from Follow the Money

Here is a scale variable for you …. Social Security’s assets increased more than the combined assets of Saudi Arabia and Russia in 2006

January 22, 2007

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In 2006, the increase in the assets of the Social Security system ($185b) will almost certainly exceed the combined increase in the assets of the Russian Central Bank ($107.5b) and the Saudi Arabian Monetary Agency (on track for around $70b).   The Social Security payroll tax (roughly $600b, counting the "disability portion" of Social Security) also raised more money than Saudi Arabia and Russia got from exporting their oil and gas (around $500b), even back when oil was at $65b.

And for that matter, the Social Security system's reserves (the Trust Fund) are twice as large as the reserves of China.    The Trust Fund ($1,994b) is about equal in size to the combined reserves of China and Japan.

The Social Security system's Treasuries are just paper assets, you say.  They aren't "real assets"   It is certainly true that US Treasuries are nothing more (or less) than a promise to pay.   They aren't secured by anything more (or less) than the full faith and credit of the United States.  They are ultimately backed by the capacity of the US government to generate the necessary tax revenues  to pay its obligations, or, should the US government opt to, its ability to borrow the needed funds in the markets.

Then again, Saudi Arabia and Russia also hold a lot of paper assets.  Not necessarily the same kind of paper -- Russia tends to shy away from US Treasuries for some reason.   But it still holds paper of various kinds.   Some of that paper is backed by mortgage payment streams – but nothing guarantees foreign government’s future ability to convert domestic US payments steams into external purchasing power. 

And in a lot of ways, the domestic tax revenue streams that assure the ability of the US government to pay back its domestic debts look a lot stronger than the external revenues streams that ultimately guarantee the ability of the (US) the country to repay its external debts.  Even after the Bush Administration's tax cuts, the gap between what the non-social security government takes in and what it spends is a lot smaller than the gap between what the US exports and what it imports.    You can throw income from US investment abroad (relative to interest and dividends on foreign lending/ investment in the US) into the mix if you want -- it doesn't change the basic equation. 

Somehow, I think the debate over Social Security would be different if every statement on Social Security started with something like "Social Security, which ran a $185b surplus last year, is expected to continue to build up its assets until roughly 2020, when it will need to dip into its accumulated assets to pay currently promised benefits."   Social Security will -- per the CBO -- first need to draw on the interest income on its assets in 2019, but the overall assets will rise for a few years after that.  I wasn't able to find the precise estimate for when Social Security will need to start to draw on its actual assets, not just the interest on its assets.

In my view, the real issue here is how will the rest of the government manage when it cannot finance itself by borrowing from the Social Security Trust Fund.  I disagree with my colleague Felix Salmon.  Felix suggests that the overall fiscal position of the US government is a good reason to cut social security benefits.   

Ultimately, Social Security benefits and other government entitlements might have to be cut in order to bring US fiscal policy into line

I think Felix has it backwards. US fiscal policy needs to be bought into line so that the rest of the government can repay the money it borrowed from Social Security, allowing Social Security to pay its promised benefits.

That, after all, was the point of the trust fund.   The fact that other taxes were cut and the government ran a deficit rather than paying down its assets over the past few years doesn't in any way reduce the (non-Social Security) government's obligation to make good on its financial obligation to repay the Social Security trust.

I am open to the idea that promised future Social Security benefits might need to be adjusted in some way so that the Social Security's accumulated assets are drawn down a bit more slowly than currently projected.   Cutting benefits promised to those expected to retire between 2030 and 2045 is one way for the Social Security system to pay additional benefits after 2045 without any increase in the payroll tax (raising the payroll tax after 2045 is another way).   I am also open to injecting additional revenues into the system.  

But the point is to make sure that Social Security is well positioned to pay future benefits -- not to reduce the burden of REPAYING Social Security out of general revenues.   I think that is basically what Delong is saying as well; he just expresses it a bit more formally.

Cutting Social Security benefits while raising payroll tax revenues is certainly one way of improving the overall long-term solvency of the federal government.   Social Security would be able to finance the rest of the government for an even longer period of time.  But it also effectively shifts more of the financing of the overall government towards the regressive tax on wage income -- the payroll tax.  

That is the wrong thing to do - especially when globalization is already putting pressure on wage income and adding to concerns about economic insecurity.

Instead we ought to be shifting more of the burden of funding the overall government back to the income tax -- or perhaps to an energy tax.  And, to the best of my knowledge, that is exactly what repaying the Social Security trust fund out of general revenues rather than financing the rest of the government out of the payroll tax will do.


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