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{Q2} Will the SIT obligations in the SSTF help lighten the burden on future taxpayers? In other words, if there are, for example, $800 Billion of SIT obligations in the SSTF, will that lighten the burden on future taxpayers by $800 Billion?
Here, the universal consensus answer is no. All of the SIT obligations are Treasury general fund liabilities. They represent loans made by the SSTF to the general fund. They are IOUs, which say in effect, "I, the Treasury general fund, owe you, the SSTF, $800 Billion" (as of mid-1999). As explained in section non77, the SSTF has loaned all of the annual social security surpluses (excess of SS tax revenues over SS expenditures) to the general fund in exchange for SIT obligations. Thus the SSTF consists entirely of SIT obligations. (Exception: the DI trust fund has $48 Million in marketable securities, less than 0.1% of its total assets (non219). However, the remaining 99.9% of the DI trust fund's "assets" are Special Issue Treasury obligations). When the SS system begins to run annual operating (cash) deficits (when annual SS tax revenues are less than annual SS expenditures), then the SSTF will ask the general fund to redeem some of its SIT obligations for cash. The general fund will then have to find the cash somehow -- by raising taxes, cutting benefits, or selling marketable bonds to the public -- in order to redeem the obligations.
As the Concord Coalition puts it, in its Social Security Primer of June 1998, (what are in square brackets are my additions for clarification):
By 2014, SS will begin running an annual cash deficit. From that point on, absent changes, SS will represent a large and growing drain on the federal budget.
The key point, in this regard, is that the assets now accumulating in the trust fund represent future general fund liabilities. [In other words, the general fund owes the trust fund. Thus, the assets cancel the liabilities, and there is no net saving or store of value.]. As such, they cannot ease the burden on tomorrow's workers and taxpayers.
And, commenting on the Social Security Trustee's March 1999 report, the Concord Coalition says:
"The Social Security Trustees, the Office of Management and Budget, and the Congressional Budget Office all agree that the IOUs in the trust fund do nothing to improve the Treasury's ability to actually pay benefits once the system begins running a cash deficit," said Bixby. "At that point, Social Security's obligations can only be met through tax increases, benefit cuts, or more borrowing from the public -- exactly the same ways those obligations would be met if the trust fund didn't exist."
The last sentence of the above is key: the assets in the trust fund do not in any way help the federal government to meet its obligations.
In this section, I've been relying a lot on quotes from the Concord Coalition. However, the same point -- that the trust funds do not contain real economic assets that the federal government can draw upon to pay benefits -- is stated clearly by the Congressional Budget Office (CBO), the Congressional Research Service (CRS), the Office of Management and Budget (OMB), and a former Social Security Administration commissioner, among others. Even the SS Trustees allude to this problem in the March 1999 Social Security Trustees Report by saying that the problem of where the general fund is going to get the revenues to redeem the bonds is "not within the scope of this report". See section non122 for quotes by official government sources and section non129 for quotes by others regarding the nature of the trust funds' assets.
I've never heard or read anyone disagree about the fundamental point -- that the SSTF bonds do not help the government or the taxpayers to pay benefits to SS beneficiaries. And that they are nothing more than promises from the general fund (and thus the taxpayers) to the SSTF to pay it back for the money it borrowed from the SSTF. I have participated in many discussions of the active alt.politics.economics newsgroup -- with participants ranging all over the political spectrum in all directions -- and nobody has disagreed about this. Rather, the debate has been about what is discussed in questions {3} and {4} below (that we perhaps are saving, kind of), and on whether or not a whole generation can save for its own retirement (see section non173).
{Q3a} In years past, we've been collecting the annual social security surplus revenues, and loaning them to the general fund, which promptly spent them on current general federal programs. Is this not a form of saving -- in that had there not been the SS surpluses, the federal government would have run larger deficits, and so would be deeper in debt?
Question 3a assumes that even in the absense of the SS surplus revenues, the U.S. government would have spent the same amount of money. Borrowing another quote from the Concord Coalition:
Behaviorally, the argument implies that our political system tracks and targets some desired balance in the rest-of-government, rather than in the unified budget. This isn't so. Over the past dozen years (the era in which we built up today's trust-fund assets), there have been many plans and processes aimed at balancing the unified budget, but none aimed at balancing the budget excluding Social Security. Remarking on Washington's failure even to attempt this, Senator Moynihan notes that Social Security's surpluses have simply allowed Congress to tax less and spend more than it otherwise would, and so denounces them as a "fraud." As for the future, no one, least of all the status quoists, is insisting that we run a $104 billion unified budget surplus in 2002 -- which is what will then be required to balance the budget excluding Social Security.
It is further argued that had we not had the Social Security surpluses in the past, the political will would have been mustered earlier to get the deficits under control. Actions that helped to reduce the deficits -- such as downsizing government, welfare reform, and Bush's and Clinton's tax increases -- might have been larger and occurred earlier. Also, nobody would argue that all the spending that occurred was necessary. Everyone agrees there is a lot of pork, and most corporate welfare could and should be done away with.
Another concern is with the concept that "spending is saving". What if your spouse was trying to save for his/her retirement, and vowed to save any bonuses that he got at work. Would anyone think he was saving his bonus if he spent it on boozing and carousing, and then argued that had he not had the bonus -- but still spent the money -- his financial position would be less well off? If your spouse did that, you would probably think he is a ding-a-ling.
What if he spent the bonus, but then made some entry in some "Retirement Savings" ledger book or spreadsheet, crediting his retirement savings with the amount of his bonus. Would you then consider him to be saving the bonus for his retirement? If you are like most people, you would say no. (This is analogous to the federal government spending the SS surplus and then making a computer entry crediting the SSTF with the amount spent.)
Suppose his bonus is $10,000, and he spent it. What if he truthfully argued that his credit rating is perfect, and that he has always met his financial obligations, and that his financial situation is currently very good. And what if he then wrote a note, saying, "I, John Doe, do hereby guarantee payment of $10,000 To The John Doe Retirement Savings Trust Fund In The Next 10 Years or Earlier If Required". What if he labelled a shoe box with the words, "The John Doe Retirement Savings Trust Fund", and then dropped the note in the shoebox. Would you then consider him to be saving the bonus for his retirement? If you are like most people, you would say no. (This is analogous to the federal government spending the SS surplus and then printing up a Special Issue Treasury Bond for the amount spent, and giving it to the SSTF.)
What if he spent his bonus on something essential -- such as medical bills or a course he had to take to meet the continuing - education requirements of his profession. Would you consider him to be saving his bonus? Most people would say that he spent his bonus wisely, and that his financial position is better off than it would be if he had borrowed the money to pay for these essentials. But few would say that he had saved anything for his retirement.
What if your parents saved for your college education by spending the money, while dutifully putting IOUs in the "Junior's College Trust Fund" shoebox? Would you feel that they were saving for your college expenses? If they had little in other savings and assets (or were in debt like the federal government), would you feel like you could count on much help from them? Even if they had a sterling credit rating all of their lives?
The general idea that we would be deeper in debt if we had not had the SS surpluses, and therefore this means that we were "saving" SS surpluses, goes a long way to explain why this nation has a negative savings rate and record bankruptcies.
{Q3b} Also, given that some of the surplus revenues have been spent on things that will improve productivity in the future -- such as infrastructure, education, and scientific research -- can't we consider that spending as a form of savings and investment?
Regarding Question 3b, some argue that by spending the SS surplus on programs that enhance education and our children's well-being, we will be enhancing the productivity of the next generation. And that it is ultimately only by increased productivity that our society will be able to maintain or improve the general standard of living and still meet the retirement and health needs of the elderly. This is certainly true. The difficult part is to ensure that money really is spent on good programs that will produce more productive and better - adjusted people.
Perhaps saving by spending on good productivity - enhancing programs is wise and the way to go. What is important, though, is that the American people be told clearly that this is the way the surplus SS revenues are being "saved". And they must be told clearly that nothing is being saved in the actual trust funds -- nothing that will help the federal government or future taxpayers to pay benefits.
{Q4} As in the past, all of the SS surplus revenues are being currently loaned to the Treasury general fund. However, unlike the past 30 years, we now have a qualified annual budget surplus. (Meaning that the budget would be in deficit if it were not for the SS surplus. But counting the SS surplus, the budget is in surplus). Thus, some of the SS surplus revenues are being used by the general fund to retire some of the the publicly - held debt. Isn't that a form of savings?
Given that our past debt is water - over - the - dam, and all that we can do is to change our present and future behavior, most people would say that using the SS surplus to reduce the publicly - held debt is a form of savings.
Just so we realize that, including the past behavior, that we haven't been, and aren't saving the SS surpluses. That is, we went on a wild - deficit - spending spree in the past 30 years -- spending the SS surpluses and much more, and only now are we using some of the SS surpluses to undo some of the damage. Would we think someone is "saving" any of their annual bonuses if they got deep into debt over several years, and then for a couple of years used their annual bonuses to reduce their debt a little bit, then for the next several years got deeper into debt, and then for another couple of years used their annual bonuse to reduce their debt a little bit, and so on?
The above sections have discussed various forms of savings, from the near - ludicrous to the reasonable. The most important point is that we understand what form of savings that we are undertaking, and that we understand the bottom-line situation that everyone agrees upon: there are no assets being saved in the SSTF except ones that are also general fund liabilities (and thus are of no net value to the federal government or future taxpayers). In other words, no matter how much saving we may have done in the past -- say by spending some of the SS surpluses on good government programs that improve our future productivity (such as education and technology) -- the fact remains that there are no assets in the SSTF that are not also general fund liabilities.
It is often asked why we even worry about the future financing of Social Security and Medicare. So what if the Social Security Trust Fund has no real economic assets in them that will help the government pay benefits? We don't have trust funds for most other federal programs. You never hear it said that we can't build any more bombers because the bomber fund has run out.
A response to the above question is that for most federal spending programs, we do it on a "pay as you go" basis because we don't anticipate much greater spending in the future, as a percent of GDP, than we have experienced in the past. Whereas, with Social Security, we've experienced a large increase in costs in the past, as a percent of GDP and as a percent of payroll. And we expect a near doubling of these cost percentage rates in the future. See section non30 where the combined SS + Medicare projected cost rate is expected to increase from 7.00% of GDP in 1999 to 12.14% of GDP in 2040. Or, if expressed as a percent of payroll, to increase from 15.85% of payroll in 1999 to 29.34% of payroll in 2040.
Therefore, the idea behind building up funds in the SSTF was to bring about greater generational equity, in particular so that baby boomers pre-funded their retirement so that their children will not have to pay huge (nearly double) payroll tax rates in order to pay for the boomers' retirements. (However, the sad reality is that the SSTF has been set up such that it has no assets that will help the federal goverment or taxpayers to pay benefits).
Some people ask why we don't set up a "Defense Trust Fund" (DTF). It would seem a matter of intergenerational equity and prudence to build up assets in such a DTF during times of peace, so as to be drawn on during times of war. However, it is hard to predict when wars will occur and how costly they will be.
The way we have traditionally saved for future wars is to pay down the federal debt (incurred in the previous war) to almost nothing, both in terms of current dollars and % of GDP. And that is what we should have been doing for the last 20 years (since the end of the Vietnam war) if not the last 50 years (since the end of WWII). But instead, after the national debt reached a low point in 1974, at 24% of GDP (non164), we've built up a huge national debt. Both in terms of nominal dollars and as a percent of GDP. And on top of publicly held debt we're building up entitlement trust fund debts. Before 1935 we didn't have any entitlement trust fund debts because we didn't have entitlements nor entitlement trust funds. (Gross federal debt, which includes trust funds debt, was 64% of GDP in 1998 (non164)).
And that is why so many are concerned about the debt situation. It seems that maybe we are going to scrape by when the boomers retire only if the Goldilocks economy continues and there are no substantial extra military expenditures or other major shocks, and only if we have the discipline to actually use the current surpluses we are enjoying to pay down the publicly - held debt, or to invest them in real assets -- as opposed to the government spending the money and creating IOUs to itself for the spent money.
A particularly good graph is from the Concord Coalition site, "Saving Social Security: A Framework For Reform" Volume 1, Updated June 1998, cc-primer. On page 9, there is a graph of National Debt as a percentage of GDP from 1790 to 2043. It shows that throughout our history, we've built up a high level of debt during major wars, and then quickly paid down the debt to very low levels after each war. (The exception being after World War II, but still we reduced publicly - held debt from 111% of GDP in 1946 to 24% of GDP in 1974, so we were doing a pretty good job up to that point). And the graph shows how our spending spree of the last 25 years during a time of relative peace has been an aberration.
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