Federal Mistrust Funds

Yesterday, I received a “Social Security Statement,” which is supposed to look like some sort of pension statement — only it is not. A pension statement shows how much money workers put into their pensions, how much that money is earning in interest, and how much they can take out.

The Social Security Statement also showed how much I put into the social security and medicare funds — to be honest, not very much, because for most of my career I worked for nearly nothing. But it doesn’t tell how much interest “my” money is earning, because of course the money is all gone — Congress spent it on something else.

“In 2017 we will begin paying more in benefits than we collect in taxes,” says the statement. “Without changes, by 2041 the Social Security Trust Fund will be exhausted.” (Actually, the latest numbers say it will run out four years sooner.) But what is the Social Security Trust Fund? It is a big fat, $2.4 trilllion IOU from Congress, which expects to repay that IOU by borrowing from someone else, or raising taxes, after 2017.

I was born in 1952, so if I retire at the traditional age of 65, it will be in the year in which the Social Security Trust Fund runs out of money. Thanks a lot.

Someone, who must have thought I am younger than I really am, recently asked me if I resented the baby boomers for spending this nation into bankruptcy. Obviously, if we baby boomers are at fault, we will get our comeuppance when we retire.

But I don’t blame any generation; I blame institutions. Throughout U.S. history, the nation has run up big deficits during wartime, and paid them off in peacetime. At the end of World War II, the federal government had a debt of $2.5 trillion (adjusted for inflation to present-day dollars). Over the next 30 years, we fought the Cold War, which prevented us from significantly reducing the debt (although we did have a few years of surpluses). But by 1974, our debt (again in present-day dollars) was down to $1.7 trillion.

Then, in 1975 or 1976, the debt began zooming upwards, and now, of course, exceeds $11 trillion.

According to a statement often attributed to a Scot named Alexander Tytler (but which he almost certainly never said), a democracy “can only exist until the voters discover that they can vote themselves largesse from the public treasury.” But the United States proved this wrong before 1974. What happened in 1974 or 1975 to change things? The answer is the Watergate scandal.

To understand why, consider a 1964 book by a political scientist named Aaron Wildavsky titled The Politics of the Budgetary Process. Wildavsky asked, in effect, why democracies such as the United States did not “vote themselves largess from the public treasury.” He found that the U.S. had a number of checks and balances that prevented it from going too deep into debt except in times of emergency.

One of the most important checks had developed haphazardly. The House of Representatives appointed committee chairs using a seniority system. Southerners tended to re-elect members of Congress to longer terms than Northerners, and Southern members of Congress tended to be fiscally conservative. As a result, the House Appropriations Committee, whose approval was required for any spending bill, acted “as guardian of the Treasury.”

What would happen, Wildavsky asked, if the House Appropriations Committee changed and started advocating increased deficits? He suggested that someone else — the Senate, the president, the Office of Management and Budget — would take over as guardian of the Treasury.

That theory was tested in 1975. In the wake of Watergate, the 1974 election produced a large turnover in the House of Representatives. The newcomers did not trust the Southerners who chaired many committees, regarding them as racists. So they changed the rules, making committee chairs dependent more on popularity than seniority. The best way to get popular in Congress is to pass out pork, so soon the Appropriations Committee was run by pork barrelers who quickly ran up deficits. Although David Stockman tried, no one successfully replaced the pre-Watergate Appropriations Committee as guardian of the Treasury.

I can see three possible futures for social security, and this country. First, we can get a lot more productive, earning enough money to pay off our $11 trillion debt without making future generations resentful that they are paying a huge share of their incomes just to support baby boomers.

Second, we can repudiate the debt, including the $2.4 trillion in social security. If you think AARP is powerful now, just wait until the baby boomers join.

Third, the government can take the easy way out and use inflation to reduce the value of the dollar so that it can pay off the debt (and baby boomers) with nearly worthless money.

Until the current recession, the nations and investors buying Treasury bonds were betting on door number one. Now that seems unlikely, and inflation seems more probable. But we still might be able to increase our productivity — provided we stop deficit spending and stop wasting the money we do spend on frivolities such as streetcars and high-speed rail. If so, we had better do it soon, as time is running out.

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7 thoughts on “Federal Mistrust Funds

  1. judgeglock

    I certainly agree that the spending explosion has burdened us with unsustainable levels of federal debt, but I don’t think the Social Security Trust Fund is necessarily a part of this problem. The trillions in the Trust Fund are after all just US bonds held in one part of the government to pay off a different part (the SSA) at some future date.

    In some senses this is just a shell game, since the bonds borrow money that is then lent to the regular government that has to tax the people in the future to pay off those bonds. In the end, the government still has to tax the same amount to pay the SSA, it’s just done through the medium of a bond. There’s no real savings anywhere. With no Savings Fund at all we would still have to pay the same amount of entitlements to future retirees. “Repudiating” that debt would mean nothing since the government already owns it anyway.

    And the incredible amount of money in the fund is really almost a mistake. The Fund was created after Alan Greenspan’s National Commission on Social Security Reform in 1983 recommended ending the pay-as-you-go system for Social Security that had existed since Roosevelt and creating a “savings fund” of bonds to prepare for future retirees. Problem was taxes brought in much more than expected. So after 2017 government won’t have to tax to pay off those bonds, it will just start “borrowing down” the fund accumulated over the last thirty-odd years. And by 2041 we would just be back to the pay-as-you-go social security system that existed before 1983. The amount of taxes or entitlement reductions required to fix this (if we thought it was worth “fixing)is relatively minimal (unlike, say, Medicare).

    If anything the Fund has only allowed the President and Congress to play down the size of the total deficits as borrowing from the Fund is usually not accounted for in the “big number” deficit.

  2. Mike

    blacquejacqueshellac: Indeed, inflation is on its way, and we may be so lucky as not to cross into hyperinflation and not to experience economic meltdown a la Argentina 2001-2002. On the one hand, the inflation could help careful spenders clear their debt. Prices and wages spiral upward and out of control, but mortgage balances, student loan balances, and credit card balances remain in “older dollars.” Of course, getting any new credit will be virtually impossible without Carterian interest rates. The economy will stagnate as a result. The question then becomes, “what now?”

    It’s possible even for an upper-50th-percentile earner to be debt-free but cash- and credit-poor. It hasn’t happened lately because credit has been so easy to come by, but just wait.

  3. C. P. Zilliacus

    The Antiplanner wrote:

    > Second, we can repudiate the debt, including the $2.4 trillion
    > in social security.

    I doubt that will happen, for an assortment of reasons, some
    good and some not-so-good.

    > If you think AARP is powerful now, just wait until the baby
    > boomers join.

    The AARP has repeatedly mailed me invites to join, which
    normally go in the recycle bin (here in politically
    correct Montgomery County, Maryland). But I used their
    postage-paid business reply envelope the last time they
    “invited” me to ask them to not send me invitations in
    the future. I don’t have so much of a problem with AARP
    as I do with some of the companies that do business with
    and through AARP, especially Colonial Penn Insurance
    Company.

  4. Frank

    I gave (or rather, was forced to give) PERS (Oregon’s Public Employee’s Retirement System) about $1500. They issued me a statement saying they’d turned that into $900. Way to go, PERS! I could have made more on silver coins.

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