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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