Trust Fund cynicism - right mood, wrong target

["Steven H. Johnson" <info@sscommonsense.org>]

A number of participants in this conversation have expressed deep
cynicism about the validity of the Social Security Trust Fund.

This issue has a short answer and a long answer.

The short answer is that, yes, there's a serious phoniness problem,
but the phoniness is with the Congress, not with the Trust Fund.
And the fix is to take Social SEcurity completely off-budget,
require it to buy all its investment securities on open capital
markets, and end forever the practice of commingling retiree
funds with government operating funds.  

If this isn't done, if a Chinese Wall isn't built between Social
Security and the government's operating budget, then the American
people will never trust Social SEcurity to invest their money safely.
The kind of capital pool I favor will never be accumulated.  The
benefit protections that Mr. Shea and Mr. Rother seek will never
be realized.  Americans who don't trust Congressional monkey 
business viz Social Security surpluses certainly won't trust Congress
to keep its greedy mitts off a growing pool of Trust Fund capital.

Now for a slightly longer answer.

The securities held by the Trust Fund are as real as any other
financial securities.  From the point of view of the U.S. Treasury,
they constitute a debt, owed by the government, to the Social 
Security system.  From the point of view of Social Security, they
constitute an interest-bearing asset.  Social Security, as the creditor,
is in a position of accumulating an ever larger collection of
assets.

>From the point of view of the taxpayer, putting money into the
Federal budget via taxes, any federal debt is a source of concern, 
whether it's owed to the Social Security system, or to outside
lenders who've acquired government bonds.  The total federal
debt, last time I looked, was somewhere around $5.4 trillion.
Of that, $3.8 trillion was owed to outside creditors, and $1.6
trillion was owed to government-related Trust Funds, of which
Social Security is the largest, but by no means the only one.  
There are at least twenty other government-created trust funds
that also generate surpluses and that also are hold portions
of the total federal debt.

Suppose an alternative arrangement had been created in 1983.
Suppose Social SEcurity had been required to go to New York
capital markets to invest its eight hundred billion in surpluses
over the past 16 years or so.  Suppose it had acquired $800 
billion in government bonds by buying them on the open market.
Then what?

We'd have a slightly different accounting entry on the debtor's
side.  Instead of the Treasury owing $3.8 trillion externally and
$1.6 trillion to government-related trust funds, for a total of
$5.4 trillion, the Treasury would owe $4.6 trillion externally,
and another $0.8 trillion internally, again for a total of $5.4
trillion.

I'd prefer this.  It would be a cleaner arrangement.  But it 
wouldn't really make a nickel's worth of difference.  Not to 
Social Security.  Not to the Treasury.

Or - suppose that Social Security hadn't been asked to run a 
surplus over the past 16 years.  Suppose we were sitting today
with a Trust Fund that didn't have any extra money in it.  What
then?

The Treasury would have had to borrow an additional $800 billion
on New York financial markets.  That would be $800 billion less
that would have been available to the private economy.

That's a very important point.  $800 billion did not get borrowed
in the private economy because Social Security ran an $800 billion
surplus.  

It seems to me - that if $800 billion was not
borrowed by the Treasury, so that they were available to private
sector borrowers - that we're talking about real dollars.
If we're talking about real dollars that were available to the
private sector, because the Treasury borrowed from Social 
Security instead of from the private sector, then surely
we're talking about $800 billion in real assets that are owned
by Social Security.  

It doesn't make any sense to say that the money which didn't get
borrowed in New York was real money, while the assets owned by
Social Security aren't real assets.

What we're dealing with here is not fraud.  The assets are real.

No, the issue is not the phoniness of the Trust Fund.  The Trust
Fund is real.  The issue is Congressional lying.

When Congress commingles Trust Fund surpluses and its own operating
deficits, in the interests of claiming a federal budget surplus
that doesn't really exist, the Congress is lying to the American
people.

It's the lying that has to stop.  And that's why Social SEcurity
has to be completely separated out, and run with the same 
sort of pension fund independence that's required in the private
sector.  Private sector companies aren't allowed to commingle
pension fund surpluses with operating deficits.  Why should 
Congress be allowed to get away with such a practice, in dealing
with its own publicly-chartered retirement program?

The cynicism around the Trust Fund is understandable, but
misplaced.  It is not the Trust Fund we should be cynical about.
We should be cynical about the Congress.  

-Steve Johnson.