The argument that Social Security holds worthless IOUs took another hit in 2015. According to a recent announcement by the Congressional Budget Office (CBO), the government started to repay not only the interest but also the principal due on securities held by the program’s Trust Fund.
The argument started to falter five years ago when payroll taxes stopped covering the annual expense of benefits. Since 2010, the system has used the interest earned by the Trust Fund to pay scheduled benefits. Without the Trust Fund, benefits would have been reduced 5 years ago, so it is more than an accounting gimmick.
I have never given much consideration to the argument that the Social Security Trust Fund is an accounting gimmick designed to funnel money to the general fund of the government. At best, the entire argument sounds like self-serving hyperbole designed to evoke an emotional response that will derail any sensible discussion. At worst, it sounds like a conspiracy theory.
First, let’s strip out the hyperbole. All debt is an IOU. It is an agreement between parties for one to repay another an agreed-upon amount. Government securities with like terms are trading at historic highs rather than at lows, much less worthless.
So what is the point? Is the goal of this argument to make Social Security appear less stable? That is hardly necessary. Today, the system has nearly $30 trillion in promises for which it will not generate cash. The program holds $2.8 trillion in reserves or IOUs, which will postpone the crisis for a number of years.
Seriously, which number poses a larger problem? No one questions whether the $2.8 trillion will be repaid. No one seriously suggests that $2.8 trillion will offset the $30 trillion gap. If I had a bill for a dollar, and had a dime to pay it, I am unlikely to be worried about the dime.
These same IOUs are held in private pensions, and no one is complaining. Many of the sharpest critics of Social Security hold these IOUs in their own portfolio, so what is the big deal?
Critics claim that the government owes the money to itself.
Technically this isn’t true. The government has no liability for Social Security benefits. The government is a fiduciary that collects revenue and distributes cash. If the amount collected is insufficient to cover expenses, the expenses are reduced to the level of revenue. The government does not owe Social Security benefits.
Critics claim that the bonds aren’t marketable.
This is true — and pointless. The government securities held in the Social Security Trust Fund contain a put option, which enables the fiduciary to request immediate payment for the bonds. If the government were unable to honor this commitment, the bonds would not be marketable anyway.
Critics claim vehemently that the bonds do not represent economic assets.
For example, critics point to the observation made by the White House’s Office of Management and Budget (OMB) that these bonds “are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” No kidding. Yes, if you borrow money, you have to repay it. What is the drama in that?
Whether the Trust Fund is held in government securities, IOUs, or gold bullion will not change the math of the system. You can’t pay a dollar of promises with a dime.
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