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December 21, 2004

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"Again, the trust fund could sell those bonds on the open market at any time, and use the proceeds to buy, say, gold. In other words, the trust fund holds real tangible assets"

This is so silly. And when done, these 'assets' would have to be paid for by tax payers when the bonds were redeemed. Which is why they are liabilities, not assets.

Argh. A piece of paper saying that I owe YOU $1,000 may or may not be an asset depending on my financial condition. A piece of paper saying I owe ME $1,000 is not an asset. It is not an asset if I put it in a lockbox. It is not an asset if I borrowed the money from my home repair fund to cover the mortgage. When my home needs repairing I cannot cash that piece of paper for a roof without taking the money out of one of my other accounts. If it were an actual asset, I wouldn't need to get money from one of my other accounts.

Saying that I have a home repair fund and a general fund does not turn that little bit of paper into an asset if I used to have money in the home repair fund to pay for my hypothetical daughter's braces but put an "I owe ME" in the home repair fund. It is not an investment or an asset when five years from now I need to replace the roof. You can label it anything you want, but I'm not going to be getting money out of that piece of paper without drawing down an equal amount of money from one of my own accounts.

It is exactly that simple.

This is so silly. And when done, these 'assets' would have to be paid for by tax payers when the bonds were redeemed. Which is why they are liabilities, not assets.

No, what you are saying is silly, and an accounting fiction. The SS payroll tax collected cash for the SS trust fund - undeniably an asset. Please explain what the balance sheet transactions looked like, from the perspective of the SS trust fund, when the cash was traded for US Treasury bonds, and what the balance sheet transaction would look like, from the perspective of the SS trust fund, if those bonds are traded for gold.

I'll repeat what I said before: when someone is making an argument that implies gold is a liability, it is completely obvious where the accounting fiction lies.

felixrayman, the talk of "earmarking" is what's dishonest. No such "earmarking" can ever be binding; a tax dollar is a tax dollar and a spending dollar is a spending dollar. All appearances to the contrary are meaningless accounting tricks.

If you want to argue that the general fund imbalance should be addressed by raising taxes on people you don't like instead of by cutting spending on people you like, fine. My point is that the imbalance is real and has to be handled one way or the other. I favor handling it with spending cuts because I favor shrinking the size and scope of government in general. In particular I favor cutting SS because I believe substantial cuts in it could be made without condemning anybody to homelessness or starvation.

Bernard: but why on earth *should* we view SS as a separate entity? I'm not defending the Bush administration's fiscal policy or claiming they represent any of the issues involved honestly; they certainly don't. Whether there ought to be changes to SS, and for what reasons, is one issue; whether the Bush administration can be trusted to make those changes well is quite another.

When I lend you money, I have an asset, and you have a liability. The Social Security trust fund has lent money to the US government generally; the bonds memorializing those loans are assets in the Social Security trust fund, and liabilities to the general fund*. Once we're talking about liabilities of the general fund as a problem we are not talking about a problem specific to Social Security. We are talking about the structural deficits that need to be addressed by some combination of raising taxes and cutting spending, and Social Security only needs to be a part of that solution in so far as sheltering retirees from indigence is the lowest priority spending that you can think of.

* And, as I said above, there is nothing incoherent or unusual in the idea of one part of an organization lending money to another. Such loans are treated as accounting and economic realities all the time.

Bernard: but why on earth *should* we view SS as a separate entity?

Because back in the '80s we increased regressive payroll taxes on American workers on the basis of a promise that the SS trust fund would be treated as a separate accounting entity.

LizardBreath: Yes, but that promise, like all such promises, was fraudulent. That tax increase was a travesty; the program should have been cut back then. The bit about "in so far as sheltering retirees from indigence is the lowest priority" ignores the question of whether we actually need SS to continue *at its current levels* in order to provide some minimal protection against indigence.

felixrayman: you're distorting history. The cash raised by the payroll tax surpluses is long since spent; it was used to offset the deficits of (most of) the past twenty years. People have been pointing out for years that since deficit figures are reported net of SS payroll tax "surpluses", it's dishonest to claim that such surpluses are going anywhere but to current spending; I remember reading the Concord Coalition's white papers on this in the 1992 campaign season.

And that jab about "gold is a liability" ignores totally what's actually going on. Government bonds are, indisputably, nothing but claims on future tax receipts. If the government sells its own bonds to bondholders and uses the proceeds to buy gold, what it has done is to tell future taxpayers that they are going to be forced to pay for the gold it is now buying. The gold is therefore *not an asset* from the perspective of the taxpayers; it does not make it any easier for them to meet their future obligations, since the need for them to pay back the bondholders *is a liability* that at least matches the gold in value.

"Bernard: but why on earth *should* we view SS as a separate entity?"

Well, one reason would be that last time a Republican Administration got everyone in a tizzy over the looming Social Security crisis, Alan Greenspan proposed a plan under which social security taxes would be raised immediately to provide the funds to pay for benefits that would be owed to those workers in 40 years.

In other words, we explicitly made a policy decision to treat social security as a separately financed operation, building up a surplus to be used in the future (hence the "trust funds" and "lock boxes"). Don't forget W was all in favor of the lock boxes in 2000 as well.

Now it turns out the whole thing was a shell game, where the Republicans managed to raise taxes on the working poor, cut taxes on the wealthy, and still declare there's crisis necessitating benefit cuts or dismantling of the system.

Maybe you think we shouldn't have adopted Greenspan's approach in the first place, but (if the deal stuck) it would not have been an unreasonable approach, and it is more than a little unfair to jump horses midstream the W is (although of course not surprising from him).

Yes. If the current admistration is willing to say that: "We regard the promise made to American workers in the 1980s that the regressive taxes upon them would be placed in a fund to be treated as a seperate accounting entity as a fraud. We will not stand by that promise, because paying Social Security benefits as promised is a lower political priority than cutting taxes on the wealthy," then we can discuss this honestly.

'Lock box' plans involved actually investing the money in assets rather than spending them on general fund expenditures.

Sebastian is absolutely correct, but let me take issue with this:

You can label it anything you want, but I'm not going to be getting money out of that piece of paper without drawing down an equal amount of money from one of my own accounts.

The beauty of being a government, of course, is that you also have the option of printing more money. But that's a subject for another time.

Nicholas,

"The promise was fraudulent."

That's your answer? The government just conned everyone and now has no obligation to keep its promise to its own citizens? Better to eliminate the estate tax, is that it?

All this time workers have been paying payroll taxes on the understanding that funds were being accumulated to meet future Social Security needs. And now they are told it was a swindle? As Lizardbreath says, if the Bush Administration wants to say, "We are changing Social Security because we want to renege on a promise," let them say so. I hope they say it before the 2006 midterms.

Yeah, and what about the whole the general fund imbalance should be addressed by raising taxes on people you don't like instead of by cutting spending on people you like? Charming, really, and so in line with Von's touching introduction to his post.

Frankly, those repeating the "accounting fiction" meme should have the courage of their convictions and mail me all the greenbacks in their possession. By their logic, they, too, are part of an "accounting fiction" and therefore worthless.

In the spirit of the holidays, I'll pay the postage.

Jadegold, I don't think you are getting it. :)

The gold is therefore *not an asset* from the perspective of the taxpayers

Try responding to the actual post:

"Please explain what the balance sheet transactions looked like, from the perspective of the SS trust fund, when the cash was traded for US Treasury bonds, and what the balance sheet transaction would look like, from the perspective of the SS trust fund, if those bonds are traded for gold."

And I'll say it again, when someone is making an argument that implies gold is a liability, it is completely obvious where the accounting fiction lies.

Of course the alternative has been described in detail above - conservatives could tell the public that Republicans made a promise to them, instituted a regressive tax, and now want to renege on their promise in order to keep cutting taxes for the rich. That doesn't sound as good as hysterically (and falsely) shrieking that Social Security is in crisis, so instead we get accounting fictions like the idea that one branch of an institution can't make a loan to another, which is absurd on its face.

Saying that I have a home repair fund and a general fund does not turn that little bit of paper into an asset if I used to have money in the home repair fund to pay for my hypothetical daughter's braces but put an "I owe ME" in the home repair fund. It is not an investment or an asset when five years from now I need to replace the roof. You can label it anything you want, but I'm not going to be getting money out of that piece of paper without drawing down an equal amount of money from one of my own accounts.

OK, now its five years from now, you need your home repaired. You can, on the open market, sell that bit of paper for $1000. Is it an asset? Of course it is. You sell it, you repair your home.

Do you have a home repair financing problem? No, you have the general problem of not taking in enough money to pay your bills. Eventually people will cease to offer you money for your bits of paper if you continuously spend more than you take in. But there is no looming home repair fund crisis.

Telling your family "we have a home repair crisis" when the bit of paper in the home repair fund can be sold to repair your home would be dishonest. You would instead tell your family "we have a budget crisis". Of course to make the situation analogous, your family would have previously cut back on things they wanted in order to put money in the home repair fund, you would have cut back your hours at work rather than work full time and fully fund the home repair fund, and you will be called on by your family to explain why you consider booze and hookers more important than home repair.

felix,

"sell that bit of paper for $1000"

You can only sell it if someone is foolish enough to buy the worthless bit of paper.

You can only sell it if someone is foolish enough to buy the worthless bit of paper.

And as we were discussing US Treasury bonds, which foreign investors purchase to the tune of billions of dollars every day, you can see why I made the assumption that the bit of paper could be sold in the market. We could have a discussion of exactly what would happen were all those investors to decide they had been acting foolishly, but DeLong's blog would probably be a better place to do it.

"Whether there ought to be changes to SS, and for what reasons, is one issue; whether the Bush administration can be trusted to make those changes well is quite another."

This, to me, is the discussion-ending comment, at least for the next 4 years. The good news is that waiting 4 years to deal with SS won't really hurt much. And wait we should, until (maybe) we can have a divided government, everybody in the boat kind of solution. (And even then, I'll be looking for a deal that will stick . . .)

Well, then, I suggest that you pull all your money out of the market.

It's in companies I have reason to trust.

Whether there ought to be changes to SS, and for what reasons, is one issue; whether the Bush administration can be trusted to make those changes well is quite another."


This, to me, is the discussion-ending comment, at least for the next 4 years.

Correct.

And let me add that even if the Administration miraculously came up with a halfway sensible change, we could count on the nutcase-controlled Congress to mangle it so that it bears no resemblance to a rational system. Does anybody seriously think that a program shaped by Delay and Hastert would be an improvement over Social Security as it exists?

I agree with Bernard. Like everything else, it's a payoff between the ideological and the achievable. If there a superintelligent genetic clone of FDR and Albert Einstein in the Oval Office and a congress of human beings the whole debate would be better framed in "how can Social Security be reformed to make it better" terms. As it is, the current question is, "how can we protect the current system from rape by the jackals until someone enters office who understands basic accounting"?

I have no doubt that all entitlement systems in all governments can be reformed and made better. The question is, will they be reformed if we let the current crop of criminals (whichever party they may belong to) try their plan out.


I'm trying to follow Sebastian's argument, and I must really be missing something. It seems that the argument against the crisis is to refer back to Brad DeLong's statement: there is no SS crisis, there's a General Fund crisis.

Nonsense, says SH. There is an SS crisis, because the money it loaned to the General Fund now doesn't exist. The bonds are worthless because they're loaned from US Gov't subsection A to US Gov't subsection B. The trust fund and the bonds are just a fiction. Therefore the General Fund deficit is actually a whole percentage point higher than the official government figures. And that's why there's no general fund crisis, but a social security crisis. Because, uh, the money to fix the general fund can only come from SS. Or something...

And, yes, here's where the entire argument falls down for me. I'm not following. It seems that whichever way you slice it, the idea that this particular General Fund deficit has to be solved by "reforming" Social Security is a convenient fiction put forward by those who want to reform social security and will take any excuse to do so.

Von, at the very least, has been consistent with the facts as we have them: there's no crisis, but it's worth doing anyway so that it works better. Absolutely, and in four years time when the US has a President who doesn't believe in Faith Based Accounting and a Congress that isn't controlled by jackals and wolves, I'll entirely agree. But invoking a fictional crisis to create a seemingly urgent need to reform this particular part of the government, for which there is no urgent need and a great deal of risk of breakage if reformed right now, is dishonest and, I am afraid, the reason I find Von's arguments far more compelling than SH's here.

"Nonsense, says SH. There is an SS crisis, because the money it loaned to the General Fund now doesn't exist. The bonds are worthless because they're loaned from US Gov't subsection A to US Gov't subsection B. The trust fund and the bonds are just a fiction. Therefore the General Fund deficit is actually a whole percentage point higher than the official government figures. And that's why there's no general fund crisis, but a social security crisis. Because, uh, the money to fix the general fund can only come from SS. Or something...

And, yes, here's where the entire argument falls down for me. I'm not following. It seems that whichever way you slice it, the idea that this particular General Fund deficit has to be solved by "reforming" Social Security is a convenient fiction put forward by those who want to reform social security and will take any excuse to do so."

Thanks McDuff for stating this so clearly. As a side point, if the trust fund is supposedly a fiction, why is no one advocating that we cease pouring billions into it each year through the regrssive payroll tax?

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