Social Security and the National Debt

January 18, 2012

Here's my thoughts on Social Security and the national debt, and on the role played by the Social Security trust fund in particular. Maybe this will be a new and interesting point of view for some. I've thought about all of this quite a bit, trying to think about the issues in terms of my own personal situation and what little understanding I have of the economic and financial fundamentals, without politics or ideology playing a role, until a little rant at the end where I will shamelessly fly my occupy flag.

I recently retired. I saved for 45 years while I was working, from when I was 17 years old and got my first job, up through when I was 62 years old and left my last one. I'm now living off my savings. I'm not special - this is how it works for all of us, or at least for those of us lucky enough to survive into full retirement.

Like most of us, I saved a significant part of my employment compensation in two different ways:

  1. My employers and I contributed to retirement plans at investment firms. I invested some of my savings in stock funds, some in bond funds. A good portion of the bond funds were invested on my behalf in US Treasuries. That money was spent on other things by the government. In terms of the fundamental underlying economics, this was a loan from me to the government that I expect to be repaid in retirement. The investment firms acted as financial intermediaries for this transaction between me and the government.
  2. My employers and I paid payroll taxes for Social Security. Most of those taxes were used to provide income for my retired grandparents, parents and the other members of their generations. Because of the foreseen demographic bulge of baby boomers like me, the excess from those taxes was invested on my behalf in US Treasuries in a trust fund. This was planned in advance many years ago, because it was well-known that for my generation revenues from payroll taxes paid by our children and grandchildren would not be sufficient to cover all of our benefits.1 That money was spent on other things by the government. In terms of the fundamental underlying economics, this was a loan from me to the government that I expect to be repaid in retirement. The Social Security Administration acted as the financial intermediary for this transaction between me and (the rest of) the government.

The government has a big budget problem and lots of debt. It sold US Treasury securities to me and to other investors like me in order to finance that debt, through a variety of different financial channels, including the Social Security trust fund and private retirement plans like the ones I've participated in. It perhaps sold too many such securities and took on too much debt. Was this because spending was too high, or because taxes were too low? Opinions differ, but it doesn't matter for the purposes of my story here, which is about a much simpler issue involving the loans I've made over my working life as part of my savings, and my expectations for the repayment of those loans now that I'm retired and need the money.

One way to solve this problem would be for the government to default on its debt. Most sane observers think this is a radical solution with major problems of its own2, and there are better solutions. But of course a brutal full or partial default is always an option in theory. The government could simply refuse to repay in full all those people like me who have foolishly lent it money. Problem solved!

My question is: Why would it be in some way "more valid" for the government to default on its debt to me of type 2 above (the bonds held on my behalf in the trust fund), but not type 1 (the bonds held on my behalf in mutual funds)? What makes these two kinds of debt different? Yes, the Social Security Administration is part of the government, and the investment firms are private financial institutions, but why does that matter? In both cases these were good-faith loans from me and others like me to the government. Yes, my bond holdings are intermingled with those of other savers of my generation in the Social Security trust fund, but they are intermingled with the savings of others in my investment firm mutual funds too. The accounting, regulatory, and legal details differ in many important ways, but I don't see a fundamental difference economically or morally.

The obligation of the government to repay my share of the loans that are held in the mutual funds in my retirement portfolio contributes to its debt and budget problems. So too does its obligation to repay my share of the loans that are held in the Social Security trust fund. I'm asking for repayment of both these kinds of loans. Is it wrong for me to expect repayment in one case but not the other? Do I somehow deserve one but not the other?

I often hear it said that the Treasury securities held in the Social Security trust fund are just worthless pieces of paper, because that money has already been spent3, and hence I have no reason to expect to receive my full promised benefit. If this is true, why aren't the Treasury securities held in my retirement portfolio also just worthless pieces of paper? Surely that money has already been spent too. It wasn't stashed away in the lock box in Al Gore's basement either, was it? How about the corporate bonds I own? The companies I lent that money to have spent it, wisely or unwisely as the case may be. Does this mean that their bonds are also worthless?

Is there something I'm missing here? These kinds of conversations always confuse me, because this simple logic seems inescapable to me.

I'll close with my occupy rant:

The bonds in the Social Security trust fund are primarily held by and are important to the 99% of us who are undeserving freeloaders sucking on the swollen teat of our socialist welfare state. The bonds in private accounts are primarily held by and are important to the 1% of us who are the campaign-contributing congress-owning hard-working job-creating Galtian overlords whose interests must be honored and protected above all others. This fully explains the politics of the debate. Note that as a hapless member of the dwindling American bourgeoisie that we used to call the "middle class", I have at least part of a financial leg in both of these camps, but my heart is with the 99%.

Footnotes:

  1. Even with the trust fund, there is still a small projected additional shortfall. This is a minor problem. For example, it could easily be covered by eliminating the cap on payroll taxes.
  2. One problem is the constitution, which says "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."
  3. Yes, the money has already been spent. What did people expect? That it would be somehow "saved" under some kind of magical virtual mattress or in some kind of infinite loop of the government loaning itself money? How would that work anyway?

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