Max's explication of the social security scheme

Max Sawicky sawicky at
Mon Feb 22 07:57:22 PST 1999

> If the Social security fund invested -- as it never
> yet has -- in risky assets, like land and stocks and corporate
bonds, than
> it would have assets in which it was "saving" its money. But
> precisely because those assets are risky, it isn't certain that
they would
> conserve value over time. So it might not constitute savings
at all.

Risk isn't really the issue. Any purchase of an asset, no matter how risky, is savings. The difference is that the Trust Fund is part of the Federal government, so that if the Trust Fund accumulates Federal bonds, there is no real saving because this is simply debt the Federal government owes to itself.

The only way the government can 'save' is by reducing debt it owes to the public and/or by buying assets from the private sector, foreign countries, state and local governments, or the Federal Reserve. These are all classified as separate entities, some less obviously than others.

> If, however, social security continues to be "invested" in
> bonds, then it is impossible for it ever to save up a penny.
> claimants will be paid out of current revenues, just as they if
they were
> bondholders. If claims increase one year in the future, and
more has to
> be paid out, then taxes have to be raised, or future revenues
> from, *that year.* The only ultimate source of social security
funds is
> the annual production of the economy, a percentage of which can
be taxed.

right, though the Federal government could accumulate assets (like a state govt pension fund does). Also, with less debt outstanding for a given level of taxes and other spending, it is easier for the government to give general revenue to the Trust Fund.

> So the only provisions that can be made against an expected
wave of claims
> in the future is increasing growth, so that the economy will be
that much
> bigger then, or decreasing debt *for the sole purpose of
running it up
> again* (if it were thought that there was a limit beyond which
it would be
> unhealthy to go)

The economy is the source of income that will finance benefits, one way or another. Real output is wholly separate from the financial position of the Federal government. By analogy, taxes right now are about 21% of GDP. Suppose there was a California earthquake and the Federal govt needed a quick $200 billion. This would clearly be easier to obtain if taxes were only 15% of GDP because there was lower interest payments in the budget, but this would be so without regard to how large or small the economy was.

> If I've got this right, then all talk about saving social
security has always been a scam, starting at least in my brief lifetime with Moynihan's plan in the 80's. He made a big fuss that Reagan used the money from increased social security taxes to pay general revenues, as if that was a scandal. But if I'm understanding you correctly, what Moynihan was piously holding out for was a Clinton style debt pay-down. Was that what he meant by inceasing the Social Security Fund? And it was just as intrisically false a notion as Clinton's?>

At the time I do not believe it was envisioned that a payroll tax surplus would be used to finance general expenditure. Also the 1980's group followed the dictum of securing the Trust Fund's 75-year actuarial solvency. My feeling was that this was defensible at the time.

By now it has become clear that there is no progressive way to maintain 75-year solvency for the Trust Fund. This imperative should be abandoned, in my view. The Trust Fund remains as a useful record of the present value of payroll tax contributions in excess of costs.

My criticism is that 75-year solvency is no longer a tenable goal, in light of what is required to achieve it. I would also reject phony accounting exercises that artificially boost the Trust Fund balances, since they are fundamentally duplicitous, hence anti-democratic, and accomplish nothing real in economic terms.

Moynihan's current role is quite different than what he did in the 1980's. Now he is promoting a variation of privatization and saying idiotic things about public debt.

> For that matter, is the idea of a Social Security
> "Fund" in itself just a pretty lie?

Not so far. See above.


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