Friday, March 11, 2011

Don Boudreaux and Charles Krauthammer seem to be confused on Social Security

Don Boudreaux points us to a Charles Krauthammer op-ed decrying the whole Social Security lock-box thing. Krauthammer writes:

"The Social Security trust fund contains - nothing. Here's why. When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it's kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury - and is spent. On roads, bridges, national defense, public television, whatever - spent, gone.

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called "special issue" bonds. Special they are: They are worthless. As the OMB explained, they are nothing more than "claims on the Treasury [i.e., promises] that, when redeemed [when you retire and are awaiting your check], will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures." That's what it means to have a so-called trust fund with no "real economic assets." When you retire, the "trust fund" will have to go to the Treasury for the money for your Social Security check."

Boudreaux has opined similarly in this video he created:

Somebody oughta forward Krauthammer's article to China. They'd probably be interested in learning that Treasury debt is "worthless". It's amazing this non-issue is still such an issue.

If you insist on thinking of the OASDI trust fund (the "Social Security lockbox") as being the same financial entity as the U.S. Treasury as Don does, that's fine - but then there's nothing to be concerned about - it's as if the bonds were never issued. It's just the way it's written down on paper. Another way to look at it is the government redeeming its own bonds. Corporations do that all the time. All you have is the Treasury paying out the Social Security benefits later. If you really think the Treasury and the trust fund are the same entity, then it shouldn't matter that the Treasury puts up the cash to fund the benefits later.

If the OASDI trust fund and the U.S. Treasury are not the same entity, then who cares if they hold each others' debt? Again, in the corporate world this would just be one company holding another company's bonds. There would be no issue with it whatsoever.

Krauthammer probably just doesn't know what he's talking about. I'm not sure if Don doesn't know what he's talking about or if he does and he's just trying to pull the wool over people's eyes. I don't know which is the more charitable option, so I'll refrain from guessing which.

But here's what Krauthammer and Boudreaux are arguing - they're essentially saying that when FICA taxes come in the U.S. Treasury and the OASDI Trust Fund are the same entity, but that when Social Security benefits get paid out they're not the same entity. I don't care what way we want to think about it. Most policy analysts treat it like the latter situation - that these different funds are different entities. But it works either way. What you can't do is pretend that sometimes they're the same thing and sometimes they're not the same thing. That's what Boudreaux and Krauthammer are doing, and it makes for very bad analysis.


  1. The Krauthammer column troubled me as well... so thanks for the context. Planet Money on NPR discussed this last year:

    I recently had someone tell me on Facebook that "We currently need a present value of around $15 trillion in ADDITION to all future SSI taxes to keep it funded for our generation."

    ... which I assume is a calculation based on current tax rates and current levels of benefits. Which, I assume, also means that we'll be fine if we raise SS taxes and/or trim benefits.

    Like you, I think I'm more alarmed by rising Medicare and health care costs overall.

  2. Some tweaks probably make sense - slight increase in the retirement age (although we ought not to outpace life expectancy - which isn't growing all that fast) might make sense, but most importantly we could raise the cap on income that is taxed for social security.

    These are minor deals, though. This is "make it solvent till 2097 instead of 2037" stuff. Those tweaks are good to think about, but there are much bigger fish to fry out there.

    The idea that it's an illegitimate system, though, is crazy.

  3. The idea that it won't pay back to people who currently are paying into the system is not all that outlandish. And if that actually happens, where is its legitimacy?

  4. I think it is fairly outlandish to worry that people currently paying into the system won't get benefits back.

  5. But if I were to accept the assumption that there is a real possibility they won't get it back, then of course - it's illegitimate by definition!

  6. Congress can change the benefit at any time. So whether those who are currently paying will receive a benefit depends on future political exigencies.

    I think that's not too far away from Don Boudreaux's point.


  8. Anyone who depends on SSI or medicare/medicaid for their retirement needs is an idiot. It simply amazes how these programs have failed at what they were supposed to do - be the exclusive sources of old age income, etc. Now they are merely seen as supplements to what people contract for in the private sector.

    "I think it is fairly outlandish to worry that people currently paying into the system won't get benefits back."

    I think it is fairly outlandish to think otherwise. The best way to prepare for the "golden years" is not to depend on the government to foot the bill when you get there.

  9. I hope you are not conflating expectation of the continued existence of Social Security with some sort of advocacy of having a program that people can or should rely on exclusively.

  10. See, that's what SSI was supposed to be; it can't even come close to that. Giving money to SSI is like taking your money and burning it. Of course you give to this particular ponzi scheme so they don't throw your arse in prison.

  11. For brilliant descriptions of Treasury debt and China, I go to the Roosevelt Institute:

    And when China buys US Treasury securities, what happens? The Fed transfers China's dollars in its checking account at the Fed to its savings account at the Fed. We call that "borrowing from China" and "going into debt to China." But it's not really "borrowing" in the sense of creating an external constraint whereby we have to defer spending to "pay back" China. The Fed simply pays off China's "debt" by transferring the dollars, plus interest, back to the holder's checking account, which it can create at the stroke of a keyboard as the monopoly issuer of dollars.

    The dollars are nothing more than data entry on the Fed's computer. They have no other existence. And it has no impact on the government's ability to spend as to whether China's dollars are in their checking account or savings account.

    All we owe China is a bank statement that shows them where their dollars are. Sadly, they know this. But they also know that we think we are dependent on them, and take advantage of our error.

  12. I got an email from a regular blog reader that was trouble with blogspot commenting. He writes:

    You're absolutely right about raising the cap on wages subject to Social Security tax. Why are the politicians afraid of that? I used to get an unnecessary and undeserved "tax holiday" for the last few months of every year. I'm OK with raising the age for full benefits, but am concerned about those folks whose working age is capped by law [police & fire?] or by the physical nature of their work; not sure how to deal with that.


    As I said above, I'm less committed to the retirement age issue because life expectancies aren't really growing all that fast, and we just moved it up recently. We do know, however, that better off people live longer. So in a sense raising the cap solves this life-expectancy disparity, because it makes wealthier people pay more for benefits that in all likelihood they're going to be collecting for a longer time.

  13. I thought Uncle Sugar already paid proportionately high yearly SS benefits to poor people compared to rich, balancing out the years-of-payout dlsparity. Anyone who understands annuities should be able to figure this one out.

  14. I'm quite sure your benefits are tied to what you pay in, not a life expectancy figure. I could be wrong about that - haven't investigated.

    Do you have information to back that up?

  15. Krauthammer's point is that, in order to pay Social Security benefits, the government will either have to collect taxes or borrow money. Nothing in the "trust fund" gives the government anything it can use to pay one cent in benefits without doing one of these two things. Do you deny that? People who sat "there's no problem because the trust fund has trillions of dollars it can use to pay benefits" are mistaken or lying.

    The fact that US government bonds are an asset when held by the Chinese does not mean they are an asset when held by the US. If the Chinese hold a trillion dollars in US bonds, they can get a trillion dollars in cash by selling them, and that's the end of the story. If the US holds those same bonds, it too could get a trillion dollars by selling them, but that's not the end of the story because it would then have to pay interest on the bonds and then repay the principal. So your comparison is absurd.

    Graduate program in economics, huh?

  16. Anonymous - first, please use a name or pseudonym on here.

    Think about what you're saying. Do the Chinese sell Treasuries on a different market than domestic holders do?

    The trust fund holds a contract obligating the United States government to provide funds at a future date, period. You act as if the trust fund gave away the initial FICA taxes for free and that now ADDITIONAL money has to be taxed to cover the benefits that the FICA taxes were intended to cover. You're misunderstanding the financing.

    Let's say you paid premiums for a private retirement plan. That private plan wouldn't just sit on those premiums and let them erode away. They'd invest it - for example in long-term bonds. Now, once they exchange your premiums for those bonds they have nothing on hand to give you, and if they want cash to give you the company or government that issued the bonds they bought does need to raise revenue and interest in order for you to be paid back. But they have an asset - and yes, in exchange for the revenue that your retirement plan provided the bond-issuer when they bought the bond, the bond-issuer will have to put up additional revenue to pay them back later. So? That's called a credit market, anonymous. That's a PRODUCTIVE use of funds. There is no retirement fund/insurance policy in the WORLD that doesn't do that. All of these accounts take your cash, exchange it for an asset that is a claim to a revenue stream, and use that revenue stream to pay you back. What fund/account/plan DOESN'T work this way? Can you name me a single one?

    Social Security is making a contract with the U.S. government. They say I'll give you $X now if you give me $X plus interest later. That contract is also widely traded on an open market. It's the EXACT SAME contract the Chinese make. Who cares that the U.S. government has to raise money down the line? They exchanged that obligation for the privelege of NOT having to raise money at an earlier date.

    Since you're commenting anonymously and taking a mocking tone towards me personally, what is your background, exactly?


All anonymous comments will be deleted. Consistent pseudonyms are fine.