Are We All “Trust Fund” Babies?

At Crooked Timber, John Holbo considers whether the Social Security Trust Fund (legally, the Federal Old-Age and Survivors Insurance Trust Fund) exists or not. And like Yglesias, whose response to a Planet Money podcast on the topic spurred Holbo’s post, he concludes it does. To paraphrase one of our more linguistically nimble former presidents, I’d say it all depends on the definition of “exist” being used.

Far more problematic to me, however, is the extended metaphor Mr. Holbo uses to facilitate his own analysis:

Here’s the way to think about it, so it seems like the Trust Fund exists. The parents (government) agree that the child (Social Security) should have an allowance. The child wants to save the money. So the parents keep a running account. Every week, the parents write the child an IOU, which the child dutifully puts in a little box. Over time the box comes to contain a lot of IOU’s from the parents. Meanwhile, the parents are not separately putting funds that would correspond to those IOU’s into yet another box. They are just running the household. But the IOU’s exist, and are backed by the parents.

Not only no, but hell no! Okay, I understand it’s only a metaphor, a rough analogy for purposes of conceptual analysis. But not only are there few such metaphors more likely to give libertarians the vapors, it’s a really lousy and completely inappropriate comparison in this particular case.

And here’s at least one important reason why. I have children. They get an allowance or, more accurately, money for chores, etc. Their mother and I have also saved over time for their future needs. But their mother and I don’t get all our money from our children in the first place. In fact, we don’t get any of our money from our children.

To make Mr. Holbo’s metaphor even roughly analogous, let’s assume our kids have actual income producing jobs. Now, let’s imagine they give us some of their actual, honest to goodness cash money which we, in turn, promise to hold in trust for their future needs but which we, in fact, fritter away buying, e.g., far more handguns and rifles than we actually need to provide for our Household Defense. Even before we get to the question whether we as parents will be able to make future payments as promised, we would at the very least call this current behavior an intentional breach of our fiduciary responsibilities as administrators of the money we were supposedly holding in trust. More to the point, what we’d really call such behavior is fraud.

But let’s flash forward. Mr. Holbo “if they are good for the money, eventually, everything is fine.” In this regard even the staunchest critic of Social Security would have to admit that the federal government has the important advantage of being able to borrow as much money as it needs to cover its current expenses. At least it always has been able to do so. There is a definite limit, on the other hand, to the parents’ creditworthiness, to their ability to earn additional income or to restructure their budget to make more money available to pay their IOUs.

Ah, but let’s look at those IOUs a bit more carefully. The federal government borrows vast sums of money from outside investors all the time by selling marketable securities. For those unfamiliar with those terms, securities come in two basic varieties: equities, such as shares of stock in a publicly held corporation, and bonds, which are essentially IOUs. They are marketable if they can be sold by the original purchaser to any third party willing to buy them.

Every investment involves some risk even if that risk is negligible. Admittedly, to say that the federal government has for many years been spending like drunken sailors is to insult the financial responsibility of drunken sailors. It is also true that the total national debt is distressingly large and that the annual cost of servicing that debt is a distressingly large part of the federal budget. Even so, for reasons I won’t address here, the risk of the U.S. defaulting on any of the marketable securities it has sold is, to all intents and purposes, zero. Moreover, at least for the medium term – in the long term we’re all, well, you know – there is no practical limit on the amount of money the United States can continue to borrow. As profligate as the federal government has been, marketable Treasury securities are nonetheless considered to be so safe that investors were even willing recently to purchase them at what amounted to a negative interest rate.

However, none of the reasons why the U.S. will never default on its marketable debt apply in the case of Social Security. The Social Security Trust Fund is funded with “special series, non-marketable bonds.” Which is to say that they are not bonds at all. They have no market value because they are not marketable. There is not even any legally enforceable promise to pay because the legal entity that ‘issues’ these instruments is the very same legal entity they are issued to.

Which is to say that unlike a real trust where there are real marketable assets which the administrator of the trust fund is legally barred from using for any non-trust purpose, the federal government has created a sham trust funded with sham bonds. Mind you, however, that unlike the case of the parents writing IOUs in lieu of some portion of their children’s allowances, real assets (our money) are routinely collected to be putatively transformed into these ‘bonds.’

I wouldn’t go so far as saying that all of this means that the Trust Fund “does not exist,” although I do think it is fair to say that the federal government is, at best, disingenuous in its public explanation of how Social Security is being funded.

Clearly, there is an accounting entity maintained by the federal government informally referred to as the Social Security Trust Fund. (Formally entitled the Federal Old-Age and Survivors Insurance Trust Fund.) Clearly, also, after current expenses are paid from current revenues, the revenues from taxpayers are ‘deposited’ into that accounting entity with the express purpose of paying both present and future Social Security benefits.

As matters stand, current FICA (Federal Insurance Contributions Act) payroll deductions more than “fund” current Social Security benefits payments, the “excess” supposedly being “invested in the Trust.” In fact, however, the system remains dependent on future contributions from future worker to pay for future benefits payments. Then again, that’s more or less how the system has always worked. If the average American probably believes that his contributions are being ‘invested’ to be used to pay for his own eventual retirement benefits, he probably believes this because stupid and dishonest politicians have talked about Social Security in these terms. Then again, the average American probably believes the money he deposits in his savings account is sitting in the vault of his local banks, too. So much for the average American.

As long as there were significantly more contributors to Social Security paying in for significantly longer than retirees were receiving benefits, the system worked just fine. Well, maybe not all that fine. The current Old-Age, Survivors, and Disability Insurance (OASDI) program has been vastly expanded beyond the scope of the original 1935 Social Security Act. How big is it today? The omniscient Wikipedia states:

By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, with 20.8% for social security, compared to 20.5% for discretionary defense and 20.1% for Medicare/Medicaid. Social Security is currently the largest social insurance program in the U.S., constituting 37% of government expenditure and 7% of the gross domestic product….

Most significantly, however, we Baby Boomers came along just as average life expectancy lengthened significantly and the birth rate began to drop. Yes, the system’s resources have already been stretched, but the real crisis in funding Social Security (and, let’s not forget, Medicare) comes when my cohort entirely becomes eligible for benefits and unreasonably refuses to die off quickly. What will happen then?

Well, at some point, assuming no change to the current system, current FICA revenues will not equal current benefits paid, the “Trust Fund” will run out of money (assuming it ever had any in the first place) and the difference will increasingly have to be paid out of general revenues. As explained above, however, one can reasonably conclude that in terms of actual federal spending, the distinction between FICA revenues and general tax revenues isn’t much of a difference.

What can or should be done to “fix” Social Security and related entitlement programs is a topic better reserved for another discussion. I want to return, though, to Mr. Holbo’s metaphor of the state being to the citizen what the parent is to the child. Mind you, I don’t know what his politics may be and it could well be that the analogy simply occurred to him as apt in this particular case without implying anything further.

But the notion of the state as parent is antithetical to the very notion of popular sovereignty. It is one thing to say that we endow the state with sufficient authority to accomplish those functions which we, the ultimate sovereigns, require of it. It is quite another to suggest that our welfare is in any sense dependent upon the beneficence of the state, and that is a connotation unavoidably entailed by the ‘state as parent’ metaphor.

I have no illusions in this regard. If there is any lesson at all to the aftermath of 9/11, it is that people will willingly sacrifice real rights and real liberty for the illusion of safety and security, and that is a bargain the state will gladly make every time.

No genuinely loving parents could want anything less for their children than to become independent adults. What state has ever wanted its citizens to enjoy such independence?