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.
The Just Gatekeeper at 10:54 AM