APPENDIX D, p7 (fb-76.html)

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[M7.B6] Even In Future, There Will Be Many More Working - Age Voters Than Elderly Voters. And Marketable Treasury Bond Holders Are Also Campaign Contributors (228)

And, as now and in the past, there will be many more working age voters than elderly voters in the future, even under the most adverse demographic scenarios. See Table T247.1 in section non247 for the past history and future projections of the size of the three population age groups: under 20, 20-64, and 65 and over. And see section non55 for a table of the number of covered workers per Social Security beneficiary. Even in the distant future, workers outnumber the elderly 2 to 1, per the Trustees' Intermediate forecast. )

Note also that rich people, who hold most of the marketable treasury securities, donate by far the most to political campaigns. They are going to be more upset by a default on their securities than on the scaling back of benefits for the elderly.  

[M7.B7] Trust Fund Debt (SIT Obligations) Soon To Exceed Publicly Held Debt (Marketable Securities) (229)

It has been argued that the publicly - held debt (in the form of Treasury marketable securities) is much larger than the trust funds debt (almost entirely in the form of SIT obligations). So if it comes down to crunch time where the government can't meet all of its obligations, it is more likely to default on some of the larger (publicly - held) debt than on the smaller (trust fund) debt. Or to put it another way, "if the government can't meet its trust fund obligations, why are you so sure it will be able to meet its publicly - held debt obligations?"

The last question seems to suppose a scenario, where one year the government is able to meet all of its obligations, then suddenly the following year, the government is unable to meet a large portion of its obligations. Rather, what is most likely to happen (given that some kind of default occurs), is a scenario where a small part of the debt is defaulted on. Then changes will be quickly made to bring the financial house in order; those changes most likely will include some scaling back of benefits to retirees.

Also, it is projected that the publicly held debt will be much smaller ten years from now, while the trust fund debt will be much larger than now. In 2009, it is projected that only 22% of the total debt will be publicly - held debt, while 78% of the debt will be trust fund debt.

This forecast is from the CBO's January 1999 projection of the federal debt, which is discussed in more detail in section non159. From the table in section non159, we see that the debt held by the public is projected to drop 68% -- from $3720 Billion in 1998 to $1206 Billion in 2009. Meanwhile, the debt held by government accounts (also called the "trust fund debt") is projected to soar by 149% -- from $1759 billion in 1998 to $4382 in 2009.

Most startling is how the components of the debt change in relative size. In 1998, 68% of the total debt was publicly-held debt, and only 32% was trust fund debt. Whereas in 2009, it is projected that only 22% of the total debt will be publicly-held debt, while 78% will be trust fund debt.

After 2009, the trust fund debt will continue to grow rapidly, to an even larger proportion of the total debt. Thus, the government will have a relatively easy time paying interest on the relatively small publicly-held debt. The real problem will be for the government to redeem the trust fund debt when the trust funds start to need real money.  

[M7.B8] Trust Fund Obligations Will Probably Be Met, It's A Matter Of When. Expect Benefit Cuts and Accounting Manuvers That Stretch Out The Lives Of The Trust Funds (230)

Probably the way crunch time will be handled is that benefits will be cut as necessary, mostly by a means-testing formula, so that the yearly costs of benefits to the working-age population will be more sustainable. This will also have the effect of stretching out the lives of the trust funds. So instead of defaulting on the trust fund debt, it is more likely that trust funds lives will be extended by cutting benefits. And increasing taxes. This has been the primary methods of keeping both the SSTF and HI funds solvent.

So, in other words, I expect that all of the bonds in the trust funds will all be redeemed eventually, its just a matter of when they will be redeemed.  

[M7.B9] Actually, This Discussion Of The Value Of The SIT Obligations Is Academic -- Benefit Levels Are Determined By Law, And Must Be Paid By Law Regardless Of Whether The SSTF Is Full Or Empty (231)

Remember, as explained many times before, the SSTF's SIT obligations are of no help in being able to make payments to beneficiaries. The SSTF has nothing more than promises to future SS beneficiaries that future general taxpayers will pay benefits. Whether the SSTF is empty or whether it has a pile of IOUs stacked halfway to the moon is irrelevant to the future general taxpayer's obligation or ability to finance the benefits. (See in particular CBO Director Dan Crippen's testimony, beginning on page 8 (non131), where he makes that point). The foregoing discussion in this section is only relevant if there is a financial crisis so severe that the government cannot meet some of its legal obligations.  

[M7.C] The government's reason not to use real marketable bonds for the trust funds (so as not to impact the financial markets) is questionable (232)

The stated reason for the Treasury not to sell bonds for the trust funds on the open market is so as not to impact the financial markets (per SSA Actuarial Note #142 -- see discussion in section non216). Rather than having to market a lot of bonds, it is less disruptive to the financial markets (and somewhat easier for the Treasury) simply to issue Special Issue Treasury obligations (SIT obligations) to itself. It's also less noticable. The financial press and even the regular media report large Treasury securities auctions. It would attract quite a bit of attention if the Treasury started auctioning large quantities of bonds for the trust funds. This would make more people aware of the true nature of the trust fund assets (that they are just more debt), and of the size of the problem.

As explained in section non77, and particularly in its subsection non86, the SSA will need to redeem $7.8 Trillion of Social Security Trust Fund (SSTF) SIT obligations between January 2014 and mid-2034 in order to raise the cash needed to pay beneficiaries. The SSA will present SSTF's SIT obligations to the Treasury general fund for redemption. The Treasury can come up with the money to redeem the bonds in only three ways -- by raising taxes, by cutting back on other federal spending programs, or by selling marketable bonds to the public. Most people believe that most of the money needed will be raised by the latter option -- selling marketable bonds to the public.

What will the impact be on the bond markets between 2014 and mid-2034 when the government needs to sell up to $7.8 Trillion in bonds to the public? and/or raise taxes and/or cut government spending? Why does the government say that it doesn't want to disrupt the financial markets now by selling marketable bonds to the public -- and thus use that as their rationale to create SIT obligations instead -- when they know that they will have to eventually sell marketable bonds to the public when it comes time to redeem the SIT obligations in the trust funds?

Considering that it is a sure bet that beginning in about 2014 the government will have to sell bonds on the open market to finance Social Security, it is hard to believe the government's reasoning for not funding the SSTF now with marketable bonds (that they don't want to impact the financial markets). Or to be more blunt, I don't believe the government's reason. I think the real reason is that, if it comes down to crunch time, they don't plan to accord the same degree of seriousness to meeting their obligations to the trust funds as they do to meeting their obligations to the marketable securities sold to the public.