According to last year’s Social Security trustees report, the program’s trust fund would end 2014 with a stunning balance of $2.784 trillion. Unfortunately, the trustees also projected that 2014 would be the high-water mark. They expect the combined old age and disability income fund will close 2015 with a slightly lower balance, $2.758 trillion. Every year after that, the trust fund shrinks, as does its interest income.
And that’s a problem, right?
Every year the Social Security administration warns us that the program is unsustainable. The most recent reports tell us that expenses have exceeded non-interest income since 2010. Trust fund assets, they warn, will be redeemed every year. And the trust will be exhausted by 2033. After that, benefits will have to be cut.
Or will they?
You can understand why I ask this rude question by following me in a thought exercise. Since 2010, Social Security has spent more on benefits than it collects in taxes. The remaining money needed is treated as a reduction in the interest income earned by the trust. But the necessary cash comes from the U.S. Treasury.
Where does the U.S. Treasury get that cash? Hey, this is a quintessential American institution: they borrow it. Our government operates at a deficit, so lots of money needs to be borrowed every year. And the U.S. Treasury is really good at borrowing, witness the $12.1 trillion borrowed between the end of the 2000 and 2014 fiscal years.
So what happens when Social Security spending exceeds all program income, including the trust fund’s interest income? Social Security will start to redeem the Treasury bonds held in the fund at the Treasury. The Treasury, in turn, will get the cash by borrowing it. It will issue new bonds to public and foreign investors. The trustees estimate that this will happen in 2020.
Over the next 18 years, trust fund assets will decline to zero, according to the intermediate projections of the trustees. Treasury obligations held by U.S. public and foreign investors will increase by about $2.7 trillion, plus interest. Alternatively, the Federal Reserve could buy the same U.S. Treasury obligations, just as they have purchased mortgages and other securities in our recent years of “quantitative easing.”
Now imagine another course of events. Suppose an edict declared the trust fund null and void? What happens?
Social Security still needs money to deliver promised benefits. So it borrows from the U.S. Treasury. The Treasury sells Social Security IOUs as Treasury-guaranteed notes to private investors or to the Federal Reserve. Social Security gets cash to send out as benefits. Public debt increases by that amount. Eventually it increases by about $2.7 trillion, plus interest.
What’s the difference?
There is no difference, except in labeling the debt. The new Treasury-guaranteed Social Security IOUs, like the Social Security trust fund itself, would be a bookkeeping exercise. The Social Security trust fund is not to be confused with something as real as Scrooge McDuck’s swimming pool vault, a gigantic bin filled with silver and gold coins, paper money and other valuables in which the legendary tight-fisted duck swims every morning.
No, it is a serious stack of paper in a West Virginia file drawer. We know that because former President George W. Bush was photographed holding part of the trust fund in in 2005.
In the end, what matters is whether outside investors will want to buy Treasury debt, however it is labeled and however fast total debt will expand. The other out is quantitative easing for Social Security as the Federal Reserve buys Social Security debt at very low interest rates.
Eventually, we may be grateful for all those too-big-to-fail bankers. They showed the way.
Does all this mean everything is hunky dory and government spending can increase faster than our economy can grow, forever? Sorry, no. We’ve got a really big problem. Promised benefits are far greater than likely tax collections. And government debt is already high.
But the end isn’t as near as the doomsayers think. Government hats are filled with rabbits. And Uncle Sam has a big hat. He has the largest hat ever created.
Watch and count the rabbits, but pray for your children.