Friday, February 21, 2014

Hey Democrats, Please Stop Talking about the "Trust Funds"

With the good news that the Obama administration is dropping its proposal to cut Social Security through chained CPI, I figured it would be a good time to do a refresher on how Social Security actually works. Although  right-wingers probably want to destroy SS, I sometimes come across Democrats making false statements too. The worst, and most common error is thinking that there are "Social Security and Medicare Trust Funds." As innocent as this mistake may be, I cringe every time I hear it. 

Sorry folks, but these Trust Funds aren't real. They exist only in a legal/accounting sense, but not in any real economic way. Unfortunately, many Americans hold views that range from thinking SS&M are not part of the government, to thinking that SS&M are funded from payroll taxes and the Trust Funds. Neither are true.

Want proof? Just take a look at the Daily Treasury Statement (link) which is a basic income statement for the Federal Government. 

On the "deposits" side, you'll see a line item for "Cash FTD's."

For a further breakdown, you can scroll down to Table IV- Federal Tax Deposits:

The first line in this box says " withheld income and employment taxes. The "employment taxes" part is that damn FICA tax that sucks away 7% of every dollar of our hard earned income (up to $112,000 that is.) These revenues supposedly go into the "trust fund" where they are either used to pay for benefits or saved for later. As you can see, this does not really happen.

Then, on the "withdrawals" side, you can see line items for Social Security and Medicare. Not surprisingly, they are the largest withdrawals:

See? Both programs deposit into, and withdraw from, the same Treasury General Account as all other government programs. Its clear just from this statement that the "funds" don't fund anything at all. When Grandma gets her Social Security check every month, the check says "Department of the Treasury", not "Social Security Trust Fund."

The Treasury describes Trust Funds as such- "These are accounts maintained to record the receipt and outlay of monies held in trust by the Government for use in carrying out specific purposes or programs in accordance with the terms of a trust agreement or statute." Notice how they used the word "record", and not "deposit" or "withdraw."

Its like if Congress passed a law allowing me to be called  "Justin Santopietro." Thanks, but I was already doing that. The numbers that show up in the Trust Fund are just accounting records for transactions that have already happened. There is no "there" there.

This is because, as few people understand, the federal government creates ex nihilio all the dollars that it chooses to spend into the economy in any given year. Federal taxation functions as a control on inflation and aggregate demand, and is entirely unrelated to spending. In fact, since taxation does not give the federal government anything it cannot already create, there is no real sense in which dollars collected by the federal government can be spent again. There are no tax dollars flying in and out of giant tubes in the Treasury Department!! Federal taxation is merely a digital transaction that deletes dollars balances in private bank accounts, and federal spending is merely a digital transaction that adds dollar balances to private bank accounts. 

When we send tax money to the government, nowadays usually as a wire, the dollars that existed only as numbers in a checking account are functionally destroyed. They are no longer part of the monetary base, because the Treasury’s General Account at the Fed, which is shown in the above statement, is isolated from the monetary base (unlike the accounts of all state and local governments and the entire private sector). US dollars can only exist in bank accounts outside the Treasury, so when the Treasury spends, the monetary base increases, and when it taxes, the monetary base decreases. Only the US Treasury (and Fed, for distinct reasons) can affect the monetary base in this way.  As the sole issuer of US dollars, the US federal government does not and cannot “use” or even “save” dollars that only it can create.

I make these points because the supposed Trust Funds have now become the weak point for Social Security and Medicare. The Peterson hacks love to scream about how the funds are going broke, and how we need to slash benefits NOW!! The reality is that Social Security and Medicare will always be solvent, just like every other federal program. There is no financial reason why the federal government cannot just credit our bank accounts in any amount that it wants.

Setting up an additional trust fund for something that is already perfectly solvent is like wearing two condoms at once. Not only does the second condom not protect you any more than the first one, the extra friction can actually make things worse than just wearing one - just like the Trust Fund makes Social Security and Medicare seem like they can be insolvent. If there were no trust funds set up for these programs, no one could claim they were somehow independently going broke. 

It almost seems that in a genius move of cruelty, Alan Greenspan intentionally set up Social Security as a "Trust Fund", in order to make it seem insolvent down the road. The great irony here, is that Greenspan himself once said, in an accidental moment of honesty, that "there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.” See, Greenspan always knew that the Trust Funds were a scam. 

For a more detailed discussion on these accounting maneuvers, please read this great primer from Kelton and Wray. 


Dan Lynch said...

Great article, shared.

I always challenge trust fund believers to show me a picture of the trust fund -- you know, the vault that is full of gold bullion or whatever.

googleheim said...

Maybe Greenspan thought that they could bring 1990's Argentina to the USA and crater it like 2001 Argentina so that skimming could be done by the private banks.

After all the banks usurp the sovereignty of the U$D and hold it against the common good by setting up their aristocracy ...

Alexander de Tocqueville argued, forecasted, and predicted with ease as also the setting up of a Lawyer Aristocracy class buffer between common person access to justice in "Democracy in America."

7 Generations have come and gone since 1776 and so according to Native American legend ....

Greenspan is just another Republican Ayn Randster...

Colin Powell pounced on the State department declaring it "broken" so they could go in and make it a Repukekkklan tool ...

Everything is broken in the government and they use that as a pretext to try to privatize it.

United States Post Office was pushed into a fictitious budget so that it could be bullied around. This might help at the counter service, but are things really more or less efficient with constant cost cutting?

The Dept of Education is deemed unconstitutional by Tea party libertarians like Tom Delay. That of course is their pretext for chopping up public education.

We don't need safety nets, according to the Colts' owner former QB Elway. So why all the safety nets for large corporations who advertise at his team's games, or the banks that finance their entire season ?

Anonymous said...

I think this approach to public finance debates is a rhetorical dead end and politically pointless. It is pointless trying to convince people who can very well see tax receipts added to a Treasury account and expenditures deducted from it, that the expenditures are "creating" the money that is spent. And even if you do persuade them of this, all that work accomplishes very little in terms of budget policy payoff.

Anonymous said...

"Federal taxation is merely a digital transaction that deletes dollars balances in private bank accounts, and federal spending is merely a digital transaction that adds dollar balances to private bank accounts."

This is incomplete. Federal taxation doesn't just delete balances from private accounts; it adds them to government accounts. And federal spending doesn't just add balances to private accounts; it deletes those balances from government accounts at the same time. Of course we don't have to use this accounting structure; but it is the one we actually use. And if you try to pretend it isn't there, it just makes you look operationally illiterate.

The same is true if you try to convince people that there isn't "really" a Social Security Trust Fund. The SSTF exists as an accounting structure managed by the Department of the Treasury, and its existence was established by law. It accomplishes nothing other than to give the government a way to track certain classes of receipts and disbursements, including the Treasury's purchase of special issue securities from itself. Nevertheless, the SSTF exists as an accounting operation and so its existence shouldn't be denied.

The Just Gatekeeper said...


It depends on what your definition of "is" is. As I said in the beginning, the trust fund does "exist" as an accounting entry. But I dont think of accounting entries as being "real things", at least not as most people perceive funds. The word "fund" tends to imply some drawer full or cash or pit of gold coins.

My other reason for writing this is that these accounting tricks confuse the hell out of people. I frequently hear weird shit like "Bush raided the Trust Funds to pay for the Wars", etc. This stuff just doesn't make sense and really breaks down our national policy discussions IMHO.

Anonymous said...

It's always worth while trying to educate people about the actual function and significance of existing government operations and accounting structures.

But anyone in the universe can navigate to this government site (and others) and get information about the Social Security Trust Fund:

You can also see the line item for the SSTF in the monthly Treasury statement, Table 4:

So I see no benefit in trying to convince people that something doesn't exist when they can easily confirm with their own two eyes that it does exist.

Jonf said...

Maybe the best thing is to burn the trust fund. It is not debt held by the public. It is like me writing an IOU to myself and convincing you it is a trust fund. What nonsense.

Anonymous said...

There is no problem with the Social Security Trust Fund as long as people recognize it is just a sub-account of the government's consolidated account, and not some kind of separate, external source of funds or investment returns.

Matt Franko said...

Dan this is from winterspeak's recent post:

"Palley spends some time talking about how it is common knowledge that "sovereign issuers of money are not constrained financially in the normal sense". Great. And yet we hear continual talk about the US Govt running out of money. So it may be common knowledge for Palley, but it is not common knowledge more broadly, and if MMT is working to popularize that understanding he should be applauding it not yawning. "

I agree with winter here that "it is NOT common knowledge" that we cannot "run out of money!"... most people are believing that we CAN "run out of money" you yourself have posted an old video of the President himself saying so over at RE....

So how do you make an empirical case for the fact that we cannot "run out of money"? I look at what Justin is doing here as trying to illustrate for people empirically (as much as abstract accounting can be "empirical") that we "cannot run out of money".... which Justin MAY be able to get thru to some people, ie non-libertarians who have the maths, with this type of an illustration and it may be helpful... in those cases... but of course not all cases as many people dont have the maths and are libertarians...


marris said...

> Federal taxation functions as a control on inflation and aggregate demand, and is entirely unrelated to spending.

Misleading at best, wrong at worst. Especially in a world where the Fed can pick an inflation target. The Fed can loosen or tighten monetary policy whether taxes rise or fall.

Sorry, but as long as the Treasury uses accounting, you might as well have stuff flowing through tubes. Sorry, but we don't live in MMTopia.

The Just Gatekeeper said...


Actually, taxes as an inflation control have been known since the 1940s...You need to read some of the stuff from Marriner Eccles and Beardsley Ruml on that. And yes, the Fed can pick whatever inflation target they want, this doesn't mean they can do anything about it necessarily. Remember the Fed can only change asset composition, it cannot create new dollar assets.

Tom Hickey said...

Lincoln mentioned taxation as an inflation control when he issued greenbacks to fund the Civil War without borrowing. Inflation remained under control in the North.

The Confederacy apparently didn't understand this principle and they weren't in the same position to collect taxes as the North either. They experienced hyperinflation of the currency.

On the policy rate relative to core inflation see The Ex-Post Real Federal Funds Rate and Inflation

Anonymous said...

Matt, it doesn't seem like this is the same issue. If someone who is convinced that the government can run out of money recognizes that the Social Security Trust Fund isn't anything more than a sub-account of the consolidated Treasury account, they will just say that Social Security Trust Fund can't run out of money unless the Treasury runs out of money. But that will not assuage their anxiety. Indeed, the people who are usually out there pushing the idea that the Social Security Trust fund is just a BS accounting fiction are the budget hawks. They are the ones who never tire of pointing out (correctly in this case) that the "investments" owned by the SSTF are just special issue government bonds representing money owed by one government account to another government account. Focusing on this issue does nothing to persuade people that our current system of retirement support is viable.

But now, suppose everyone comes to recognize that the government can't "run out of money" in the same way that the runner of a game can't run out of points. What will change in our public policy debates? My guess is nothing of substance, and only the language of the debate will change. Yes, for any existing level of nominal government commitments to its citizens, the government cannot literally run out of the tokens in which it discharges those commitments. But ...

Could it have a problem in that the government's nominal commitments grow so large that paying out those commitments without increasing revenues shrinks the anticipated real value of those payments via inflation, and shrinks the real value of everyone's monetary savings? Yes.

Could it have a problem in that the ratio of retirees to workers might grow so large that a decent quality of life cannot be provided to all of those retirees without pacing a cruel and unjust burden on younger, working people? Yes.

Could it have the problem that maintaining the real value of its commitments without inflation results in a decision to slash other more future-oriented investment programs benefiting the young? Yes.

So my feeling is that most of the really hard problems about how to socially organize and manage a sustainable retirement system are being avoided by this incessant focus on the government's magic money well.

Anonymous said...

The Fed can create new dollar assets. It does so every time it pays interest on reserve accounts. But that doesn't mean that it can hit any inflation target it announces.

Inflation, in my view, is primarily a matter of the way inflation expectations interact with finance.

Steve Roth said...

Right on!

In somewhat briefer terms:

Is the Social Security Trust Fund a Liberal Own-Goal?

Matt Franko said...


Yes those REAL issues are what we should be talking about and doing policy analysis about...

But dont you think that FIRST, before we can get to those types of discussions we FIRST have to dispense with these false notions of "we're out of money" and "borrowing from the Chinese"?

THEN we can get to those types of rational discussions?

iow if the President and Congress think "we're out of money!" then those types of discussions can NEVER happen...

So I look at what Justin is doing here as trying to FIRST dispense with these falsehoods so that the types of discussions you mention here, which yes STILL have to then happen, can take place...

Looks to me like a 2 step process that we cant skip over step 1 and go right to your step 2...


Tom Hickey said...

"Inflation" is a capitalist crock.

Assets "appreciate," but prices and wages "inflate" and "wage inflation" is the big bugaboo.

Tell me another fairly tale.

Roger Erickson said...

Dan Kervick,

I'm shocked at your comments.

Your persistent angle seems to be acceptance of literal form, not evolutionary pursuit of operational function.

Such arguments about form always converge to failure, through the 1,2 punch of literalism:

1) that it's impossible to orient humans to reality once it's already been mis-described, and therefore

2) THAT WE SHOULD GIVE UP TRYING to change the median context awareness of citizens!

With defeatist friends like that masquerading as MMT writers, who needs Benedict Arnolds? Or Quislings?

Heck, we don't even need the Scientific Method, since EVERYTHING we know is, by definition, mis-described!

No reason to ever change ANY of our other theories either, right?

Here's a simple challenge for you.

If a given, formal description (of anything) doesn't match functional reality - which one are you going to try to change?

And if you don't like the futility of the hopeless approach ... how long will you keep trying to chase reality through additional layers of Kabuki theater?

About as long as astronomy clung to Ptolomaic circles?

Ever tried Occam's Razor? It requires continual, recursive practice, but it always produces a more honest shave.

marris said...

> Actually, taxes as an inflation control have been known since the 1940s

Oh boy. I agree that increased taxes (tighter fiscal policy) can decrease demand *if the Fed does not respond*. And I agree that looser fiscal policy can increase demand *if the Fed does not respond.*

But once we leave the hypothetical world of MMT and look at the *real world*, we see that the Fed *often does* respond to such changes.

The Fed targets nominal variables. I guess until MMTers understand that, they're going to be stuck in 1940.

Tom Hickey said...

marris, that sounds like Scott Sumner, who thinks that the Treasury and cb relationship is adversarial.

Right now the cb has the policy rate at the floor and is begging Congress to loosen fiscal policy, not realizing that the lower rates are reducing incomes and QE is functioning as a tax, transferring billions in interest income to the Treasury that would have gone to the private sector.

mike norman said...


The Fed pays interest out of income it earns on its own portfolio of assets, which are mainly treasuries. So the Treasury is paying the interest when you think about it, not the Fed. Moreover, the Fed has to first REMOVE those securities (those net financial assets)in order to be able to pay. And it needs to remove more income than it pays out or it won't have the income to pay.

mike norman said...


How does monetary policy control or "target" inflation?

Roger Erickson said...

much of heterodox economics holds that arbitrarily treating too many nominal variables as real ... is exactly the root of all policy failures;
that's one definition of ideology

System survival requires

1) setting aggregate goals;

2) continuously LEARNING which REAL variables must stay within which, safely adjustable patterns of which tolerance limits (while chasing aggregate goals), and

3) letting all the nominal variables float, to settings dictated by the real inter-dependencies between real variables.

To keep Adaptive Rate the same (or growing), EVERY variable has to change, unpredictably.

It's easier in practice to sort out what new permutations are/aren't workable, if you follow a cascade from real to nominal. NOT the other way around.

Roger Erickson said...

Tom Hickey

"INFLATION is a capitalist myth. Assets APPRECIATE, but prices and wages INFLATE. And, WAGE INFLATION is the big bugaboo."

hope you don't mind me quoting you re inflation

thanks for clearing that up; never quite sank in that graphically

With this many instances of DoubleSpeak prevailing,

throughout all aspects of our public discourse .... how can we increase Cultural Agility?

By tracking the occurrence of unexamined DoubleSpeak examples, can we accurately track the patterns of cultural taboos still slowing discussion & exploration of aggregate options?

It may well be that recursively examining our own examples of DoubleSpeak, & tightening tolerance limits for accepting them, is the primary method by which aggregates tune their own agility.

Without reducing the confusion from unmanaged DoubleSpeak-taboos, how else do electorate's learn faster [aka, reset net context awareness], as context continuously changes?

Anonymous said...

The Fed pays interest out of income it earns on its own portfolio of assets, which are mainly treasuries.

Mike, not really. That's just like saying, "the Treasury makes payments out of tax revenues." Fed payments are one thing, revenues are another, and there is no operational connection between the two. Whether the Fed operates with a positive balance sheet or a negative balance sheet is a policy matter, not an operational necessity.

Fed remission of net earnings to the Treasury is also a policy choice which was unilaterally implemented by the Fed in 1947 and is not a statutory requirement.

I don't understand why so many MMTers are so stubbornly committed to making the same error with the Fed that they are so clear in avoiding in the case of the Treasury.

Anonymous said...

Roger, as usual I have not the slightest idea what you are saying.

Anonymous said...

Inflation is not really a myth, but it is extremely difficult to measure in any definite way. Yet, there is a clear intuitive distinction between the value of something increasing over time, on the one hand, and a mere increase in its money price as a result of an economy-wide increase in money prices.

One problem in contemporary measures of inflation is that economists focus too much on the prices of consumer goods, and leave out the prices of labor and capital assets.

marris said...

> How does monetary policy control or "target" inflation?

By adding or subtracting zero interest money in response to deviations from their target.

So if something like a sequester threatens to reduce inflation, the Fed can announce that they will fill the gap. And if necessary, they will do so.

Tom Hickey said...


Roger Erickson said...

As I see it, there's no evidence that monetary policy can have much affect on asset inflation, EXCEPT by driving labor income down & unemployment up.

Mosler been harping for years that the price of liquidity is a very weak control on the volume of liquidity. So dominant players just use holes left in the policy field to shunt risk & consequences to other sectors - notably labor & unemployment.

It usually comes down to a useless & net-harmful civil war between people trying to maintain the nominal unitary buying power of hoarded currency, & their own offspring pursuing the always-greater return-on-coordination.

Back in the 1960s there was a great, warning segment about this topic, on a sci-fi tv show called "The Outer Limits."

In one episode, some supernatural critter offers to grant a greedy guy ONE Wish, and warns him to choose very carefully.

He ponder & ponders, and wishes to be the wealthiest & most powerful person, ruling a country with no chance of any dissent.

He blinks his eyes & finds himself as Hitler, 3 days before the Reichstag falls.

They could have started from day one, but selecting the last days drives home the point more emphatically.

Static Assets NEVER guarantee that you know how to use - or even keep - them.

Surely you've played chess? One wrong move (misuses of a static asset) can GUARANTEE that all static assets are eventually lost - no matter how long it takes.

Roger Erickson said...

Dan Kervick: "There is no problem with the Social Security Trust Fund as long as people recognize it is just a sub-account of the government's consolidated account, and not some kind of separate, external source of funds or investment returns."

Dan, how are people ever going to recognize that if you're telling the people saying that to give up trying to tell people?
Best way to destroy any honest effort to educate people is to argue about it in front of the people to be educated.

When an audience sees ANY presenters arguing about their presentation on stage, they're sure not likely to take it seriously.

If you weren't a known author on MMT blogs this wouldn't be an issue. Audiences would just see you as another crank undermining the utility of MMT axioms. Since you are seen as an MMT-connected author, you're shooting your co-authors in the foot.