federal debt

The Social Security Trust Fund Is Not a “Get Out of Jail Free Card”


David Friedman, drawing on an op-ed by Thomas Saving, suggests that

Obama may have a $2.7 trillion dollar get out of jail free card, a way of spending that much additional money without exceeding the debt limit.

How does that work? Friedman explains:

Suppose no agreement is reached on raising the debt limit. Obama instructs the relevant people to spend the income from Social Security on the war in Afghanistan, bailouts, whatever he thinks needs money. He then instructs the Social Security system to cash in as many bonds as are required to meet its obligations to Social Security recipients, say $700 billion. He then instructs the treasury, since the national debt is now $700 billion below the debt limit, to borrow $700 billion. The net effect is that he has increased total expenditure, Social Security included, by $700 billion without exceeding the debt limit. The trust fund is currently at about $2.7 trillion, so he can do it for four more years.

Friedman’s scheme would work only if total federal receipts (including Social Security taxes) remain greater than or equal to total federal outlays (including SS benefits), from the point at which federal indebtedness hits the statutory ceiling. But that is not the situation.

Let us say, for the sake of argument, that the ceiling will be reached at the end of FY 2011. The president’s budget for FY 2012 shows total outlays of $3.729 trillion (including SS benefits of $0.761 T) and total revenues of $2.626 T (including SS taxes of $0.660 T). (See tables S-1 and S-3, here.) In other words, if Congress passes the president’s budget exactly as it stands, the debt ceiling must rise by $1.103 T ($3.729 T – $2.626 T) in FY 2012. And the SS trust fund, no matter how large it is, cannot alter the arithmetic.

Here is why. Suppose the feds spend all $0.660 T in SS taxes on things other than SS benefits (as they will, in effect). From an accounting standpoint, that reduces the non-SS deficit for FY 2012 from $1.001 T (non-SS spending less non-SS receipts) to $0.341 T. But the folks at SS are faced with a bill for $0.761 T in SS benefits. To pay the bill without having received a dime in SS taxes, the SS folks must go to the SS trust fund and grab U.S. treasury bonds with a value of $0.761 T, which they must then present to Tim Geithner for payment. Geithner thinks, “Who are these fools? Do they imagine that I’ve got that much unencumbered cash lying around, when I’m over my head in debt and sinking fast?” But being a good Obamanite, Geithner gives the SS folks their $0.761 T, and they go away happy.

If the analysis stops there, Friedman is correct. The treasury has just redeemed $0.761 T in bonds held by the SS trust fund, and the total debt of the federal government has magically dropped by $0.761 T. But the analysis cannot stop there, because the treasury does not have the $0.761 T in unencumbered cash. It must now borrow $0.761 T, to cover the redemption of the SS trust fund bonds, plus another $0.341 T, to cover the amount by which non-SS outlays exceed total receipts (including the SS taxes that it intercepts). With rounding, that comes to $1.103 T, which just happens to be the amount by which total federal outlays exceed total federal receipts.

Under what conditions would Friedman’s fix work? Here is a list (perhaps not an exhaustive one):

  • The debt ceiling will not be reached, given current projections of federal outlays and receipts (including SS benefits and taxes).
  • The debt ceiling has been reached but will not be exceeded, given current projections of federal outlays and receipts (including SS benefits and taxes).
  • The debt ceiling has been reached, but the surplus from non-SS programs will offset the deficit in SS accounts, or vice versa.

What about the SS trust fund? As long as the federal government is in debt by at least the face value of the SS trust fund, the trust fund has no real value. There is one (unlikely) saving condition, which is that the government’s net worth — represented by real assets — is equal to or greater than the face value of the trust fund. Such assets would have to be authorized for sale, by law, and would have to be valued at their quick-sale price on the open market. Given the reluctance with which Congress and federal agencies part with valuable assets (mainly land), it will be a cold day on the Equator before the SS trust fund is more than a valueless collection of accounting entries.

UPDATE (07/25/11)

The crux of my objection to Friedman’s scheme is found in the original post and my reply to his first comment; viz.:

If the analysis stops there, Friedman is correct. The treasury has just redeemed $0.761 T in bonds held by the SS trust fund, and the total debt of the federal government has magically dropped by $0.761 T. But the analysis cannot stop there, because the treasury does not have the $0.761 T in unencumbered cash….

*     *     *

3. This intra-governmental transaction does not affect the revenues that SS and non-SS receive from third parties.

4. Total spending by SS and non-SS must therefore equal their total receipts from third parties.

I ended my reply with this observation:

If you disagree with this analysis, then you and/or I must be making some assumptions (perhaps inadvertently) that remain hidden from view….

As it turns out, Friedman was making a hidden assumption that allows his scheme to work. That hidden assumption is revealed in a note appended to Friedman’s original post. The note was not there when I published this post, and I was unaware of it when I replied to Friedman’s first comment. In fact, I was unaware of it until late yesterday, when I revisited this post and Friedman’s after receiving his second comment. The note reads:

Some readers seem puzzled as to where the Treasury, in my story, is to find the $700 billion that it is to pay to the Social Security Administration, once the debt limit is reached. The answer is straightforward. With or without a debt limit, the federal government is continually collecting money and spending it. In my scenario, the government takes (say) $50 billion that it was supposed to pay as salary to federal employees, pays it to SSA instead. SSA cancels $50 billion in trust fund bonds. The national debt, which includes the debt owed by the federal government to the SSA, is now $50 billion below the limit, so the Treasury borrows $50 billion and pays out salaries to federal employees. Rinse and repeat as many times as necessary.

This is too clever by half. It requires exquisite timing on the part of the Treasury; otherwise, payrolls are not met, vendors are not paid, and existing debt is not serviced. In other words, the federal government would be in constructive default and violation of the debt limit. Moreover, it most certainly would not allow the federal government’s outlays to exceed its revenues over an extended period, which is why Obama seeks a higher debt limit in the first place. I could stop there, but there’s more to say about the scheme.

It resembles check-kiting, and may be just as illegal. But even if it is not illegal, it amounts to a patent evasion of the debt limit, and the evasion soon would be obvious to knowledgeable observers. Among other things, financial markets probably would react as if the federal government were in default — because the scheme could sooner or later result in a default of some kind (especially if outlays are rising as revenues stay flat). It would not take an act of Congress (over Obama’s veto) to put an end to the scheme; financial markets would do the job, as Treasury would be unable to refinance existing debt, except (possibly) at exorbitant interest rates.

In the best case, climbing interest payments would eat up revenues and force the federal government to cut back on the actual operations and programs. The result would be exactly opposite the one desired by Obama and company, which is real expansion of government. In the worst case, the Federal Reserve would pick up the tab, if it could scrape together a voting majority with the stomach for wading into a political firestorm. But that is another deus ex machina — of dubious durability — and not a surefire way of getting around the debt limit.

I am through with this subject. Comments are closed.

Miss Brooks’s “Grand Bargain”

The idiot known as David Brooks — The New York Times‘s idea of a conservative — is true to form today:

Imagine you’re a member of Congress. You have your own preferred way to reduce debt. If you’re a Democrat, it probably involves protecting Medicare and raising taxes. If you’re a Republican, it probably involves cutting spending, reforming Medicare and keeping taxes low.

Your plan is going nowhere. There just aren’t the votes. Meanwhile, the debt ceiling is fast approaching and a national catastrophe could be just weeks away.

At the last minute, two bipartisan approaches heave into view. In the Senate, the “Gang of Six” produces one Grand Bargain. Meanwhile, President Obama and John Boehner, the House speaker, have been quietly working on another. They suddenly seem close to a deal.

There’s a lot you don’t know about these two Grand Bargains….

You are being asked to support a foggy approach, not a specific plan. You are being asked to do this even though you have no faith in the other party and limited faith in the leadership of your own. You are being asked to risk your political life for an approach that bears little resemblance to what you would ideally prefer.

Do you do this? I think you do….

You do it because while the Grand Bargains won’t solve most of our fiscal problems. They will produce some incremental progress. We won’t fundamentally address the debt until we control health care inflation….

Both Grand Bargains produce real fiscal progress. They aim for $3 trillion or $4 trillion in debt reduction. Boehner and Obama have talked about raising the Medicare eligibility age and reducing Social Security benefit increases. The White House is offering big cuts in exchange for some revenue increases, or small cuts in exchange for few or none. The Gang of Six has a less-compelling blend of cuts, but it would repeal the Class Act, a health care Ponzi scheme. It would force committees across Congress to cut spending, and it would introduce an enforcement mechanism if they don’t. Sure there’s chicanery, but compared with any recent real-life budget, from Republican or Democratic administrations, these approaches are models of fiscal rectitude.

You do it because both bargains would boost growth. The tax code really is a travesty and a drag on the country’s economic dynamism. Any serious effort to simplify the code, strip out tax expenditures and reduce rates would have significant positive effects — even if it raised some tax revenues along the way….

In other words, Republicans should simply give in, on Miss Brooks’s say-so.

But Miss Brooks doesn’t know what he’s talking about.

First, with respect to “health care inflation,” government is the problem, not the solution. There are two key reasons for rising health-care prices, aside from innovation that yields expensive but effective drugs, procedures, and equipment. They are (a) the tax break that enables employers to subsidize employees’ health plans and (b) the subsidization of old folks’ health care via Medicare and (indirectly) SS. Those two interventions result in the overuse of health-care products and services. (There’s a 25-year old but still valid RAND study on the subject.) A far better system — if one insists on government involvement — would be to provide means-tested vouchers that can be redeemed for a  limited menu of vital medical products and services (e.g., critical surgeries, cardiovascular medications, chemotherapy). That’s it — no more Medicare, Medicaid, or their expansion via Obamacare.

Second, with respect to “tax expenditures” — there ain’t no such thing. Any action that results in higher taxes is a tax increase, no matter what Miss Brooks and his fellow Democrats choose to call it. And tax increases are growth inhibitors, not growth stimulators.

So much for the wisdom of The New York Times‘s pet “conservative.”

Related posts:
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
Our Miss Brooks
Rationing and Health Care
The Perils of Nannyism: The Case of Obamacare
More about the Perils of Obamacare
Health-Care Reform: The Short of It
Toward a Risk-Free Economy
Undermining the Free Society
The Constitution: Original Meaning, Corruption, and Restoration
The Unconstitutionality of the Individual Mandate
Does the Power to Tax Give Congress Unlimited Power?
Does Congress Have the Power to Regulate Inactivity?
“Tax Expenditures” Are Not Expenditures
My Negotiating Position on the Federal Debt

My Negotiating Position on the Federal Debt

Democrats’ insistence on ramming Obamacare through  Congress is a key ingredient of the dire long-term fiscal outlook. The supposed 10-year “savings” from Obamacare are phony — a matter of timing and “cuts” that will never happen.

Therefore, if I were at the negotiating table, I would insist on rescinding the O-bomanation or taking the equivalent in cuts to Medicare, Medicaid, and/or Social Security. My argument would run like this: Obamacare cost Democrats the House and it has yet to kick in, except in small ways. So, if you Democrats agree to rescind Obamacare — or, to save face, agree to cuts of equal magnitude in Medicare, Medicaid, and Social Security — we Republicans will allow you to take credit for averting a default while undoing a politically poisonous act.

With that out of the way, we can talk about the rest of the deficit-reduction package. I am open to changes in the tax code (e.g. elimination of certain deductions and loopholes), as long as long as total tax revenues do not exceed 19 percent of GDP. You Democrats can choose ways to meet that target with cuts in addition to those I’ve already discussed. Defense is off-limits, but everything else is on the table, including farm subsidies and corporate welfare.

Finally, as a bonus, I’m giving you a chance to sign on to a balanced-budge amendment. You don’t have to campaign in support of it when it goes to the States for ratification, but most of you would reap a political dividend by voting for its passage by Congress.

Don’t say I never did you a favor.