Centerfield

Brian,

Thanks for sharing. That's kind of what I thought as well, but like you, I'm glad to see it laid out by someone obviously "in the know."

Hopefully this isn't an stupid question (I don't claim to be an economist), but I wonder what our deficits would actually run without the money that we are essentially raiding (or stealing) from the trust fund? How much are we talking about? Instead of a $500 billion dollar deficit, would we be in the trillions?

Does that make sense?

Since seeing is believeing, here's a photo of the "trust fund" that was printed in the USA Today:

http://www.socialsecuritychoice.org/archives/2005/03/america_meet_yo_1.php

Tully might have a better answer, but I think the answer might be, "who knows?"

First, I think those special bonds issued to SS actually count as debt, so they should be part of the debt accounting. Even though they are really just "money the government owes itself. But I may well be wrong. Tully? (Vocab: notice that "deficit" refers to the amount that we spend over and above what we collect annually, so the deficit is the annual amount of debt. The national debt is the accumulated amount of unpaid debt remaining from the debt incurred by each year's deficit.)

But to your question of what it would be like otherwise, it's hard to say. Notice that the revenue the government spend by raiding SS had to come from somewhere, and it came from increasing the SS payroll tax. If congress hadn't been able to do that, for whatever reason, they may well have had to spend less money than they did. For them to have spent the extra dough without using SS dollars, they would have had to either raise another tax, or increase borrowing by issuing more bonds.

Our deficits/external debt increase since the initiation of the trust funds would have been exactly the same amount higher as the amount of money purportedly in the "trust funds," the exact same as the internal debt increase. It's a straight one-to-one, assuming that the government would have spent that amount of money anyway, and that external debt would have carried the same interest rate as the internal debt. The actual accumulated total figure of deficit spending financed to date by the OASDI "trust funds" (with interest) is about $1.7 trillion.

Of course, that's a big assumption. If the spending had not been masked by the trust funds, there might have been more pressure to restrain spending, resulting in lower deficits. And if the debt had been open-market external debt, the interest rates might have been different. But hey, what's done is done.

The projected peak in OASDI fund "assets" will come in 2017, and is projected to be about $2.4 trillion. So we've got about another $700 billion in deficit spending and interest on same penciled in over the next decade or so.

You pay it in. They spend it and call it "assets." They promise to give it back to you. Then they tax you to pay you back. Neat trick, no?

I know this can be a little confusing, but essentially what has been done is to swap current money for future funding promises. Since the internal debt is carried as an "asset" by one part of the government, it doesn't really show up in the debt figures. It's a wash in double-entry terms. A debit of cash spent on one side against an "asset" credit in a filing cabinet on the other. (As you can see in that picture--there's the "trust fund!") But the net effect to overall future government revenue requirements is ZERO, unless the future funding promise (which DOESN'T show up on the ledger) is changed.

Which Congress can do, and likely will. Indeed, after 2041, MUST. By law. What we need to decide is which reform we like. If we do nothing, we're voting for (currently) about $6 trillion in future tax increases, borrowing, and/or program cuts.

If the "trust funds" did not exist at all, the funding requirements for the government as a whole would remain unchanged as long as the SS benefit structure remains unchanged. Call it a "trust fund" or a "payroll tax revenue shortfall," it's the same thing. The government as a whole still has to either come up with $XXXX to fill the shortfall (beginning in 2017) or change the payouts. Period.

There is no magic wand.

It's creative. I'll give them that.

So, basically, the deficit figure that is bantied around does not include this money? In other words, they are counting this trust fund money as revenue, when in truth it's borrowed funds. Kind of like doing a cash advance on your credit card and calling it "income?"

Of course, as we know as well...I don't believe any Iraq or Afghanistan money is included in the deficit figure as well. Correct?

OK, so the debt figure represents an overal reconciliation of sorts,

So, as Tully points out, It's not that the money in question is debt, it's that it's not assets. The treasury dept. calls it debt, because they issued bonds for it. The ss program calls it assets, because they got bonds for their money. When the departments are all reconciled, it shows up as $0 from the point of vioew of the government as a total.

I've wondered for some time about the issue of "off budget" expenditures. I understand that certain expenditures can fail to be listed in the budget; tbut it seems to me that unless there are "off budget" revenue sources too, all expenditures have to show up either as tax revenues or as additional borrowing via bonds/t-bills?

Tully?

I understand that certain expenditures can fail to be listed in the budget; tbut it seems to me that unless there are "off budget" revenue sources too, all expenditures have to show up either as tax revenues or as additional borrowing via bonds/t-bills?

Yes. All actual expenditures will show up somewhere. They just doesn't show up in the "submitted" budgets--which are advance planning tools, not actual expenditure reports.

The neat (and misleading) trick with the SS trust funds is that they show up at first as a double asset with a single liability. The assets are cash in hand (used to offset the deficit) and the "trust fund" bonds. One asset is real, the other is an accounting gimmick. But the only liability that shows up is the offsetting treasury debt notation. Which leaves the illusory "asset" on the books offset by the non-illusory debt. What doesn't show up on the books is the second matching liability that would make the accounting honest--the promise of future dedicated program funding that has no matching dedicated revenue source.

So when you break it down, you've borrowed and spent the money for future dedicated program spending from current revenues, so you'll still have to come up with the actual future program funding when the bills come due. Like "borrowing" your rent money to go on vacation and replacing it with an IOU to yourself, then saying "No problem, I'll just cash in the IOU when the rent is due."

Internal debt is not an asset. It's an accounting device.

Yabbut, what do you know about "off budget" expenditures?

Do we ever get to find out exactly how much we spent on, say, Iraq? Or do we only get to know later on that some actual amount of money A was spent, and that A is greater than the budget amount originally listed, B?

So A - B = off-budget and other sundry additional spending.

Everything shows up somewhere sooner or later in some account. Doesn't mean it's easy to find out what it went for--the "black budget" spending, for example. Don't ask the NSA for itemized lists....

Trying to track it all can give you ulcers. For another example, "How much we spent in Iraq" is not an easy figure. To be real, you have to start by taking out all the money that would have been spent anyway, even had we not gone. Soldier salaries. And things we didn't collect because we went. Lost revenue from tax-exempted combat zone salaries. And so on.

If it were easy to be precise, we'd probably lynch our Congresscritters regularly. But by the time we can figure it out, the issue has usually faded in impact.

So sooner or later we get an overall answer about "how much" but not an answer about how it was spent.

How about some sort of a percent figure? Anyone ever estimate the percent of collected dollars that aren't accounted for at least semi-specifically? Or the amount we ended up spending over what we accounted for in the budget?

Federal program accounting is a nightmare. Some agencies aren't all that sure where their money goes at all. For a giggle, enter "HUD" and "audit" into Google....

It reminds you of the old Will Rogers quote:

"I don't make jokes; I just watch the Government and report the facts."

And the sad commentary to all this is if a private company played this way with its books, the CEO, CFO and any accountant/bookkeeper standing near the closest water cooler would be in prison for a long, long time.

Yah....if they got caught because their share price began plummetting.

That's how the US will get caught, if their "share price" starts plummeting. As long as others keep buying our bonds, we can keep issuing debt.

But if the buying slows over debt worries, and we have to promise increasingly high returns to get the buyers to come back, that's when the real trouble would begin.

Ok the part of my brain that hurt through business school is starting to ache again through this discussion. I haven't used these brain cells in quite a while so correct me if I'm wrong.

Assets aren't revenues, so is our national defict based on revenues minus expenses, or is it calculated some other way?

The reason I ask this is because most larger corporations use acrual accounting which means you book the revenue when those goods or services are delivered. For instance, if I run a lemonade stand and a customer comes up to me and hands me a $100 to prepay some drinks, I wouldn't count the whole $100 as revenue. At the end of the month, I'd calculate the amount of lemonade that customer actually purchased; not the amount of money he handed me. If I used cash accounting instead of acrual accounting, I would count all $100.

So does the US govt use cash accounting? If not, how is the deficit calculated (as opposed to net income/ net loss I suppose)?

Yeah, all municipalities and non-profits use cash accounting.

The actual deficit for a given year is computed some time after the end of the fiscal year, and it essentially boils down to income and expenditures.

The projected deficit is generall computed from one of several accounting bodies (the House, Senate, and Executive all have at least one), and generally are computed 10 years into the future.

Off-budget items refer to things that Congress has passed on the ability to control. The war in Iraq gets what they need, Congress has effectively written a blank check. But remember the budget is for next year, not this year.

Besides kidding the voters about Social Security, there are a number of other tricks used in the past. Johnson and Nixon were fond of shortening the fiscal year, spending in 11 months what had been authorized for 12 (This used to happen virtually every year, which is how the fiscal year ended up in September, IIRC).

This is also complicated a little bit by the fact that the world economy demands a risk-free instrument. For the last 50-60 years, that's been Treasury notes. In other words, even if there were enough surplus to pay down all US debt, it's unlikely that we would. It's likely that the debt would grow each year to satisfy growing international demand.

I've explained this so many times over the last two decades that I should've written an FAQ. SS in a simplified nutshell.

The deficit is calculated as income minus spending. SS payroll tax revenues (including surpluses) are government revenue. SS payouts are government spending. So SS payroll tax revenue surpluses reduce the deficit. Simple so far, no?

Now the fun part. Follow the bouncing ball! The government records those surplus SS revenues as assets (cash in hand) against overall government spending, and reduces the deficit by spending the cash. The money is supposed to go to SS benefits. But SS doesn't need it yet. To note the taking of that money from SS, the government issues bonds to SS. These bonds are counted as an "asset" to SS, and a "liability" to the Treasury. It all balances! Except for one little detail....

The internal trust fund "asset" is offset by an internal matching liability, which means it's a wash as far as real money goes. BUT...they spent the money. So they're counting it TWICE as an "asset" (cash for deficit AND bonds in SS) but only booking ONE liability (the Treasury entry). The other liability (the future revenue required to pay the bonds and maintain promised SS spending/benefit levels) doesn't show up on the books. Money for nothing--until SS revenue dips below benefits payable. Then the pyramid starts to crumble.

At the point that SS payroll tax income dips below benefits due, SS has to fill their revenue hole by redeeming the trust fund notes. Which means they have to get the money to do so from the Treasury. But the Treasury hasn't stuffed those bucks in a mattress. The Treasury gets ALL its money from us via taxation, or from borrowing.

The current estimate of the size of the "hole" at current benefit levels is $4 trillion (Net Present Value). But that's not the whole tab, because we'll also have to pay back that stack o' tabs in the "trust funds." That's currently $1.7T NPV. And that too will increase by another $700B over the next decade, requiring another $700B payback from us taxpayers. Total tab, today, is $6.4T NPV.

That's the figure to use for reference when assessing reforms. If the "reform" reduces the NPV liability by more than the cost of the reform, we're making progress. If it doesn't, we're not accomplishing anything.

ALL reforms that can bring the system into balance will REQUIRE some combination of revenue increases, borrowing, or benefit reductions. And probably all three. There are no other options. And the tab grows every year, so the sooner we act, the less painful the reform. ANyone telling you anything different is either ignorant or lying.

ALL reforms that can bring the system into balance will REQUIRE some combination of revenue increases, borrowing, or benefit reductions. And probably all three. There are no other options. And the tab grows every year, so the sooner we act, the less painful the reform. ANyone telling you anything different is either ignorant or lying.

Exactly true. Now, is anyone in government seriously proposing higher taxes or lower benefits for SS? ASFAIK, the Bush "plan" of personal/private accounts adds tremendous short-term borrowing, without reducing benefits or increasing taxes.

Furthermore, if we're going to analyze the SS system as part of the whole gov't, rather than a separately funded program, then we have to stop talking about the SS system running into trouble in 2043 (or 2042) -- the "system" facing finacial disaster is the entire government today, not just SS in 30 years.

ASFAIK, the Bush "plan" (which isn't even really a proposal yet, but a call for proposals with "suggestions") would also require reducing the guaranteed SS benefits to match the guaranteed proceeds portions of the private accounts. That would be a certified benefit cut, albeit one that still left the beneficiaries' overall income unchanged. What would change would be the origin of some of the funds.

But it has been more popular to take the one element (private accounts) and either treat it in isolation, or yell about benefit cuts without mentioning the compensating income offsets. Also to yell about the "borrowing," when it would probably be a straight offset against the current debt in the system, thus resulting in zero NPV liability change or a reduction. Gotta score it by the numbers, not the rhetoric. Congress is famous for weasel-wording about money. Follow the numbers instead. Origins and uses. Amounts. End product.

Yep, the whole system has overall problems. I've never talked about SS having problems in 2041. I've always pointed out that it goes negative much sooner. Nor is it the biggest problem we have.

Now, Medicare's a certified nightmare--but dealing with that will require a comprehensive overhaul of the entire American health care system, not just the government-funded portion. But ya gotta start somewhere. Holding off on working on any part of the system until you develop a "unified field theory" solution of fiscal reform just guarantees the first steps never get taken.

you get a pat on the back for correctly explaining why I put quotes around "plan"

Yup. I put quote marks around "plan" and "trust funds assets" for the same reason. So far they're illusory.

We don't really have much to analyze until Congress gets into the act, and something solid gets put on the table. Before that we're still in theory-land, with various groups trying to sell us vague maps of different routes to the Big Rock Candy Mountain.

I have heard several in Congress, both sides of the aisle, propose "minor" increases in the payroll tax to "enhance" the current system, or to fund private accounts. Once again, until they actually put something on the table with real numbers, it's talk-talk.

And I have heard several Dems say no fix is needed, everything is just peachy, which is a de facto endorsement of the current $6.4T NPV shortfall scenario requiring large tax increases and/or benefit cuts, just not Right Now.