Academic

I will never subscribe to Money Magazine (I think)

By Tung Yin

I don't think I'll ever subscribe to Money Magazine if its "analysis" of the soundness of Social Security is an example of its journalism.

In its discussion of why you should be counting on(!) Social Security as part of your retirement planning, it notes: 

Despite what you may hear about the system going broke, the funds from workers' payroll taxes will cover all retirees' payments until 2016 even if no changes are made to the current program. After that the Social Security Administration can cover full benefits until 2037 by cashing in its Treasury bonds from the Social Security trust fund. And when the bonds run out, income from payroll taxes would be enough to cover about 75% of payments for decades.

Um . . . where does Money think that the government will come up with the cash to pay off those T-bills in the trust fund?  What is a T-bill, anyway?  It's just a piece of paper saying that the government will pay some amount of money on the specified future date, along with interest.  It's not a claim against actual assets.

Since the government does not actually segregate Social Security tax collections, it simply adds it to the federal budget sheet.  In other words, the government takes in income through two ways -- income taxes and Social Security taxes.  (I'm oversimplifying here, there are obviously other income sources.)  Call those X and Y.  The government spends its income on Social Security benefits and other spending (defense, courts, FBI, etc.).  Call those A and B.

If X+Y > A+B, then yea, we have a surplus.  This is what happened during the later parts of the Clinton Administration.  Note that it wasn't a true operating surplus, which would be X > B.  In other words, the Clinton Administration claimed a balanced budget but only by "borrowing" from the Social Security trust fund.

Our current situation, on the other hand, is X+Y<A+B.  Oh no, a deficit!  Call the difference between the two sides Z.  This is our deficit.  How do we come up with $Z?  We borrow it by issuing more T-bills.

Okay, in 2016, what is projected to happen is that A > Y.  Social Security will have to pay out more than it collects.  According to Money, that's no problem, because for all these years, Y > A, so the federal government owes the trust fund some immense amount of money.  The trust fund will just collect on that debt.

But wait a minute.  That accumulated trust surplus is not in a bank account with Wells Fargo that you could just start to withdraw from.  It was already spent in all those years when B > X.  And unless X > B, the government doesn't actually have extra money to pay back the trust fund.  So the government will have to borrow more money, call it W, to make up the gap between A and Y.  Worse yet, because X >>B, and because we don't have the Social Security surplus to raid, the government is going to have to borrow even more money to make up that operating deficit.  In other words, at the same time the government is borrowing W to pay for Social Security, it still needs to be borrowing Z, only Z is going to be more like ZZZZZ.

And we haven't even talked about the impact of the projected universal health care coverage!

Do you feel comfortable about the future of Social Security when it depends on the government's ability to issue T-bills to raise W while at the same time issuing T-bills to raise ZZZZZ?!?  How much of our GDP is going to go toward paying the interest on that?

Full post as published by The Yin Blog on September 18, 2009 (boomark / email).