Chew on this: There is no sur­plus fairy for So­cial Se­cu­rity

Austin American-Statesman - - OPINION - Sandy LeedS lo­Cal Con­Trib­u­Tor Leeds is a se­nior lec­turer in the Depart­ment of Fi­nance, McCombs School of Busi­ness, at the Uni­ver­sity of Texas. He blogs on fi­nance and mar­ket is­sues at leed­son­fi­nance.com/.

This past month, PolitiFact Texas helped per­pet­u­ate the false be­lief that the So­cial Se­cu­rity pro­gram is funded and that we have a mys­ti­cal “lock­box” at our dis­posal. While ar­gu­ing that U.S. Rep. Michele Bach­mann, R-Minn., made false state­ments about So­cial Se­cu­rity, PolitiFact stated that “in as­sess­ing the fi­nan­cial health of So­cial Se­cu­rity, it’s im­por­tant to re­al­ize … it’s also built up a big trust fund that it can tap when nec­es­sary.”

Too many Amer­i­cans are hor­ri­bly un­e­d­u­cated when it comes to our govern­ment’s fi­nances and our even­tual debt cri­sis (which will be caused by deficits, Medi­care and So­cial Se­cu­rity). Com­ments like those made by PolitiFact com­pound this prob­lem. While So­cial Se­cu­rity is just one piece of our even­tual debt cri­sis, it’s an im­por­tant piece.

We all need to un­der­stand how this works. Only then will cit­i­zens know the ques­tions that they should be ask­ing our politi­cians, and then maybe we can stop kick­ing the can down the road.

I would urge all cit­i­zens to start by un­der­stand­ing two things: the amount of un­der­fund­ing that So­cial Se­cu­rity faces and the fact that the $2.4 tril­lion in “our big trust fund” has al­ready been spent by our govern­ment.

In ad­di­tion, it would re­ally help if we all ac­cepted the fact that this isn’t a Repub­li­can or Demo­cratic is­sue, and it’s not a lib­eral or con­ser­va­tive is­sue. This is a prob­lem we face as a nation: We don’t have enough money to pay re­tirees what we have promised to pay.

This isn’t a Repub­li­can or Demo­cratic is­sue. We don’t have enough money to pay re­tirees what we have promised to pay.

Start by un­der­stand­ing the num­bers. Peo­ple cur­rently in the So­cial Se­cu­rity sys­tem (any­one who is work­ing) will put in an­other $19.1 tril­lion (in to­day’s dol­lars). Un­for­tu­nately, cur­rent work­ers and re­tirees will take out ap­prox­i­mately $37.7 tril­lion (in to­day’s dol­lars).

So we have $2.4 tril­lion; we’ll take in $19.1 tril­lion, bring­ing us to $21.5 tril­lion. But we’ll pay out $37.7 tril­lion. We are short by $16 tril­lion! It would be one thing to be $16 tril­lion short on a $900 tril­lion li­a­bil­ity, but it’s par­tic­u­larly out­ra­geous to be $16 tril­lion short on a $37.7 tril­lion li­a­bil­ity.

At this point, you should re­al­ize that PolitiFact’s as­ser­tion that there is a “big trust fund” is like a par­ent who has saved $20,000 to pay for col­lege for his 10 chil­dren. When asked how he’s go­ing to pay for all that tu­ition, he points to his trusty lock­box. The re­al­ity is that he may pay for the first child, but the rules are go­ing to change for the rest of the chil­dren. In ad­di­tion, if Mom and Dad want to pay tu­ition for more than the first child, they’re go­ing to need to cut their spend­ing on other things or they’re go­ing to need to raise their in­come (or sell as­sets).

Sec­ond, un­der­stand what hap­pens with our big trust fund. By law, the So­cial Se­cu­rity Ad­min­is­tra­tion can do only one thing with these funds (the $2.4 tril­lion that it is hold­ing for us). It can in­vest them in spe­cial Trea­sury bonds. In other words, by law, the only thing that it can do is loan the money to our govern­ment.

Our govern­ment needs to bor­row the money be­cause we run a deficit most years. (When you’re good at some­thing, stick with it.) This deficit has been fi­nanced by So­cial Se­cu­rity, China and oth­ers. Un­for­tu­nately, So­cial Se­cu­rity is go­ing to need to be paid back in the com­ing years (as baby boomers re­tire). Hope­fully other len­ders will not need their money back.

As So­cial Se­cu­rity re­deems its Trea­sury se­cu­ri­ties (be­cause it will need its $2.4 tril­lion back), our govern­ment will have to pay this back out of our gen­eral fund. It would be great if our govern­ment ran a sur­plus and could use the sur­plus to pay So­cial Se­cu­rity back. But, since I re­cently broke it to my chil­dren that there is no tooth fairy, I’ll also break it to you that it’s very un­likely that the sur­plus fairy is go­ing to ap­pear any time soon. This means that we’re go­ing to have to con­vince len­ders to step in and re­place So­cial Se­cu­rity.

You have to ask your­self how long len­ders will trust a govern­ment that is ap­prox­i­mately $50 tril­lion un­der­funded (when you con­sider So­cial Se­cu­rity and Medi­care com­bined). Re­mem­ber that len­ders (out­side of So­cial Se­cu­rity and other parts of are govern­ment) have only loaned us $9 tril­lion (to date). We’re count­ing on our abil­ity to turn to them for much more.

The bot­tom line is that we’re in trou­ble. So­cial Se­cu­rity is woe­fully un­der­funded, and Medi­care is an even larger prob­lem. This is go­ing to in­crease the amount that we’re go­ing to have to bor­row from in­vestors, and there’s no cer­tainty that in­vestors will al­ways be will­ing to lend to us.

Most im­por­tantly, we’re never go­ing to solve these prob­lems un­til the elec­torate un­der­stands the is­sues and starts to pres­sure elected of­fi­cials into mak­ing the hard (but right) de­ci­sions. We’re not do­ing any­one any fa­vors by con­vinc­ing them that we have “built up a big trust fund.”

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