The Social Security Lockbox Hoax: Heartier than the cockroach

Although the cockroach has been hanging on tenaciously for billions of years, it’s now getting a run for its money from a tough-as-nails competitor: the bi-partisan political deception about "The Great Raid on the Social Security Trust Fund."

Senator Kent Conrad (D-ND) was the latest one to step up to the mike on that subject yesterday, when the Senate Finance Committee questioned Henry Paulson, nominee for Treasury secretary. 

Paulson told the committee that the deficit, at 2% GDP, was manageable—and what really matters is growth.  At that point, Senator Conrad saw his opening, and quickly changed the subject from faith-in-the-future (growth) to fear-of-the-future:

You say the deficit is in the realm of the historical norm.  You left out of the calculation the amount of money that's being taken from every trust fund in sight to float this boat.

Conrad's website confirms his purported "concerns" about The Great Trust Fund Raid.  His colleague, Senator Voinovich (R-OH) apparently couldn’t resist joining the chorus. 

The following graphic is from Kent Conrad’s website.  Before reading the caption, look carefully and try to spot what’s wrong with the cartoon. 

Remember Sherlock Holmes’s famous “dog that didn’t bark”?  Well, where are the trust fund’s government bonds?  Why aren’t they shown?  Do Conrad and Voinovich think US government bonds are a worthless joke? 

Before answering that, let’s review the difference between “government money” and “government bonds”:

Money:
A financial asset backed by the full faith and credit of the United States of America.  Does not earn interest.

Government bond:
A financial asset backed by the full faith and credit of the United States of America.  Earns interest.

The difference: bonds earn interest; money does not. 

Senators Conrad and Voinovich want intragovernmental borrowing from the trust fund to stop.  The unraidable money in their Lockbox wouldn’t be lendable to anyone or anything.  The SS Trust Fund would therefore stop earning interest on its surplus money.  Should we picture $3 trillion of cash, sitting on thousands of pallets in a big government warehouse somewhere?  Two aisles over from the Ark of the Covenant, maybe?

Gee, I wonder how future social security recipients feel about a trust fund that doesn’t earn interest any more? 

For anyone who’s detail-oriented, I took the liberty of extracting a diagram from page 46 of the US Treasury’s Financial Report of the US Government (FRUSG), and circled in red the portion that Senators Conrad and Voinovich want to eliminate.  Their “Stop The Raid” plan would eliminate the financial flows indicated by the red star and the green star.

Click to enlarge.

The Lockbox idea is a hoax.  It is financially meaningless.  However, its fear-factor value makes it a political goldmine for anyone willing to capitalize on it. 

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Important end note:

Obviously, some of that was tongue-in-cheek.  The financial reality is that intragovernmental borrowing, lending, and interest payments are a wash.  The government’s left pocket owes the government’s right pocket some of the government’s money; whoopee, big deal. 

What really counts is borrowing, lending, and interest payments involving the government and the public.  And what makes the government more and more able to borrow from (and pay interest to) the public—as we’ve discussed at length at this website—is robust economic growth.  What makes the public willing to lend at low rates to the government is faith in the future. 

Growth is what matters most.  Henry Paulson hit the nail on the head; unfortunately, Conrad changed the subject.