The SS Trust Fund

The Social Security Trust Fund, A Political Exercise in Economic Futility

It is well known, even if not politically acceptable, that the Social Security Trust Fund provides exactly zero economic benefit in providing funds for future SS payments. This is because it contains nothing but the government's IOUs to itself, which must be redeemed in the future. If the SSTF did not exist, future SS obligations would have to be met by some combination of reduced benefits and increased taxes and government borrowing. Since it does exist, the government need only do exactly the same things, to the same degree, and call some things by different names. This situation is usually described by saying that the contents of the SSTF, special non-marketable Treasury securities, are merely government IOUs to itself, and are not real economic assets, and thus have no real economic significance.

This is all true, but I believe that the story has ended too soon.

In an earlier post, Money and the Government , I described a situation where a fictional Money Supply Control Agency (MSCA) pulled $4B from the economy in 2010 and put $4B back in 2060, fifty years later. I attempted to demonstrate that it was irrelevant whether the $4B was destroyed and reprinted or stored in Treasury warehouses for 50 years. My conclusion, expected to be controversial, is that money held (really held) by the government must be excluded from any discussion of the money supply that is expected to be a factor in determining the purchasing power of money (PPM).

However, this discussion can be extended further. The actions of the MSCA, look much like what a sample of the Social Security Administration's basic action is thought to look like. If we make the connection between the two, the obvious conclusion is that even if the SSTF contained actual money, the economic effect of social security payments (or at least those in excess of transferred payroll taxes) is exactly the same as if the payments were simply new money printed on the spot. Does this imply that the key item is the ability of the government to make money out of thin air? In a word, no.

Even if the SSTF had stored assets of real economic value over the years, say euros, or even gold, it is the fact of the distribution of purchasing power, not its form, that produces the rise in prices associated with an inflation of the money supply. The rise in prices is the result of individuals reducing the intensity of their grip on their marginal dollar as a result of having more dollars. Since the very purpose of SS is to provide spending power for seniors, the fact that what they receive may not be money itself has no significance, as whatever they receive will be quickly converted to dollars.

In the end, the payment of SS to seniors tends to increase the prices of the products that they buy, and the taxation of workers tends to reduce the prices of the products that they buy, although the taxes additionally increase the cost of labor and increase all prices generally after competition and markets work their magic.

In summary, SS Is really a current tax that transfers cash from workers to retired seniors. To the extent that the taxes fall short of the amount needed for SS payments, even if the SSTF contained real economic assets, their distribution would produce the same economic effect as if the government merely printed new money to make up the shortfall.

Share this

It seems as if you are

It seems as if you are overlooking the impact of printing dollars on the world market. When dollars are printed, all of the people holding dollars suffer from a loss in the purchasing power of the dollar. They would be able to import less from other nations.
If real assets were handed out instead, it would create a greater supply to be bidded for with the same amount of dollars. This would strengthen the dollar; people would be able to buy more goods from the rest of the world.

Jeff, There's not really

Jeff,

There's not really that much difference. You have to realize that prices rise in response to monetary supply inflation only when individuals react to an increase in THEIR money by changing their buying decisions. Typically, they will buy a specific something at a price that they would have prevously rejected. When this is repeated by lots of people for lots of goods, both in parallel and in sequence, the effective purchasing power of money has decreased.

If a social security payment consists of $400 in newly printed paper dollars to Jane Doe, she may buy something for $10 that she would have paid no more than $9 for before.

If instead, she received an ounce of gold that she could sell for $400 in cash, she would then once again make the $10 purchase as she has greater purchasing power whether or not she actually sells the gold first.

While all of this can vary considerably with individual preferences to hold dollars or gold, this is accounted for if the amount of gold distributed is set so that the added purchasing power of the recipients after distribution is the same whether the payments are made in gold or in paper money. To see this, instead of distributing actual gold, distribute a $400 bill 100% backed by and convertible to gold. For short term purchasing power decisions, it doesn't really matter if the distribution is made in $1, $10, $100 or $400(g) bills. The marginal value of the dollar will fall in any case.

Regards, Don