Software Nerd

Saturday, October 18, 2008

Social Security's Trust Fund

The Social Security's Trust Fund is a fiction. Basic problem: it is not a fund in the first place.

Joe Sixpack (or is it Joe Plumber?) might create a "home down-payment fund". He does this by putting aside some money and not spending it. The bank is his "lock-box". Imagine that he did something else: he loaned the money to himself and treated the IOUs written to himself as if they were a fund! For all his protestations that he owes money to himself, we would have to tell him that he has spent it, and the fund is fiction. The same with social security.

So, it really irritates me when newspapers who ought to know better, gloss over this, and pretend that this fiction is real. For instance, this New York Times story says:
If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041 and will begin paying out more than it collects in benefits even sooner, starting in 2017.

Both these dates are bogus. Firstly, there is no fund. Secondly, Social Security has already reached the point where collections are much neared payout levels than "fund" accounting would show. That second fiction is maintained through another ruse: over the original IOUs that Joe Sixpack wrote to himself, each year he write brand new IOUs to pay himself interest! The New York Times adds this fictional interest to the fictional inflows, to calculate a total collection that is significantly larger than it really is.

Summary: The first step toward reforming social-security is to be honest about what it is, and not to use terms like "fund" and "interest" that only obfuscate.

Appendix: Detailed numbers:

The Social Security administration (see page 2 on this PDF), shows the following for 2007:
  • "Fund" Income $ 772 billion
  • Outflows $ 624 billion
  • Surplus = $ 158 billion

However, about $95 billion of the inflows were fictional "interest" on the fictional "fund". Subtract that, and one gets an inflow of about $677 billion and the surplus comes down to $53 billion. (Aside: Out of these non-government receipts, $18 billion comes from "taxation of benefits". This is money that is taken from retirees who had the wsdom to get rich enough not to depend totally on social security.)

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  • "For all his protestations that he owes money to himself, we would have to tell him that he has spent it, and the fund is fiction. The same with social security."

    Imagine that Joe Sixpack decided to start a bank instead, with the money he borrowed himself. Lets assume it is $100. He decides to have a fractional-reserve of 10%. So he puts away $10, and lends himself another $90. Of these $90 he puts away $9 and lends himself another $81. I am assuming you see where this is going? Well, in the end, Joe is going to have lent himself $1000. Joe is ready to start making money by lending out money to someone else. So, with Joes way of calculating, he can now lend out $1000, backed by his security of $100. Welcome to the world of fractional reserve banking ....

    By Anonymous hpx83, at 1:53 PM  

  • Hpx83, Thanks for the comment. I don't agree, but that's a topic for elsewhere.

    By Blogger softwareNerd, at 6:06 PM  

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