A Stitch in Haste

The New York Times:

In suggesting that 2018 is doomsyear, the president is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.'s - as detractors of Social Security so often claim. The facts are different: since 1983, payroll taxes have exceeded benefits, with the excess tax revenue invested in interest-bearing Treasury securities. (An alternative would be to, say, put the money in a mattress.) That accumulating interest and the securities themselves make up the Social Security trust fund. If the trust fund's Treasury securities are worthless, someone better tell investors throughout the world, who currently hold $4.3 trillion in Treasury debt that carries the exact same government obligation to pay as the trust fund securities. The president is irresponsible to even imply that the United States might not honor its debt obligations.

Um, lie.

No one, including the President, is suggesting that United States might not honor its debt obligations. That's a big part of the problem.

Of course it's great if I hold a Treasury security -- it means that an entity that is not myself owes me money that I am certain to be repaid. Awesome.

But if I own a "KipEsquire" security -- it only means that I have deluded myself into thinking that I have more assets than I really do. An IOU to myself is -- let's be perfectly, utterly and unambiguously clear about this -- 100% worthless.

The Treasury Department is the United States government. The Social Security Administration is the United States government. The "Social Security Trust Fund" is a mountain of IOUs from the federal government to the federal government -- and is therefore 100% worthless.

Stated differently, a Treasury security is nothing more than a promise by the federal government to raise revenue in the future. It is not a gold coin, or an acre of federal land, or a vault full of Snickers bars. Just a promise to tax you later. Not so awesome.

Consider another analogy: If your parents own a mountain of Treasury securities then you stand to receive a very nice inheritance. But if your parents instead own a mountain of IOUs to and from each other, what is the value of your inheritance then? That's right: 100% worthless.

The more straightforward the truth is, the more complex the con artist's lies must become.

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Daily NYT Social Security Lie
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I find this hilarious:

The Social Security trust fund really does exist -- nestled in the bottom drawer of an unremarkable government file cabinet. It's in a pair of white loose-leaf notebooks holding plastic page covers. Each caresses a piece of paper representing a bond worth a staggering amount of money. Say, $8,577,396,000.00 ($8.577 billion), due on June 30, 2013, with 6.5 percent interest.
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The papers -- signed by Susan Chapman of the Office of Public Debt Accounting -- obligating the "full faith and credit" of the United States to make good on the money owed. "The paper is symbolic," says Pete Hollenbach, spokesman for the U.S. Bureau of Public Debt, the creation of a 1994 law that anticipated the current debate about Social Security's solvency and whether the trust funds held anything more than IOUs.

In an interview, [former Congressman Andy] Jacobs said he wanted to rebut the "disingenuous assertions" that there was no trust fund, even though there was, in fact, no vault stuffed with cash to pay benefits.

So, to review, if I owe you $1,000 next year but keep spending my paycheck every two weeks in the meantime, having a piggy bank full of ever more IOUs from myself to myself is somehow "more real" than a piggy bank that is simply empty. (Remember, you don't get the IOUs -- I keep them myself in a piggy bank in a file cabinet strictly as an accounting device. But, according to the "there is no crisis" crowd, you should sleep better at night knowing that they exist.)

Then we have the "full faith and credit" straw man. The lie goes something like this: The federal government has never defaulted on its securities. The "trust fund" is full of government securities. Therefore, for the "trust fund" to be a fraud requires that the government default on its securities, which simply does not happen. Reductio ad absurdum. Therefore the trust fund exists. QED.

Um, no.

Again, the trust fund securities are obligations from the government to itself -- an accounting entry in a binder in Virginia. The Jacobs maneuver of having "a piece of paper" changes nothing. When it comes time for Social Security (i.e., the government) to redeem those trust fund obligations from the Treasury (i.e., the government), complete with their "full faith and credit" protections of "the government," it simply means that Treasury (i.e., the government) is going to have to find the money somewhere else to give to Social Security (i.e., the government).

And how does the government find money? Two ways: taxes or debt. So the net result of the "trust fund" is to force the government to raise taxes or raise the national debt anyway. Splendid.

Folks, I'm running out of different ways to explain this. The trust fund is a fraud -- it represents nothing more than a promise by the federal government to raise taxes, public debt or both in the future. With or without binders in Virginia, with or without piggy banks, with or without honesty from the opponents of Social Security reform.

The only questions now are: (1) What do we do about it? (2) Why are the politicians and others who oppose reform continuing to lie about this? What is their real agenda?

POST SCRIPT: For the record, there's actually there's a third way to "redeem" the trust fund -- monetizing the debt, a/k/a "cranking up the presses" and just printing more hard currency. But that would lead to pure (and quite high) inflation, which the government, not to mention the American people, won't tolerate.

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Well not really, but he easily could have:

President Bush on Tuesday used a four-drawer filing cabinet stuffed with paper representing government IOUs that he said symbolized the Social Security trust fund’s bleak outlook for meeting Americans’ future retirement needs.

“A lot of people in America think there is a trust -- that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you,” Bush said in a speech at the University of West Virginia at Parkersburg.

“But that’s not the way it works,” Bush said. “There is no trust ‘fund’ — just IOUs that I saw firsthand,” Bush said.

Neat. I blogged about the "Trust Fund" vault filing cabinet here.

For better or worse, this is the kind of theatrics the Administration is going to have to engage in more often to sell Social Security reform. Between the flood of lies from opponents of Social Security to the wishy-washy timidity of Congressional Republicans, no wonder the push for reform is foundering. If the President needs a dog-and-pony show to get the message across, then so be it.

Perhaps next up the President should stage a photo op with survivors of people who died right before they qualified for Social Security benefits, telling the stories of how much their deceased loved ones paid in Social Security taxes, only to get zero benefits because they died too soon. And then slide into a discussion of what would happen with private accounts. I think that would be very effective if done tastefully.

The New York Times is rehashing the same old red herring that it did previously regarding “full faith and credit” as it applies to the phantom Social Security “trust fund” --

Mr. Bush ... visited the office of the federal Bureau of Public Debt in Parkersburg, W.Va. He posed next to a file cabinet that holds the $1.7 trillion in Treasury securities that make up the Social Security trust fund. He tossed off a comment to the effect that the bonds were not "real assets." Later, in a speech at a nearby university, he said: "There is no trust fund. Just i.o.u.'s that I saw firsthand."

Social Security takes in more money than it needs to pay current beneficiaries, and the excess is invested in the Treasury securities that Mr. Bush was discussing. They carry the same legal and political obligations as all other forms of Treasury debt, every penny of which has always been paid in full and on time.
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Fortunately, the governments, institutions and individuals who hold United States debt can tell a publicity stunt from a policy statement. Still, casting aspersions on a basic obligation of the United States government is insulting and irresponsible.

This is, of course, utter nonsense.

The Times is correct when it says that Social Security takes in more in taxes than it pays in benefits. But that money is not invested – it is spent. A dollar in taxes cannot be simultaneously invested and spent. No amount of sophistry can evade that simple fact.

And what of those pieces of paper in a Virginia filing cabinet? Call them “Treasury Securities” or call them “IOUs” or call them “Zoop.” Whatever you call them, they are utterly worthless, as is any IOU from an entity to itself.

A Treasury security held by me, or, you, or the Bank of Japan, or a pension fund, is indeed a real asset to us, but only because it’s a transaction between two distinct entities: the federal government and someone or something that is not the federal government. But the “trust fund” is a transaction between the government and itself, which is meaningless.

If I have a piggy bank filled with Treasury securities, then yes I am very well off and I am protected by “full faith & credit.” But if I have a piggy bank filled with IOUs from myself to myself, then I have absolutely nothing, and my promise, from myself to myself, that my IOUs from myself to myself are backed by my own “full faith and credit” is at best accounting trickery and at worst schizophrenia.

If a married couple (same-sex or otherwise) has a piggy bank full of Treasury securities stashed away for their retirement, then yes they are very well off and they are protected by “full faith and credit.” But if they have a piggy bank full of IOUs from one spouse to the other spouse, then they have absolutely nothing, and their mutual promise to each other that their IOUs to and from each other are backed by their mutual “full faith and credit” is meaningless.

If the federal government has a piggy bank full of, say, IOUs from the Bank of Japan, then yes it has real assets that (I presume) are backed by the “full faith and credit’ of the Bank of Japan. But if the piggy bank is full of IOUs from itself to itself, then it has absolutely nothing. “Full faith and credit” — which only has meaning in the context of “full faith and credit to whom?” — has no meaning whatsoever when a person, or government, extends it to itself.

Now replace “piggy bank” with “trust fund” and IOU with “securities” and you have the President’s message, which, unlike the “trust fund,” is very real.

Meanwhile, Social Security Choice notes something interesting:

The New York Times editorial page weighs in on President Bush's photo-op in West Virginia inspecting the non-existent assets of the Social Security trust fund. And what do you know — it's practically verbatim from Democratic Party talking points.

Go figure.

I think there's an unwritten rule somewhere concerning blogging about an op-ed piece that's more than 24 hours old. Still, I didn't want to let this one go unnoticed:

In the late 1990's, the tobacco companies made a historic legal settlement with every state and the District of Columbia, agreeing to pay $246 billion over 25 years for tobacco prevention and cessation programs. In the last five years, the states have received $40.7 billion in tobacco settlement revenue but have devoted only 5 percent of this money to fighting the tobacco epidemic.
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This lawsuit was never intended to balance ailing state budgets, let alone buy golf carts, cable lines and security cameras. Voters, millions of smokers who want to quit and millions more we want to keep from ever smoking ought to ask their legislators where the money went.

Go read the whole piece and see some of the obnoxious ways activist legislatures are concocting to spend this windfall. Hint: Very little is being used for anti-smoking campaigns.

So, the government receives monies specifically earmarked for a particular purpose, but then decides, "To heck with that, let's spend it on whatever the Politics of Pull, or the Politics of the Warm Fuzzy Feeling, or the Politics of Pork suggest we spend it on."

Where have we seen that before?

POST SCRIPT: Here's a delicious conundrum — if private lawsuits against the tobacco companies continue to produce gargantuan awards large enough to endanger the companies financially, they may, unwillingly, default on the Master Settlement Agreement. If they do, then the states, many of which have securitized their shares from the MSA by issuing bonds backed only by those payoffs, could default on the bonds, or, alternatively, be forced to raise taxes to make up shortfalls in the payments from the overlitigated tobacco companies.

I ask again: Where have we seen that before? (See also here.)

Never trust a politician to put off spending on A until tomorrow revenues that can be instead spent on B today.

Never.

Perhaps the New York Times editorial board has finally embraced fiscal responsibility?

Congress has passed and President Bush is sure to sign into law a bill that will spare some 23 million Americans from having to pay the alternative minimum tax next April.
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What they fail to say is that the bill doesn't include a way to make up for the lost revenue[.] To make up the shortfall, the government plans to borrow the money, which will have to be paid back later with interest, either by raising taxes or reducing government services.
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That's at best bait and switch, or at worst gross negligence.

That's also the Social Security "trust fund" — which the Times embraces and adores. Go figure.

The FICA taxes — one-eighth of most Americans' paychecks — that the federal government confiscates currently exceed current Social Security liabilities. The surplus is spent on other stuff: war, domestic spying, bridges to nowhere, etc. It is also used to lie to the American people about the size of the federal budget deficit (i.e., the reported deficit is the operating or "on-budget" deficit, reduced by the size of the Social Security surplus, which is "off-budget;" some people might call that "Enron accounting").

How deceitful — or stupid — does one have to be to call "war, domestic spying and bridges to nowhere" a "trust fund"? Yet that is exactly what the Social Security "trust fund" is — FICA taxes that have already been spent on other stuff.

The "Treasury bonds" (actually just a notebook in West Virginia) that comprise the Social Security "trust fund" are nothing more than an IOU from the government to itself. And just as IOU from yourself to yourself is not a "trust fund," so too is an IOU from the government to itself not a "trust fund."

Those ledger entries in that notebook in West Virginia are nothing more than a pledge by the federal government to fund future Social Security shortfalls — starting in less than a decade — with higher taxes or higher deficits in the future. Exactly the same fiscal shenanigans that, in the context of AMT reform, the Times blasts as "at best bait and switch, or at worst gross negligence." Yet it can't be negligence in one context and competence in another.

How, exactly, is it "at best bait and switch, or at worst gross negligence" for Congress to call spending money today and promising to pay for it tomorrow in the context of the AMT but not in the context of Social Security? How is less of a "bait and switch" to call it "tax relief" than to call it a "trust fund"?

This is not a difficult concept, except to the extent that politicians and their apologists try to make it difficult.