FDR signing the 1935 SS Act (click image for person key)

Saturday, January 5, 2013

Trust Funds, Chained CPI and Debt Limits

(Cross posted from dKos) Well let's start where my last diary ended up: Debt Toolkit: Public, Subject to the Limit, Social Security Trust Fund and put those tools to work starting from the same screen shot from Treasury's Debt to the Penny web application.
To recap: by law since their foundation in 1939 (OAS) and 1956 (DI) the Social Security Trust Funds have been required to hold all income in excess of current cost in the form of financial instruments fully guaranteed as to principal and interest by the federal government, which in practice means Treasuries. The specific Treasuries held by the Trust Funds are called Special Issues and have some unique features but are legal obligations of the U.S. fully backed up by Full Faith and Credit of the United States. As such the $2.6 trillion in the Trust Funds are held on the books at Treasury as just over half of the $4.8 tn of 'Intragovernmental Holdings' in the screen shot and so right on 1/7th of the $16.4 tn of Total Public Debt Outstanding. And importantly, and as shown in the last diary, an equal amount of Debt Subject to the Limit, that same $16.4 tn. Since Trust Fund assets are over half of Intragovernmental Holdings and those Holdings are included in Debt Subject to the Limit it follows that ANY increase in Trust Fund assets puts pressure on the Debt Limit. Now Trust Fund assets grow in any year where income from all sources, including interest credited to the existing TF assets, exceeds current cost. For example in 2011 Social Security operations on a combined basis were as shown in this linked Table from the 2012 Social Security Report: Table III.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Year 2011 The literal top line shows cumulative assets of $2.608 (fixed typo) trillion as of Dec 31, 2010, the bottom line $2.678 trillion on Dec 31, 2011. This difference of $69 billion in assets added directly to Intragovernmental Holdings and so directly into Total Public Debt Outstanding and Debt Subject to the Limit. Now it is a fact that this increase in assets is net of interest credited, on a cash flow basis Social Security was actually negative as a portion of the $114 billion in interest earned on existing Trust Fund assets had to be paid in the form of cash. Now one can argue whether this is a problem for taxpayers or not, after all the money comes from somewhere, but for the purposes of deficit and debt scoring that cash flow fact is irrelevant. In 2011 Social Security ran a surplus of $69 billion which subtracted directly from the unified budget deficit. At the same time that $69 billion flowed right to the bottom line of Total Public Debt. Meaning that as regards Social Security the common sense idea that debt is simply the sum of deficits is totally reversed. Social Security surpluses add to debt and don't subtract from it. And of course the reverse is true. If you want to reduce the pressure exerted by Intragovernmental Holdings on Debt Subject to the Limit you would want to REDUCE Trust Fund Assets. And given that growth in those assets is directly the result of income from all sources exceeding cost, the only way to reduce that growth is to either cut income or increase benefits. Which leads to the rather astonishing result that over the short run and in specific regards to Debt Limit calculations proposals to means test Social Security and/or impose a new COLA formula via Chained-CPI are arithmetically COUNTERPRODUCTIVE, they tend to put pressure on the Debt Limit and not relieve it. Now this doesn't mean that it is totally irresponsible to address long term solvency issues in Social Security, but dragging them into a specific debate over the Debt Limit is pure blackmail, the 'solutions' the Republicans are demanding have literally less than zero to do with the vehicle which they are using to demand them. Now it is not true (as some supporters would have it) that Social Security has no effect on deficits or in our case debt, because it does. But in ways that go against 'common sense'. Cutting Social Security cost does less than zero to reduce either short term or long term Public Debt, instead any such cuts either increase that Public Debt or in some formulations (which personally I don't agree with, but are pushed by people smarter than me) leave it unchanged on net. On the other hand Social Security benefit cuts or alternately revenue increases do serve to reduce so called unfunded liability. But unfunded liability is not debt. And for that matter is not legally a liability. Instead it is a purely theoretical calculation of the Present Value of the gap between Scheduled and Payable benefits under Social Security, something I discussed in my diary from Monday Social Security Rashomon: an Actuary, a Defender and a Reformer Meet Now I am perfectly happy to talk for hours and days about Unfunded Liability over either the 75 year actuarial window or even over the (God Help Us) Infinite Future Horizon. Fun stuff!!! But neither that 'Liability' or that Horizon have any direct relevance to either 10 year budget windows or the current Debt Limit. And only fools or liars will tell you different. Or to summarize: House Republicans.


  1. Let me see if I am understanding you correctly. If SS runs a surplus of 10 billion, it ends up as an addition of 10 billion to the intragovernmental holdings. OK?

    Now, at the same time lets say the government is running a deficit of 10 billion dollars, so it uses the 10 billion from the sale of treasuries to SS to cover its deficit.

    If, instead, SS balanced exactly, then the government would have to sell treasuries to someone else to cover their 10 billion deficit.

    The end result on the total public debt is the same -- an increase of 10 billion. That increase occurs whether or not SS runs a surplus.


    1. Jerry first congrats (to you or to me I am not sure) for being the first commenter on SSD.

      The short answer to your question is 'yes' and certainly that is the economist's take.

      Assume Congress wants to fund a $10 billion weapons program at $1 billion a year. It could authorize the sale of $1 billion of Treasuries to the Public each year, take the resulting funds and send them to Boeing. At which point Debt Held by the Public and so Total Public Debt goes up by a $1 bn a year. Or it could authorize an increase in FICA, with or without the stated excuse of pre-funding FICA, of that same $1 billion a year, place $1 trillion worth of Special Issue Treasuries in the Trust Fund, and send the resulting funds to Boeing. At which point Trust Fund assets increase by $1 bn, Intragovernmental Holdings/Debt by $1 bn and Total Public Debt by $1 bn. Same overall debt position.

      But this assumes that the purchase decision was not effected by the finance method. Now instead assume that the Congress is dominated by a Party that is equal part Defense and Budget Hawk. Yes they want the weapon system, no they don't want to pay a tax whose incidence would be on them and their patrons. The decision might well hang in the balance. But then some bright boy proposes instead to finance it by new borrowing from the Public, raise all the $10 billion at once, but only repay it over 20 years via a long bond. The patrons are mostly still on the hook, but are on an 'easy payment plan'. That might decide the matter in favor of the purchase. Or perhaps some brighter boy suggests financing it via an increase in FICA, raising a $1 billion a year in excess of current needs, and then discharging that debt via deposit of a Special Issue Treasury whose redemption might not come for decades, or perhaps never. Well now the buying decision is 'no money down, no payments for 120 months'. Except of course from the wage workers who are paying right away from their first wage dollar.

      That is the availability of a Social Security surplus whether on-going or freshly created might well enable spending that otherwise might not have occured. But my economist friends, including some names that drop quite well, tend to discount that and assert that all things being equal the effects are the same whatever the source of the borrowing. Well yes, after the purchase decision is made. Me I don't think politicians calculate quite in that rational way but instead rely on cover and scoring tricks. And it that scenario it does matter whether Social Security is running or can be made to run a surplus.

      But to get back to the simple answer. Yes both basic scenarios have the same end result total public debt.

    2. Then, can't you say that as SS does not affect the total public debt because if it does not run a surplus, the money to cover the deficit will have to be borrowed anyway which means the same increase in the total public debt anyway, with or without SS.

  2. Mr. Webb-How can I determine an individual's contribution and that same individual's recieved benefits? Little John

  3. I have read this article somewhere on the net "9 Facts About Social Security" and I found out that Social Security benefits increases happen automatically based on the Consumer Price Index. Unlike before 1975 that increasing benefits required an act of Congress.

  4. Thank you so much for this post! It it so important that there are reliable defenders out there for those who need it the most!

    Elijah Ali | www.malatch.com