Social Security, the Debt Ceiling and Partisan Politics

Curse You John Boehner!

Late last night, the departing Speaker of the House announced a tentative deal aimed at heading off a government shutdown and debt crisis. While this agreement may be good for the country, the timing is inconvenient for me and my latest article on Social Security and the debt ceiling.

The article says that Social Security is the one function of government that is virtually exempt from the consequences of the debt ceiling. This piece is compelling when politicians are baiting seniors over their benefit checks. It becomes less interesting once seniors cease to worry about whether there is enough money in the coffers to cover the next round of benefit checks.

Where are partisan politics when you need them?

What is the debt ceiling? The debt ceiling limits the amount of debt that the U.S. Treasury can issue. When the level of the government’s debt exceeds the legal limit, government spending is limited to the revenue collected by the government because it cannot borrow money.

Social Security is largely unaffected by this event because the system has layers of dedicated funding. The program has exclusive claims on payroll tax revenue. Beyond that line of funding, Social Security has a trust fund with more than $2.7 trillion in dedicated funding. 

The mechanics of the Social Security program are poorly understood even by experts. Ed Lorenzen, a budget analyst at the Center for a Responsible Federal Budget, says it would be like a homeowner paying the mortgage but not all of his or her utility bills. Actually it would be like the utility expecting to invade the escrow account with the bank that holds the mortgage.

The debt held by the Social Security Trust Fund can be refinanced without increasing the total debt outstanding. The government has to issue bonds which will increase the debt outstanding.  The proceeds are however used to pay down debt.  The net impact on total outstanding debt is zero.

The last person to play the Social Security card in a debt ceiling debate was Treasury Secretary Jacob Lew.  He is of course the last person who should be playing this card because he happens to be managing trustee of the Social Security Trust Funds.

As such, it is his job to manage the resources of the trust fund to anticipate foreseeable events such as the debt ceiling crisis. In fact, he recently signed a letter to Congress assuring the public that the Social Security Trust Fund had sufficient resources to pay benefits for more than three years. So if there were any truth to his claim, he would be pleading the fifth rather than publically admitting to the largest breach of fiduciary responsibility in the history of mankind. 

Let’s assume that the Treasury employees who process payroll taxes are sent home.  No one collects payroll taxes. In that case, Social Security would draw on the resources of the Trust Fund.  Let’s assume that Secretary Lew is completely remiss in his responsibilities, and has failed to build a cash reserve in the Trust Fund. The government can still pay the bills of Social Security because refinancing the debt held by Social Security has no impact on the overall national debt.

Life is stranger than fiction. When Social Security has excess cash, the program is required to invest the money in government securities. Once the debt ceiling limits the government’s ability to borrow money, any excess cash would sit uninvested, while the rest of the government shuts down from lack of funding.

Social Security will plenty of money to pay the check.  The real question is whether the rest of the government will have the money to mail it.

The Mythology Of Borrowing And Stealing From Social Security

There is a level of crazy in the Social Security debate that is simply not healthy for the nation.  We have reached the point where the sound of the sound bite is more important than the facts underneath it.

Governor Christie in an effort to shutdown Mike Huckabee in the recent GOP debate invoked the crazy card.  He said, "The lying and stealing has already occurred. The Trust Fund is filled with IOUs.” He subsequently followed this statement with a plea for political honesty with the public. Are you kidding me?

Every candidate is entitled to his own opinion, but today candidates simply make up facts that fit their sound bite. Christies’ statement is classified by the Social Security Administration as Urban Legend. He isn't lying. He is wrong.

So we have left the realm of reason and entered Crazytown. And, Crazytown has a large voting block.  Consider that the following quote has drawn 50,000 likes and 500,000 shares.

 “Next time a Republican tells you that ‘Social Security is broke,’ remind them that Pres. Bush ‘borrowed’ $1.37 trillion of Social Security surplus revenue to pay for his tax cuts for the rich and his war in Iraq and never paid it back.” ~ Occupy Democrats

PolitiFact conidered this quote, and rated it as “Mostly False.” That is of course a polite rating. It is “Stir Crazy”, and 500,000 people took time out of their day to share lunacy. Make no mistake, Governor Christie wants to tap into the energy of Crazytown for his campaign.

Every President since Kennedy has been accused of stealing money from Social Security. There isn’t a shred of evidence to suggest that any program money has been misused. I have seen people accuse Ford and Carter of stealing money, and their budgets actually subsidized the system. 

I have written previously on LBJ, who draws the ire of conservatives. Bush draws serves as a lightning rod for liberals. The story is all the same, where the name of the thief varies based on the ideology of the author. The story is noise.

PolitiFact’s article is right on a number of things. It correctly points out that the current surplus stems from changes made in 1983.  Also the process of borrowing the money hasn’t changed since the inception of the system. Between the two, we are borrowing more money under a process that dates back to the 1930s.

By law, the excess cash of Social Security is converted into government securities, and, yes, the cash is used by the Treasury to pay for government expenses.  This is no different from a private pension that buys Treasury obligations.  The only difference is that no one at these private pensions complains about the theft, questions the IOUs, or worries about the repayment of the bonds.  Why? Because these investment professionals aren’t crazy.

The article is specifically incorrect about the repayment of bonds.  It says: “As for not ‘paying back’, the bonds won’t need to be repaid until 2020.” This is nutty. The bonds held by the Social Security Trust Fund have specific maturity dates.  On those dates, the Treasury refinances the maturing bonds with new loans under new terms from the Social Security Trust Fund.

To be clear, it is factually wrong to say that no one pressed Bush for payment on the money borrowed by the government.  It is factually wrong to say that the money borrowed by the Bush administration hasn’t been repaid with interest. Much of the money that was borrowed by the Bush administration has been repaid by loans made from Social Security to the Obama administration.

It is more accurate to say that we will need to find a new source of refinancing in the next few years.  CBO says that it is 2017.  SSA projects it is likely to be 2019. This is a serious problem – one that get no attention in Crazytown.

Governor Christie isn’t lying.  He is simply wrong.  The problems of Social Security have nothing to do with what is in the Trust Fund, and everything to do with the sums that were never put into it.

Today the largest expense in the government’s budget is on auto-pilot, and largely governed by politicians trolling Crazytown for votes. No one really should be surprised if that mix falls into crisis.

2015 Social Security Trustees Reports & Leprechauns

The slight improvement in the forecast for the Social Security Trust Funds is largely a false positive that results more from optimistic estimates than improvements to the system's fundamentals.

The report increases the projected exhaustion point from 2033 to 2034.  But the assumptions on which the increase is based isn't terribly more realistic than expecting leprechauns to spit out gold coins to pay for the imbalances. 

The improvement in the system’s prospects do not come from people working in a better economy.  The Trustees have offset what is with what might be. 2014 wasn’t good, but 2016-2089 are going to be fantastic! Understand that the drivers of the progress are jobs that do not yet exist and wage increases that have not occurred.

The longer piece was written for FedSmith.Com (read more)

This isn't the first piece questioning the Trustees estimates.

Jed Graham, (see Why The Trustees Of Social Security Can't Be Trusted)
David Stockman (see The 2015 Untrustworthies Report )
American Journal Of Economic Perspectives (see Systematic Bias and Nontransparency in US Social Security Administration Forecasts)

Social Security’s (Missing) Guarantee

Social Security benefits are not guaranteed. This isn’t my opinion.  It is the opinion of the Supreme Court, Flemming V Nestor.

In its ruling, the Court held that entitlement to Social Security benefits is not a contractual right.  Benefit levels are what Congress says that they are. The Social Security Administration recognizes the case.  PolitiFact delivers research on it. Notch Babies provide evidence of it.  There is no guarantee.

See more at: http://www.fedsmith.com/2015/07/06/social-securitys-missing-guarantee

The piece looks at the specifics of the case, and how they affect you, your parents, and beneficiaries in general.  Nestor sets an unusual precedent.  Nestor was retired at the time that his benefits were reduced, and no longer participating in the Communist Party. 

What Happened to the $2.6 Trillion Social Security Trust Fund?”

This is part of a series of articles in which I look at other articles on the internet that are forwarded as reasoned thought.  Just because you read it on the internet, does not make it true.

Many want to believe that Social Security Trust Fund is a scam.  No matter how reasoned the counter-argument, they eventually cite a piece from Forbes blog, “What Happened to the $2.6 Trillion Social Security Trust Fund?”

Readers tend to think that the article says that the Social Security Trust Fund is a scam.  That isn’t what the article actually says though.

The article contains some fact problems. The author states that the Social Security Trust Fund is the source of benefit checks.  This is factually wrong.  The primary resource of revenue for the system is payroll taxes.  So it is factually wrong to suggest that the only way for Social Security to get cash is from the general fund or incremental borrowing. The Trust Fund is little more than a parking lot for excess cash.

The article has reasoning problems. This statement is a false dichotomy. 

·        “Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades.  It must be one or the other.”

It is unlikely to be either. 

Anytime you deal with politics you are dealing with words that have many meanings.  Here is the quote, "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

The writer has chosen to read that sentence as social security checks might not go out because there may not be money in the Social Security Trust Fund."  If that is what the President meant, then the answer is simple: the President doesn't understand how Social Security works. The benefits of Social Security are funded by the payroll tax.  If checks didn't go out, it would mean that payroll tax collection had entirely ceased.  The Trust Fund serves as a buffer for Social Security rather than a primary source of cash.

Moreover, the Social Security Trust Fund is exempt from the discussion of the debt ceiling.  The government has the power to refinance any bond held by the Trust Fund because refinancing debt does not increase overall debt levels.  The government issues a bond and uses the proceeds to retire a bond.  The impact is a wash on the level of Federal debt.

One fact that Matthews fails to mention is that Secretary Geithner is the managing trustee of the Social Security Trust Fund.  It is his responsibility to build cash reserves necessary to pay bills in the face of foreseeable events.  If Geithner is telling the truth, he is effectively pleading guilty to the largest breach of fiduciary responsibility in the history of mankind. 

It is highly unlikely that the asset structure of the Social Security Trust Fund would be the cause the government's inability to deliver checks – nearly zero.  The primary source of revenue is payroll taxes.  It is virtually impossible to believe that the Trustee would have failed to build the necessary cash reserves if the Trust Fund was going to be needed.

The problem here is that no one in Congress or the media took the statement seriously enough to drive out the meaning of the President's words. The writer attributes meanings to the words that the President cannot mean. I have seen a number of other interpretations about the statement. 

There are two things that we know for sure: Coffers clearly can't mean the Social Security Trust Fund. If checks didn’t go out on that August 3rd, it would have been a matter of priority rather than financial resources.

At best for Matthews’ argument, the President is woefully uninformed about the mechanics of the system.  The idea that ‘real assets’ would have changed the President’s statement is simply false.