Bruce Krasting dissects the recent transactions of the Social Security Trust Fund in a post which can be summarized:
- the assets are real
- the debts are real
- the problems are real
If you don’t believe that the problems posed by the SSTF are real, consider the political implications of default. Ain’t gonna happen.
He follows up with some very interesting observations on the accounting of the fund:
I conclude that the TF is costing us much more than just the payroll taxes that are collected. To get a real sense of the cost you have to add in the interest. Our economy has to pay that as well. The total interest tab in 2010 will be ~$118 billion. The average yield on the portfolio is 4.7%. The recent fair market rate on an eight-year average life Treasury investment would be about 2.2%. The Fund is enjoying an above market yield of 2.5% currently. That comes to $63 billion a year. The formula that sets the interest rates is now 50 years old. It should be reviewed. It is no longer a viable methodology. Our short term financial position is being impaired so that SS can “look better†long term. We are kidding ourselves.
Isn’t that more of a problem with how we finance our debt, than the SSTF itself? It is just a big pool of capital, after all, if we’re borrowing from it, or ANY pool of capital, with interest rates that are not ideal, is that the pool of capital’s fault?
There are two equally valid ways of looking at the SSTF:
1. The US Federal Government is a single corporate entity, and money that it owes itself is meaningless on both sides of the accounting ledger. When cash flow from Social Security activities goes negative, there will be some major scrambling to come up with the money from other sources.
2. Social Security and the General Fund are partitioned by law, and should thus be treated as seperate entitites with their own accounting. The Social Security Administration is doing just fine, but the General Fund is in big trouble when it comes time to pay back the trillions of dollars it’s borrowed from Social Security over the past decades.
Either way, there’s a big problem. The same big problem, just looked at from different angles.
Eric, from my point of view it’s a cash flow problem. For the last 40 years (since LBJ’s reforms of the system) in nearly every year the Social Security system has been a cash cow for the federal government, taking in more money than it disbursed. For the next 30 or 40 years it’s likely to be the opposite, paying out more money than it takes in.
Those who’ve been beneficiaries of the system for the last 40 years (the list is quite long) have come to think of the net contribution of the Social Security system to the general fund as a law of nature. It’s just been a temporary anomaly.
Those who hate and detest the Social Security system haven’t hesitated to take the money the system provided to the general fund and wish that they could ignore all of those real liabilities; those who praise the system don’t appreciate the cash flow issues. The system will continue to exist and make payouts in some form for the foreseeable future. The question is merely one of ways and means.
Heh. Now you are thinking like an LBO guy. Cash flow doesn’t lie. And going CF negative for the next 30-40 years is exactly the problem.
In quaint old days there were things like sinking fund debentures, or rainy day funds, to deal with issues like this. I’ve been pointing out the eventual problem for years, to completely deaf ears.
[Bernard Finel mode]
There is no problem with Social Security. Leave Brittney…errr Social Security alone. Leave Medicare alone.
[/Bernard Finel mode]
I was going to go there, SV, but resisted. But now I can’t, can’t you just hear it: “well “we” have to pay for the things “we” want.”
The naivete and dodge is staggering.