How the SS Trust Fund is Like an Auto Lease

Imagine that you have leased an automobile for 36 months at $300 per month.

When you reach the end of the lease and make the 36th payment, is this a welcome event or an unwelcome event?

Answer - Some of both.

The good news is that you now have an increase in free cash flow of $300 per month.

The bad news is that you no longer have the services of the leased automobile.

If you have the option to simply continue the $300 payments and the use of the automobile on a month to month basis, would you choose to do so?

That would depend on your circumstances and preferences. The services of the automobile might or might not be worth the $300 monthly payment, given whatever alternatives may exist at that time.

With your automobile lease contract, you are in an analogous position to that of the US Treasury as it meets its commitment to redeem Social Security Trust Fund bonds.

When the Treasury redeems the last bond in the SSTF, exhausting it, as it makes up for the payroll tax shortfall for some year in the range of 2042 to 2053, this is equivalent to your making of the last contracted lease payment.

The good news for the Treasury is that it has no further obligation to redeem Trust Fund bonds, relieving some of its burden for general tax revenues and/or new borrowing.

The bad news is that the payroll tax alone will continue to fall about 27% short of meeting the expected level of mandated SS payments.

Does the Treasury have a choice of simply continuing to fund the payroll tax revenue shortfall directly without redeeming SSTF bonds, none of which any longer exist?

Yes, if Congress commands that it do so.

The positive choice before Congress would be, on one hand, to either reduce general taxes, or reduce new borrowing, or, on the other hand, to prevent an abrupt 27% reduction in SS benefits paid.

Since Congress is most likely to be responsive to the immediate pain of SS recipients, suffering a 27% reduction in benefits, it is likely to demand that the Treasury simply continue to finance the payroll tax revenue shortfall directly without going through a SSTF bond redemption process. The burden on the Treasury will be the same, whether it is financing the shortfall indirectly by redeeming SSTF bonds or directly by general taxes and/or new borrowing from the public.

If this is the case, then the SSTF fund itself is clearly seen to be of no economic reality as its exhaustion is an economic non-event.

This all means that the White House claim of a SS bankruptcy crisis and its opponents' claim that the SSTF has an economic reality are of equal validity, i.e. none.

The real issue is that, like any other government program that takes in less in taxes than it spends or transfers, SS produces an accelerating Federal deficit and an increase in budget interest payments on an accumulating Federal debt.

Share this

I think this was pointed out

I think this was pointed out by MaxSpeak some while ago; i.e. the government just continue paying - first paying off the bonds and when that's all done just continue paying SS benefits directly. No big catastrophic event.

Let me add a contingent

Let me add a contingent qualification.

The Social Security Trust Fund can only have economic significance if and only if Congress is willing to allow SS benefit payments to abruptly fall when the SSTF becomes exhausted. In this case, the exhaustion will also imply an abrupt improvement in the economic status of the Treasury as it need no longer redeem SSTF bonds which no longer exist.

Regards, Don

Mike, Thank you. Following

Mike,

Thank you.

Following up on that leads to this Bruce Bartlett column.

http://www.washingtontimes.com/commentary/20050208-083632-1544r.htm

...This means that, long before the trust fund is exhausted, income taxes must rise by an amount equal to difference between current Social Security revenues and benefits. In other words, income taxes will have to go up by about 2½ percent of GDP between now and when the trust fund is exhausted to redeem the bonds it holds, which will be cashed in to pay benefits over and above Social Security taxes.
But on the date the trust fund is exhausted, taxpayers will have paid off their debt to the trust fund. Thus income taxes could theoretically fall by 1.7 percent of GDP that day. If the payroll tax had to rise by the same amount, most taxpayers would be unaffected. Their income taxes would then go down by exactly the same amount their payroll taxes rise.
More likely, Congress would simply authorize general revenue financing for Social Security, which happens when the trust fund is drawn down. In short, absolutely nothing would change for either taxes or benefits the day the trust fund is exhausted....

However, he's wrong about most taxpayers being unaffected. The entire SS crisis is related to the fall in the number of workers supporting each retiree. The total tax increase may remain the same, but the income tax increase would be spread out over a broader base of taxpayers.

Regards, Don