Recycling a Social Security Comment

From Macroblog, one of my comments that seems more coherent than usual --


David,

I think that you have a pretty clean picture, but that it might be clearer with a couple of assumptions that could be true, but which don't have to be to contribute to the big picture.

Assume that there will be no tax increases of any kind, and no benefit cuts of any kind, and that the scheduled benefits will actually be paid out in full. Also assume whatever future economic and demographic trajectory projections that you feel most comfortable with.

Unless I've missed something, the only variable left to align all of the above assumptions is new borrowing from the public.

Either at some year in the future the payroll tax receipts will start to fall short of mandated benefit payouts or they won't. If they won't ever fall short, then we don't have a problem and there is nothing to discuss.

However, there is near universal agreement that some time in the 2018 timeframe, there will indeed start to be a shortfall.

For simplicity, let the first year's shortfall be $100M. What happens?

First, given all of the above assumptions,the Treasury must sell $100M in new debt to the public.

Secondly, the Treasury must give the $100M proceeds to the SSA to pay out in benefits. In exchange, the SSA will return $100M of its internal bonds for retirement, cancelling the obligation that they represent.

For a number of years thereafter, probably more than 20 or 25, the exact same process will be repeated for increasing sums, possibly to $200B, just for discussion.

The process as described above is only interrupted by the exhaustion of SS Trust Fund, as its bonds and their interest have all been retired/redeemed.

Let's say that in 2043 the last $200B of SSTF bonds are retired in exchange for $200B of new borrowing from the public.

If the 2044 shortfall is $201B, and the SSTF is empty, what happens?

Again, assuming along with everything else above that all mandated benefit payments are made, the Treasury must borrow an additional $201B from the public and turn it over to the SSA even though there are no remaining bonds to retire. This likely requires Congressional approval, but is there any likelihood that Congress will allow benefits to fall short of mandates by $201B in 2044 (maybe by 28%) just to avoid a new public borrowing of $201B when the 2043 level was $200B? The bad news is the $201B to be borrowed. The good news is that there are no further SSTF bonds to be retired. If $200B in new borrowing wasn't worth avoiding in 2043, then why would $201B in 2044 be any more of a problem?

Of course they would both really be problems, but it should be clear that the proximate cause and degree of the problem has everything to do with the shortfall, and nothing to do with the exhaustion of the SSTF.

In this light, it should be clear that the PAST increases in the payroll tax were indeed employment tax increases, and that the resulting surpluses were of no help at all in paying future benefits when shortfalls appear(ed).

While it is possible for individuals to save to prefund future purchases or expenses, it is almost impossible for a government to do so, certainly using the existing method.

Regards, Don

A corollary to all this is that the only Federal Debt that matters is the debt held by the public, broadly defined.

To include the intragovernment quasi-debt held by the Trust Funds in the overall Federal debt would seem to be illogical. If this year were exceptional in that payroll tax receipts were exceptionally high and that all the recipients of SS benefits voluntarily refused to cash their benefit checks, the result would be a huge one year surplus added to the Trust Fund. What possible sense can it make to say that this surplus increases the overall Federal debt.

Well, it could make a sort of superficial sense if the amount of the bonds added to the SSTF this year produced a consequent numerical requirement for an addition to public debt sometime in the future. But, as we see above, it doesn't. Current surpluses have no necessary relationship to future shortfalls. It is only future shortfalls that determine future new public debt requirements.

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