Putting Social Security on Solid Footing

If you lend yourself money, should you charge interest on the loan?  It would depend on how badly you need the interest income, wouldn't it?  If you were desperate for cash, you'd pay yourself a hefty interest rate.  After all, you need the money, right?

If you fail to see the absurdity in those questions, you might be a member of Congress.  But what may be even more absurd than those questions is federal finance.  You see, the federal government "lends" itself money and pays interest on those "loans."  The prime example of this practice is the surpluses generated by the Social Security portion of the payroll tax that have been "lent" to the general fund.  But what does the government pay itself in interest rates on those loans?

In 2013, the federal government paid an average rate of 1.875 percent on the "special issue securities" held by the Social Security Administration (SSA).  How does that rate compare with other interest rates?  The FDIC lists the national average one-year CD rate for jumbos ($100,000 or more) as 0.21 percent, while Bankrate reported an average rate of 0.24 percent for such CDs.  So the feds are paying themselves close to nine times the interest that commercial banks are paying depositors.  For January 2014, the feds paid a 2.5 percent interest rate on securities held by the SSA.  According to the FDIC, that's more than three times higher than even 5-year CDs are currently paying.

But the rates paid by commercial banks are excellent compared to what the feds are currently paying on 1-year T-bills.  Recently, that rate has been below 0.10 percent.  The feds pay lousy interest rates to those buying America's debt, but they pay themselves comparatively handsome rates that are well above market rates.

Also, the interest the feds "pay" on the "special issue securities" held by the SSA differs from the interest paid on regular treasuries in that it accumulates.  With regular treasuries, interest is paid out periodically, it doesn't accumulate.  T-bond owners, for example, get an interest check every six months.  But the interest in the SSA's "trust fund" has been accumulating since 1937.

Democrats are forever alleging that the Social Security "trust fund" has, as Senator Liz Warren puts it, a "$2.7-trillion surplus," and that that, along with payroll tax revenue, is enough to pay benefits in full until 2033.  As comforting as that might be to some folks, Social Security has never really been "solvent."

Regardless of whether there's a "trust fund" or not, Social Security, just like the rest of the federal government, operates on cash flow.  Federal bills are paid out of tax revenue that is continually coming in, and out of the sale of treasuries.  The government operates "hand to mouth"; what money comes in goes right back out.  There's no "money in the bank," the federal government has no mechanism to save money, and if there is money left over at the end of the year, it is used to retire public debt, and the feds then start the new fiscal year from zero.  Add to that the federal government's ability to "print" money and the term "insolvency" has little meaning in federal financing.

The big problem with Social Security is that it is not subject to a budget process; in fact, the program is classified as "off-budget."  Whether payroll tax surpluses are flowing into the general fund, or income tax revenues in the general fund are flowing back to the SSA, no budgeting decision is required of Congress.  It's all automatic.

If Congress is ever to get control over the federal deficit, its members must address automatic "mandatory spending."  In a December article, I urged that Congress change Social Security to require the system to operate entirely out of revenue from its dedicated tax, the payroll tax.  That requirement alone would bring an end to the "autopilot" nature of the program, and would force Congress to deal with their fiscal problem immediately.  Rather than being "off-budget," Social Security would be on its own budget.  Social Security would be a totally separate system and totally self-funding.

That would require Congress to create a mechanism to actually save payroll tax surpluses so that Congress couldn't spend them.  It's a pity that in 1953, when the GOP controlled Congress and the presidency, they didn't create such a mechanism.  Such a change would have altered the history of federal finance from that point forward.

The payroll tax should never have been so high as to produce $1T of surplus, as it did in the 25 years after 1984.  Ideally, the payroll tax would produce only a tiny surplus -- just a bit of a cushion.  The proper repository for payroll tax surpluses should never have been government securities of any kind.  (Personally, I think the surpluses should have been deposited in very conservative commercial banks, or have been used to buy income-producing commercial real estate.  Perhaps the SSA could have used the surpluses to buy Rockefeller Center; instead, a Japanese concern bought it.)

Congress should summarily scrap the "unified budget."  Congress should also declare that the SSA's "trust funds" are defunct, and that all past payroll tax surpluses were income taxes, which they effectively were.

The reason for the "autopilot" structure of Social Security is that Democrats want the income tax to fund social programs.  The reason the feds pay interest on inter-agency loans is that that's how the Democrats insure that income tax revenue is used to fund social programs long after the "principle" has been paid back.  This scheme allows the feds to not have to adjust the system and to continue paying benefits at the same level without raising the payroll tax.  And it masks the financial unsustainability of Social Security.

During the aforementioned quarter-century following 1984, the interest credited to the "trust fund" was actually more than the payroll tax surpluses.  But how "righteous" is it that the feds pay any interest on inter-agency "loans"?  Paying Social Security benefits with "trust fund" interest is triple-taxation.

In another December article, I calculated that at the end of 2012, less than a third of the SSA's "trust fund" could be attributed to payroll tax surplus, while the remainder of it was mainly interest.  The "trust fund" contains about $1.6 trillion of interest, an "asset" created out of thin air that will be paid for by your income taxes.

Democrats hate the idea of adjusting their sacred system in any way whatsoever other than expanding it, despite the highest deficits in history.  Democrats fervently insist that the "trust fund" is good until 2033, and that Social Security spending "doesn't add a dime to the deficit."  Americans who believe that have simply been duped.  Social Security has been adding to the deficit since 2010 and will continue to do so unless fundamental change is made.

Hey, "fundamental change."  Democrats ought to be up for that.

Jon N. Hall is a programmer/analyst from Kansas City.

If you lend yourself money, should you charge interest on the loan?  It would depend on how badly you need the interest income, wouldn't it?  If you were desperate for cash, you'd pay yourself a hefty interest rate.  After all, you need the money, right?

If you fail to see the absurdity in those questions, you might be a member of Congress.  But what may be even more absurd than those questions is federal finance.  You see, the federal government "lends" itself money and pays interest on those "loans."  The prime example of this practice is the surpluses generated by the Social Security portion of the payroll tax that have been "lent" to the general fund.  But what does the government pay itself in interest rates on those loans?

In 2013, the federal government paid an average rate of 1.875 percent on the "special issue securities" held by the Social Security Administration (SSA).  How does that rate compare with other interest rates?  The FDIC lists the national average one-year CD rate for jumbos ($100,000 or more) as 0.21 percent, while Bankrate reported an average rate of 0.24 percent for such CDs.  So the feds are paying themselves close to nine times the interest that commercial banks are paying depositors.  For January 2014, the feds paid a 2.5 percent interest rate on securities held by the SSA.  According to the FDIC, that's more than three times higher than even 5-year CDs are currently paying.

But the rates paid by commercial banks are excellent compared to what the feds are currently paying on 1-year T-bills.  Recently, that rate has been below 0.10 percent.  The feds pay lousy interest rates to those buying America's debt, but they pay themselves comparatively handsome rates that are well above market rates.

Also, the interest the feds "pay" on the "special issue securities" held by the SSA differs from the interest paid on regular treasuries in that it accumulates.  With regular treasuries, interest is paid out periodically, it doesn't accumulate.  T-bond owners, for example, get an interest check every six months.  But the interest in the SSA's "trust fund" has been accumulating since 1937.

Democrats are forever alleging that the Social Security "trust fund" has, as Senator Liz Warren puts it, a "$2.7-trillion surplus," and that that, along with payroll tax revenue, is enough to pay benefits in full until 2033.  As comforting as that might be to some folks, Social Security has never really been "solvent."

Regardless of whether there's a "trust fund" or not, Social Security, just like the rest of the federal government, operates on cash flow.  Federal bills are paid out of tax revenue that is continually coming in, and out of the sale of treasuries.  The government operates "hand to mouth"; what money comes in goes right back out.  There's no "money in the bank," the federal government has no mechanism to save money, and if there is money left over at the end of the year, it is used to retire public debt, and the feds then start the new fiscal year from zero.  Add to that the federal government's ability to "print" money and the term "insolvency" has little meaning in federal financing.

The big problem with Social Security is that it is not subject to a budget process; in fact, the program is classified as "off-budget."  Whether payroll tax surpluses are flowing into the general fund, or income tax revenues in the general fund are flowing back to the SSA, no budgeting decision is required of Congress.  It's all automatic.

If Congress is ever to get control over the federal deficit, its members must address automatic "mandatory spending."  In a December article, I urged that Congress change Social Security to require the system to operate entirely out of revenue from its dedicated tax, the payroll tax.  That requirement alone would bring an end to the "autopilot" nature of the program, and would force Congress to deal with their fiscal problem immediately.  Rather than being "off-budget," Social Security would be on its own budget.  Social Security would be a totally separate system and totally self-funding.

That would require Congress to create a mechanism to actually save payroll tax surpluses so that Congress couldn't spend them.  It's a pity that in 1953, when the GOP controlled Congress and the presidency, they didn't create such a mechanism.  Such a change would have altered the history of federal finance from that point forward.

The payroll tax should never have been so high as to produce $1T of surplus, as it did in the 25 years after 1984.  Ideally, the payroll tax would produce only a tiny surplus -- just a bit of a cushion.  The proper repository for payroll tax surpluses should never have been government securities of any kind.  (Personally, I think the surpluses should have been deposited in very conservative commercial banks, or have been used to buy income-producing commercial real estate.  Perhaps the SSA could have used the surpluses to buy Rockefeller Center; instead, a Japanese concern bought it.)

Congress should summarily scrap the "unified budget."  Congress should also declare that the SSA's "trust funds" are defunct, and that all past payroll tax surpluses were income taxes, which they effectively were.

The reason for the "autopilot" structure of Social Security is that Democrats want the income tax to fund social programs.  The reason the feds pay interest on inter-agency loans is that that's how the Democrats insure that income tax revenue is used to fund social programs long after the "principle" has been paid back.  This scheme allows the feds to not have to adjust the system and to continue paying benefits at the same level without raising the payroll tax.  And it masks the financial unsustainability of Social Security.

During the aforementioned quarter-century following 1984, the interest credited to the "trust fund" was actually more than the payroll tax surpluses.  But how "righteous" is it that the feds pay any interest on inter-agency "loans"?  Paying Social Security benefits with "trust fund" interest is triple-taxation.

In another December article, I calculated that at the end of 2012, less than a third of the SSA's "trust fund" could be attributed to payroll tax surplus, while the remainder of it was mainly interest.  The "trust fund" contains about $1.6 trillion of interest, an "asset" created out of thin air that will be paid for by your income taxes.

Democrats hate the idea of adjusting their sacred system in any way whatsoever other than expanding it, despite the highest deficits in history.  Democrats fervently insist that the "trust fund" is good until 2033, and that Social Security spending "doesn't add a dime to the deficit."  Americans who believe that have simply been duped.  Social Security has been adding to the deficit since 2010 and will continue to do so unless fundamental change is made.

Hey, "fundamental change."  Democrats ought to be up for that.

Jon N. Hall is a programmer/analyst from Kansas City.

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