In today’s Washington Post, Allan Sloan provides a very cute but very clear explanation of why having “money in the bank”–if we’re talking “money” in the Social Security trust fund–isn’t nearly the same as having positive net income coming into the program:
Here’s why the trust fund is funny money. Let’s say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenue is below its expenses, Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow money to pay me, regardless of how big the trust fund is.
Allan sniffs out an interesting change in this year’s Trustees’ report from last year’s:
[A quote from the introduction of the 2009 Trustees' report] says:, “Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”
In other words, the trust fund is of no economic value.
This sentence wasn’t in the 2010 introduction, released last week. Treasury says that it stands by the statement but that the Social Security trustees decided not to include it this year because it reiterates the obvious.
And he explains what the trouble is with the “Geithner bond” depicted above, created by Allan’s Fortune colleague, Robert Dominguez:
Now, to the “Geithner bond,” which shows how easy (and useless) it would be for Treasury to stick as many bonds as needed into the trust fund, and then declare Social Security to be sound forever.
You know, of course, why this wouldn’t work — at least, I hope you know. It’s because the U.S. government ultimately has to pay its bills with cash, not with its own IOUs. In the long run, you need cash — real money — not funny money. Other than being a send-up, this hypothetical Geithner trust-fund bond is no different than the Treasury bonds the trust fund owns, except that it carries a higher interest rate.
By the way, this issue is the same one the Concord Coalition raised earlier last week, just prior to the release of the Trustees’ report.
None of this is meant to suggest that Social Security is a “funny” (unreal) program. To the contrary, it is to urge that we get some real money really into the program. As Allan concludes:
There are ways, even at this late hour, to begin turning the trust fund from funny money into real money without unduly stressing the government’s finances. (I’ve discussed them before, and will do so again, but not today.) Given that taxpayers are bailing out the most imprudent companies and people in the country, we damn well should bail out Social Security, the mainstay of low- and middle-income people.
But let’s not kid ourselves that a fat trust fund is the solution. When Social Security’s cash deficits begin running more than $100 billion a year within a decade, it’s going to take a lot of money to keep the checks coming. And it sure won’t be funny.