Wednesday, November 3, 2010

Is the Social Security Trust Fund Real or Imagined?

Groan...why must The Oregonian publish such nonsense?  The other day in an Op-Ed, Lewis and Clark law professor Tung Yin (one wonders why a lawyer is considered an expert on these things) makes the tired claim that since the Social Security trust fund is invested in Treasury securities, it doesn't really exist, it is all just a shell game.

Except for the rather annoying fact that treasuries are legal contracts backed by the full faith and credit of the US government.  Whether the government of China, the Social Security trust fund or a US citizen like me holds it is irrelevant.  A default on its debt is a default no matter who holds the securities.  Defaulting on obligation is simply not an option for the US, unless it wants the entire economy to go kablooey, and so there is no reason at all to view this as some elaborate shell game.

The fact that the US government is in deficit is a separate issue and only confuses the discussion of Social Security.  In time, once the reality of the earnings power of the current working age adults is known and the trust fund is on the verge of running out there will be three options: raise the tax, means-test benefits, and/or raise the retirement age.  Probably some combination of all three will end up being the solution (or at least the last two), but it is not a terribly hard problem to solve.  Just look at France.

And, by the way, foreign governments own a bunch of US debt (a little over a quarter), but the vast majority of the US debt is owed to...ourselves.  So while US debt is an obligation of the government it also represents income to all who own it.


BJCefola said...

One thing I wondered about this subject- how much of an impact does social security have on overall demand for treasuries? What does their average annual purchase look like compared to say, the top 5 other purchasers? Without any idea of the answer, I’d guess very different impacts if SS was 10% of demand vs. it being .01% of demand.

Patrick Emerson said...

I don't know about average annual but the total holdings are about $2.4 trillion out of what i believe is about a total of about $13.5 trillion in total US treasury debt.


Right now, of course there is no crowding out as we are able to borrow money for very little interest.