The Social Security Trust Fund. And the Truth about Money: It’s never “there.”

Op-Ed by Jeremy Sykes, Accounting, MBA Candidate

Now that the tax issue has been settled by team R’Obama-can, the next issue for the new congress to solve is clearing the deficit.  And the first thing they will try to “reform” will be Social Security.  There is a lot of misinformation on Social Security on the net, and believe it or not, there’s a ton of nuance in what Social Security actually is.  It comes down to one fact that NPR’s PlanetMoney team did a great job in explaining.  You should really listen to the whole podcast.  The safest investment any bank, here or in another country can buy is U.S. government debt, that’s right, U.S. Treasury bonds.  But that leaves the question, how does the U.S. government save money?  The government can’t just deposit what it chooses to save into a standard savings account at a private bank, the amount of money, the amount of risk entailed in doing so would be astronomical, add to that, a controlling interest in a private venture, and it being flat against the law to do so, and you get a thorny problem.  So, they do what everyone else does—they buy U.S. debt.  But the social security fund is supposed to be our money, not a loan to the government.  This is why they call it the Social Security Trust Fund.  It’s a naming convention to remind the government (and everyone else) that this is hands-off money.

So when people say the money isn’t in the trust fund, or that it’s all loaned out, they’re right, and they’re completely wrong.  Here are some observations which I hope will clear things up.

1.  When you deposit money in a bank, the bank doesn’t just sit on the money, it lends it out to other creditors.  Money standing still is A) wasted, B) not safe.  That is very much how the “trust fund” works. When you ask for your money back, the bank has a cash reserve, mandated (and guaranteed) by the FDIC (very nice of them, and courtesy of the safetynet), and they pay it back.  And in so doing, they debit your account, but more of that later.  That cash reserve isn’t nearly enough to cover all bank deposits, hence the fear of “runs on the bank”.  But you see, there was never actually any money “in” your account. 

2.  In accounting, we learn that all the columns and rows on a balance sheet aren’t safe deposit boxes at the Gringotts vault, they’re methods of organization.  About the only thing that would amount to a safe deposit box on a company’s balance sheet is its cash account, which really means very little if you think about it like you would your checking account.  Meaning, what you have at the end of the month doesn’t reflect your networth, because its a residual, whereas gain or loss in savings and assets would be the real measure of your networth.

3.  The principle of double entry accounting means that for every accounting transaction two entries are made, one in debits, one in credits, sometimes more than one credit is involved, but the amounts must balance out (hence balance sheet).

4.  So too with the government’s revenues.  The money, when it comes in gets debited to the cash account (obviously it’s a bit more complicated with the Leviathan being what it is), meanwhile, a credit is created elsewhere.  The social security trust fund is a credit and is on the right side of the balance sheet equation: Assets = Liabilities + Owners Equity.

5.  So when social security gets paid out, it doesn’t come from the “trust fund” which doesn’t actually exist, it comes from the cash account, on the left side of the equation.  The big news last week, about how Social Security will soon be pulling in less than it is putting out means that the actual credit in the Trust Fund will start to go down, but remember, there was never supposed to be a surplus in the first place.  Each generation puts in what it earns, and they get it back when they retire.  The babyboom meant that suddenly the coffers were flooding with excess funds, afterall, the previous generation was smaller.  The fund was set up to keep a record of the excess created by the baby boom.  Of course, the excess is a good thing, because of times like these, when 9.3% of the country is unemployed and can’t save for their retirement.

6.  So you can think of the trust fund as a liability, but recall what I said about the right side of the equation, it’s Liabilities AND Owners Equity.  In a strictly metaphorical sense, social security is your part of the ownership stake in the government.  You have taken a guarantee that the goverment will pay you back.  That is the very definition of a bond, but it’s also the definition of a Savings account.  Except that a Savings account has an interest rate (and one that is taxable at that.)  Privatizing Social Security might mean more bang for your buck.  But given that pension funds lost billions in 2008 based on the same concept, I wouldn’t bank on it.

7.  Opting Out and Taxes.  You could make an argument that you’d like the ability to “opt-out” of social security.  Afterall, it’s just your money coming back to you, and with great care and attention you could probably invest that money and do more with it than social security does, so why not just say ‘eff off government’ I want my money back.  The sad fact is that most people are completely incapable of the kind of discipline it takes to save enough money to retire comfortably.  Even Social Security provides just subsistence payments, and most people expect to pay-in with their IRAs and 401ks and various other incomes and investments.  But there are three other reasons why this idea could be disastrous. 

  • First of all, you may not be able to see the larger picture here, but that doesn’t mean I want you, or anyone else, to suffer for it. 
  • If you don’t pay into social security, we’ll be paying you endless unemployment thirty years from now when you’re destitute and unable to find work.  People have forgotten that the original need for Social Security was the deplorable condition of old age homes in the 30s.
  • What about the collateral costs?  If you can’t pay your retirement, you’ll lose all of your assets, your home will go into foreclosure, you’ll beggar your children and grandchildren, property values will decrease, and medicare won’t pay for everything so hospital bills will go up, and hospitals will be forced to close or turn you away, and the public will have to set up hostels and care facilities to get you off the streets, which means more big government! 

All of which brings me to taxes.  Every paycheck, your employer reduces the amount of your take home pay to account for taxes.  This wasn’t always the case.  Pay-as-you-go was established because it increased accountability.  People weren’t taking taxes into account, and come April, they’d be woefully short, and the government would have to pick up the bill, either in uncollected taxes, or in the cost of auditing you and forcing you to pay, raising the cost of government!  You may be a libertarian and not be in favor of taxes, but that doesn’t mean you’re not obligated to pay them. 

8.  A common thread in these debates is that tax-and-spend liberals are saying, let’s just keep borrowing and “milk this as long as we can.”  No one on any side of the argument supports that.  The liberal economic argument goes, “This is the biggest economic hit to this country since the Great Depression, our priorities are to lower unemployment, increase technology, ramp up demand, and encourage stability in all the relevant fiscal indicators (inflation, interest rates, stock markets, exchange rates, etc.).  Social Security is in no immediate danger, and won’t be for thirty years = NOT A PRIORITY.

 9.  Certain ideologies are opposed to Social Security as a principle.  Rich conservatives who don’t need to worry about their own retirements and could give two pennies about anyone else’s.  They A) want to save their own money, and invest it, B) Want that saved untouchable “trustfund money to be circulating in the market”, i.e. spent, not saved, C)  mistakenly think social security is a socialist welfare program instead of a retirement account.  The Middle class conservatives likewise mistakenly think social security is a socialist welfare program instead of a retirement account.  And the poor conservatives who can’t afford to eat today, and can’t afford to think about tomorrow.  Of all of them, I have the most sympathy for the poor.  But they’re eligible for Welfare, which IS a socialist safetynet program, and one they dare not touch.

2 Responses to “The Social Security Trust Fund. And the Truth about Money: It’s never “there.””
  1. Lemuel Morrison says:

    Jeremy: Nice work. Planet Money is one my favorite podcasts too. There’ s a big factor here you left out — new workers. The system is brilliant as long as the population grows. Alternatively, it’s a disaster — Japan or Italy anyone. America does have one ace in the hold — immigrant. We need immigrants for their brains, brawn and to keep workers in the system.

  2. J.P. says:

    Interesting and well thought out points. Although, I have a couple of counter-points and concerns about social security. Sorry if I misunderstood any of your points.

    1. When the social security cash account gets credited, the argument could be made that the offset is to some sort of investment. Not an investment in securities, but probably some earmark spending. That investment, however, will only bring in revenue through tax dollars (I don’t believe that there is a large Keynesian multiplier, thus the revenue will not be enough to offset the cost of the project). Additionally, when tax revenues aren’t enough to cover all of the government spending, let alone interest or principle payments to China, how can anyone be sure that the social security cash account will ever be debited again?

    2. You mention that there was never supposed to be a surplus, and that everyone gets what they put in. First, this is wrong due to the way social security was set up. The very first generation of retirees got social security payments without ever paying for it. It was all funded by the taxpayers at the time. Those taxpayers’ retirements were then funded the following generation of taxpayers, and so on. Thus, social security is a never ending beast, which can only be stopped by screwing over one generation. Secondly, the surplus gets “invested” like I mentioned in my previous point. When social security starts paying more than it’s collecting, the government will need to print more money or borrow since tax revenues clearly won’t be enough to cover it.

    3. I agree some people can’t save for their own retirement. However, people should be able to opt out of social security. I, for one, do not need the government to protect me from myself. I would love that extra 12% of my salary (6% taken out plus the amount matched by my employer). That 12% invested at a risk free rate would bring much stronger returns over the next 40 years than social security. Plus, social security is not risk free. Retirement age will undoubtedly increase. And, that money is not mine. New legislation could quickly take it all away from someone that has had a successful career (and contributed the most money). One easy solution could be that, if someone were to opt out of social security, they would be required to put that money into some sort of account, not touchable until retirement.

    4. My last point is in regards to your opinion on what rich conservatives believe. First, rich conservatives should not be stereotyped as not giving two pennies about other people. That was a cheap shot. Many like to be charitable, except they would rather give money to charities of their choosing rather than letting the government distribute it. Please don’t make the assumption that conservatives are any less moral than liberals.

    A) “They want to save their own money and invest it.” Yes, why not?
    B) “Want that saved untouchable ‘trustfund money to be circulating in the market’, i.e. spent, not saved.” The social security money is already spent by our politicians. Circulating in the market = saved, although, slightly higher risk. However, this could provide great capital to various businesses. I do see how the government investing money could cause a great deal of problems. But they’re already invested in a couple of companies (e.g. GM, AIG).
    C) “They mistakenly think social security is a socialist welfare program instead of a retirement account.” If it’s not a socialist welfare program, then there shouldn’t be any problem if they opt-out. Provided, of course, they can prove they are capable of saving for their own retirement.

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