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Allan Sloan on the “Funny Money” in the Social Security Trust Fund

August 10th, 2010 . by economistmom


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.

24 Responses to “Allan Sloan on the “Funny Money” in the Social Security Trust Fund”

  1. comment number 1 by: Brooks

    the trust fund is of no economic value.

    Indeed. Just like the Social Security “gap” is of no fiscal significance.

  2. comment number 2 by: SteveinCH

    The gap is actually of worse than no significance. A focus on merely addressing the gap undermines the need to critically examine all spending. Solving the gap is not only a fictitious exercise but limits our search for improvements to make SS more sustainable.

    After all, the ACA already broke the fiction of dedicated revenue when “medicare” taxes are now being used to finance directly something that isn’t Medicare.

  3. comment number 3 by: Arne

    “Social Security would have to cash in about $3,400 of its trust-fund Treasurys”
    False for two reasons.
    1) Since he is so specific about taking retirement, he is actually talking about Federal Old-Age and Survivors Insurance (not Federal Disability Insurance) which is still in surplus (unlike DI).
    2) Taking OASI + DI together (which is the more common way) the cash shortage is about 1 percent, so only $34 of that is borrowed.

    In any event, the $34 that would need to be borrowed would now be owed by income tax payers, and a portion of the loan from payroll to income tax payers would be paid back as always expected.

  4. comment number 4 by: Brooks


    Re: The gap is actually of worse than no significance. A focus on merely addressing the gap undermines the need to critically examine all spending.

    Exactly. The implication of this focus on the “gap” is that the gap represents the degree to which SS spending contributes to our overall fiscal imbalance. A few years ago when some on the left were claiming there was very little or no gap at all based on their “more realistic” projections, they were arguing that a tiny “gap” meant that SS was not contributing much/anything to our long-term fiscal imbalance and therefore it would make no sense to even consider reducing projected SS spending as part of our effort to reduce that overall fiscal imbalance.

    And some piled idiocy on top of idiocy by claiming that, if there were no SS “gap”, the only way reducing projected SS spending could reduce the overall fiscal imbalance would be to “default” on the bonds in the SS “trust funds”. Now, it’s true that in that scenario, if all we did were to reduce SS spending, we’d have a perpetually growing total balance in those SS “trust funds” and that would violate the spirit of the policy. But if the whole purpose were to reduce overall deficits, we would just reduce FICA SS taxation to adjust to the lower spending level, and offset that tax reduction with increases in other taxes. Result would be no net change in projected revenue, lower projected overall spending, and thus lower deficits. It ain’t rocket science, but it may as well be to some.

  5. comment number 5 by: Brooks

    Oh, and in case it isn’t obvious to anyone (ahem…Arne), what I’m saying is that a dollar of SS spending adds a dollar to our overall fiscal imbalance (roughly, net of dynamic effects), regardless of the size of this artificial construct of bookkeeping, the SS “gap”.

  6. comment number 6 by: Arne

    The invalid premise here is that “overall fiscal imbalance” is a valuable tool. You can add them together since they are both in dollars, but shifting revenue from payroll taxes to income taxes and saying it is all just the same is ludicrous.

  7. comment number 7 by: AMTbuff

    It’s all dollars. Maybe not the same meaning to you, but it spends the same. Shifting the mix of taxes makes no more difference than shifting the mix of spending.

  8. comment number 8 by: BillSmith

    If you look at the assumptions underlying the report you will see that the numbers will be much worse than the report claims. The report assumes the economy will add about 1 million jobs a month next year. It also assumes a average growth rate over 75 years that has never been achieved.

  9. comment number 9 by: SteveinCH

    And it also assumes an inflation rate of less than 2 percent for a decade that has never been achieved for a single decade of the 20th or 21st centuries.

    While high inflation is good for overall government finances, if one simply looks at SS finances as the report does, it’s quite a bad thing (because of the payroll tax cap)

  10. comment number 10 by: SteveinCH


    Tell me what the difference is between payroll taxes and income taxes that are deducted from your paycheck? I don’t see any difference but maybe that’s just me.

  11. comment number 11 by: Brooks

    I don’t know why I’m bothering at all with Arne, since I spent quite a bit of time in the past trying to explain this kind of stuff to him and I doubt he’ll ever get any of it, but…


    Re: The invalid premise here is that “overall fiscal imbalance” is a valuable tool. You can add them together since they are both in dollars, but shifting revenue from payroll taxes to income taxes and saying it is all just the same is ludicrous.

    The projected long-term overall fiscal imbalance is not a “tool”; it’s the problem. It’s what will threaten and cost our economy and standard of living via interest rates, higher taxes, spending cuts, possibly very high/volatile inflation, etc.

    And as AMT says, it’s all dollars, so you can spew one liners about something being “ludicrous” with no supporting argument whatsoever, but don’t confuse that with making any kind of sensible point.

  12. comment number 12 by: Arne


    I only pay payroll tax on the first $106,800 of my income. Exactly the same amount as Bill Gates.

  13. comment number 13 by: Arne

    Numbers are tools. The SS gap, overall imbalance, amount in the TF, cost of a cup of coffee. All tools. All for different purposes. Of these four most people find the last to be the most useful.

  14. comment number 14 by: SteveinCH


    Not sure what that has to do with anything but I don’t disagree with you.

  15. comment number 15 by: Arne


    I am answering your question as to what is different about payroll and income taxes. I’m left of center, but I know that the top 10 percent pay most of the income taxes. That is not true of payroll taxes.

    If you want to make sure that SS does not unduly transfer money to people who don’t need it, you should be for making sure the trust fund is honored.

  16. comment number 16 by: SteveinCH

    No I should be taking benefits away from those who don’t need them, far and away the best solvency solution.

  17. comment number 17 by: Brooks

    Well Arne, thanks to your presence, there is at least one “tool” in the room.

  18. comment number 18 by: SteveinCH

    Oh and PS Arne, I’m not sure what your definitions are but the top 10% pay more than 25% of all social insurance taxes. Sure that’s not the 72% they pay of income taxes, but it isn’t 10 percent either.

    I’m just curious, is there anyone other than you and crazies on Huff Post who thinks that the bonds in the trust fund are worth anything. I’d love to read their point of view.

  19. comment number 19 by: Brooks


    And there’s even another way in which the trust fund balances are almost meaningless.

    Suppose there really were cash in those trust funds. And let’s assume that the only legal use of those funds is on SS benefits, and let’s assume we won’t change that law. What would that mean? It would mean only that the $2 or $3 billion in the trust funds would be the minimum we’d have to spend on SS over time. It would still be a big fat “so what?” because that amount is far short of any conceivable amount we’d spend on SS over the next couple of decades. The bulk of the funding will come from ongoing taxation.

    It’s like if we enacted a law that mandated that we spend at least $2 billion on Defense over the next 40 years. Big fat “so what?” No possible policy impact whatsoever, within the bounds of what is conceivable politically.

  20. comment number 20 by: Arne

    The top 10 percent of earners paid less than 5 percent of total SS payroll taxes.

  21. comment number 21 by: Arne

    Check that, it’s obviously more than 10 percent.

  22. comment number 22 by: SteveinCH


    Here is the data from the CBO on the top earners paying “social insurance” social security and Medicare taxes.

    You’ll find it in the second table

  23. comment number 23 by: SteveinCH

    Check that, I think it’s the third table…the one labeled social insurance taxes

  24. comment number 24 by: Arne

    The bottom 90 percent put in 75 percent of payroll taxes and 28 percent of income taxes. So transferring money from the SS TF to the general fund (without transferring it back) would be a huge transfer of money from the less wealthy to the more wealthy.

    Am I wrong about that?