For example, consider the Social Security trust funds. The important thing to realize about the trust funds is that they are unimportant. Consider the following parable.
This year I make $100,000. I spend all of this income on current consumption. But I have misgivings that I should be providing for my future retirement. In order to allay these concerns, I write on a piece of paper "The Steven Jay Blatt Treasury Department promises to pay the Steven Jay Blatt Social Security Department a sum of $100,000 on the occasion of Steven Jay Blatt's 65th birthday."
Clearly writing this IOU to myself has not changed my financial position in the slightest, either for the better or the worse. It is neither a net asset nor a net liability. The only possible purpose of the IOU is self-deception.
It is hard to believe, but the Social Security program employs this same childish deception. The Social Security trust fund consists of IOU's the government has written to itself!
My point is not that future Social Security payments are in jeopardy. I'm simply saying that the "trust fund" plays no role in ensuring the government's ability to make future payments. Instead, they rest on the government's power to tax, which would be the same if the trust fund didn't exist. Which it doesn't.
So long as I didn't take myself seriously, there wouldn't be any actual harm in my writing an IOU to myself. Similarly, there is no intrinsic problem with the trust fund; once we see that it's irrelevant, we can just ignore it. It is an unnecessary complication, however, and can obscure important issues. For example:
The Social Security trust fund will not be depleted until 2029. But, as we have seen, the trust fund is just IOU's the government has written to itself--they are not a net asset to the government.
By 2012 at the latest, Social Security taxes will not bring in enough revenue to fund Social Security payments.[S1] What will the government do? It will go to the Social Security trust fund. There it will find a huge pile of U.S. Treasury Bonds--IOU's the government has written to itself. But the government can't give an old person a Treasury bond, it has to give money. So the government will cash in its bond to itself. How can it pay for the bond? By taxing or borrowing--exactly what the government would have to do if there was no trust. Which there isn't.
So the 2029 number is flapdoodle, an irrelevancy we could have avoided by ignoring the trust fund from the beginning. 2012 is the date to watch for.
Except it isn't, which brings me to a second, subtler confusion: the idea that there is some special relationship between Social Security taxes and Social Security payments. There isn't. they're just one way the government raises money and one way the government spends money.
What's my pont? Well, even before 2012, Social Security payments will rise. Thus there will be less tax revenue to pay for other government programs. Thus, my point is that, just as taking the trust fund seriously leads us into mistakenly thinking the year 2029 is special, so assuming that there is so special relation between SS payments and SS taxes leads us into mistakenly thinking the year 2012 is special, when it's not--well before then the pressure of rising Social Security obligations will force us either to spend less, or tax or borrow more.
The CATO Social Security page avoids the first confusion ("there is no money in the trust fund") but it falls victim to the second: "By 2013, Social Security will begin paying out more than it takes in." "In order to meet the revenue shortfall, the government will have three choices: raise taxes, lower benefits, or privatize the system." So what? There's nothing special about 2013. Every year that Social Security payments rise more than SS taxes forces that same choice. (The CATO pages graphs SS Outlays against SS Revenues. But it could show with just as little reason a graph of SS Outlays against Corporate Income Tax Revenues; or Defense Outlays against SS Revenues.)
That CATO quotation actually embodies a third Social Security confusion, this time suffered by the enemies of Social Security: that "privatization" is a solution to Social Security's looming fiscal crisis. Well, privatization is a solution, but only a very partial one: it will stop the crisis from getting any worse, but it won't help with the existing problem. That is to say: if we privatize now, we will still have to find a way to pay the SS benefits that people think they've accumulated up to now.
A fourth confusion is that we have to abandon Social
Security because demographic trends indicate that in the future there will
be too few workers to support the retirees. The confusion here is
the idea that these demographic trends are especially threatening to government-funded
retirement payments. In fact, an increase in the proportion of the
population that is not working will make everyone poorer, regardless of
whether retirees income is publicly or privately funded. (Adam Smith
states this obvious truth, that fewer workers per capita means less income
per capita, in Chapter One of The Wealth of Nations.)
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This page maintained by Steven Blatt. Suggestions, comments, questions, and corrections are welcome.
S1. Source: Ramesh Ponnuru, "Ponzi's
Revenge," National Review, p. 36. As Ponnuru notes that
there's nothing outrageous about using the Social Security surplus to fund
other government programs. I am criticizing not that, but the subterfuge
of the trust fund.
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Security page.
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This page maintained by Steven
Blatt. Suggestions, comments, questions, and corrections are welcome.
