to meet those obligations.

Methinks1776 March 17, 2011 at 4:43 pm

And yet again, the problems that do exist have nothing to do with the fact that the trust fund holds Treasuries. The situation would be even worse if they weren’t holding Treasuries.

Well, yes it does have everything to do with holding Treasuries, but you’re for some reason completely unable to understand this, so I’m losing interest. I’m just much more interested in your ominous final sentence. So in response I ask why is that?

John Kannarr March 17, 2011 at 6:40 pm

There’s an e-mail circulating that makes the same, hoary old claim that the Social Security System was once in fine shape, but then the politicians wrecked that system by various give-aways and spending programs instead of setting aside that money to pay future benefits. The relevant wording in the e-mail is:

“3. My Social Security payments, and those of millions of other
Americans, were safely tucked away in an interest bearing account for
decades until you political pukes decided to raid the account … ”

I responded to my friend who had forwarded the e-mail by asking him:

In order to earn interest, an interest-bearing account must actually be used in some productive activity that creates new wealth to return the interest plus original principal. But money used to purchase treasury notes goes into the current spending of the federal government, which in no way creates new wealth that can be drawn upon to repay investors. And when those treasury notes eventually come due, where then does the money come from to pay off the principal and all the interest supposedly earned? From current taxes, or maybe from the proceeds of selling even more new treasury notes to new gullible investors. Just claiming that the funds go into “interest-bearing accounts” does not in fact provide a means for the accounts to actually have any way to earn interest. Many people never think this basic issue through – where would the interest supposedly earned come from?

Methinks1776 March 17, 2011 at 6:45 pm


Nicholas Shackel March 21, 2011 at 6:03 pm

you might like this ‘The colonel and pocahontas discuss our wonderful state pensions.’

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