Why Trust Fund Bonds are Indeed Different

Angry Bear asks the question : Do Federal Bonds Have Any Value?

While the question is not really germane to the fact that the SS Trust Fund is a meaningless political bookkeeping device, the liberal disputers of this fact keep going back to the TF bonds and think that they are making a real point. In fact, a government bond held by the TF is grossly different in character from the same bond held by the public.

If I, as a member of the public, hold a government bond, I can hold it to maturity and have it redeemed or sell it on the secondary market at any time for its then current market value.

In contrast, the same bond held in the SSTF differs in the following ways:

1. It can never be sold on the secondary market.

2. It doesn't really have a maturity date and it never really matures, as it is automatically rolled over.

3. It cannot be redeemed at will, but only at such times and in such amounts as payroll taxes fall short of benefit payout mandates. While this may seem useful, the controlling factor is the shortfall, which must be financed by either new taxes or new borrowing from the public. The amount of bonds in the SSTF, if any, is of no economic significance whatever, as the amount of financing is the same whether or not the redemption of a SSTF bond is involved in the paperwork.

If my bond could only be redeemed at a bank on a Sunday, and no bank was ever open on a Sunday, my bond wouldn't have any economic significance either.

If every future year were to produce a non-negative surplus of payroll taxes over payout mandates, then the quantity of bonds in the SSTF would continue to grow, even to infinity, without having any effect whatever.

A given shortfall in a given year produces the exact same amount of financing difficulty whether a SSTF bond remains to be redeemed or not.

From the Treasury's point of view, the exhaustion of the SSTF is like making the last payment on an auto lease, the discharging of a liability. This benefit is of course offset by the need to enter into a new agreement if one wishes to continue driving.

While Congressional action will almost certainly be required to permit the Treasury to make up for a shortfall directly without redeeming a no longer existing TF bond, this will be the world's biggest political no-brainer since the impact will be no greater than if SSTF bonds still remained to be redeemed.

The idea that the pay/go Social Security system could be prefunded by a current surplus is and always was a myth.

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