How to replenish the social security trust fund in six years, painlessly

As the election season approaches, I'm detecting an increased decibel level in the rhetoric about the social security trust fund.  We raided it.  It's bankrupt.  There's nothing in there for our grandchildren except a bunch of IOUs.  In other words, it's SSDD (same stuff, different day).  No surprise, though, because trust fund sob story still seems to score political points.  [Feel free to replace "stuff" with the word of your choice.]

In this election season, I would personally prefer to hear the scarce time for issues debates devoted to topics of substance instead of wasted on meaningless malarkey about intragovernmental trust funds, so I decided to take another run at this topic.  Rather than trying to explain again why it's malarkey, I thought it would be better this time to propose a quick fix.  In that light, here's a little-known fact:

Believe it or not, our legislators on Capitol Hill have it within their power to replenish the social security trust fund in six short years—and here's the best part—with absolutely no effect on anybody.  That's right: nobody's taxes will increase, nobody's social security check will decrease, and the trust fund will be 100% paid back by the general fund at the end of that time, or maybe even before.  All it will take is a brief, four-point law that expires six years after it takes effect. 

First, a brief diversion in the form of a mini-brain-teaser.  Examine the cash flow diagram below; can you spot any difference in the net effect of scenario 1 versus scenario 2?  [Hint: the correct answer is "No."]

Good.  I presume your three representatives on Capitol Hill could also get that answer correct(?).  In any case, now click on the thumbnail below to reveal the key to those scenarios:

Note that cash inflows equal cash outflows.  That's important. 

Now for the magic-wand law.  The six-year trust fund fix is described in the blue thumbnail below.  Click on it to read how simple it will be to completely replenish the trust fund, painlessly. 

With this law in place, the general fund would pay back the trust fund at a rate of more than 600 billion per year.  At that rate, six years would make the trust fund whole again—and we wouldn't have to waste any more national debate time on the financially phony topic of the "trust fund raid."  (Conveniently, if the trust fund ever got out of whack again, we could reinstate the law for as long as necessary to accomplish the two-pronged goals of keeping the general fund out of debt to the trust fund, and getting the doom-peddling politicians to shut up about it and talk about something substantive—such as how to grow the economy.)

Comments are open, of course.  I was in a hurry when I wrote the new law's wording, so let me know if you spot any flaws, and how you'd fix them.  (I would, however, like to keep it short enough to fit on a postcard.)

======
End note:
As Bob has probably detected already, my tongue is firmly planted in my cheek.  Although this truly would balance the intragovernmental funds, the chances are zero that our politicians would consider it.  Maybe this little exercise would turn on a few light bulbs, however.

Comments

[Don Lloyd]

Steve,

I'm not sure that you're dealing with the right phony problem.

Normally, when people talk about the bankruptcy of SS they are talking about 2042 or so, whenever the TF has its last pseudo-bond redeemed and the TF is no longer owed any money by the treasury. In this light, the problem is not owing money, but NOT owing money, if that can be understood. It's not the debt, but the lack of an ongoing debt that drives people crazy.

Regards, Don

[Phil]

Steve,

You are exactly correct in your analysis, if for no other reason than the "FICA tax" is nothing more than another line-item federal tax. That is why your analysis works.

I, however, would go one step further. I would devise a new social security plan to piggy-back a new income tax plan according to the following:

- After six years, when this temporary law expires, you will be given the one-time choice to either continue the conventional method of funding social security or to begin establishing your own private account with these funds instead (what would happen with the employee matching is another discussion). This choice is irrevocable once your decision has been made.

2. Regarding your federal income tax, in 6 years' time, you will have the choice of either staying in the conventional system or moving to a flat tax structure (however this would be structured). This choice is irrevocable once your decision has been made.

After all, if it works for Hong Kong, why can't it work for the United States (that of allowing citizens to choose how they're taxed)?

-Phil

[mark]

The public debt to GDP ratio reached around 125% percent during WWII. No economic meltdown followed. How about we draft everyone over the age 65 into the military to fight the war on terror. They can keep on eye on cruise ships, golf courses, etc. for suspicious activity. Since the baby boomers will be employed for life they will not need Social Security. So let's sell the trust fund bonds back the the Treasury and use the cash to pay down some of the public debt.
Or we could just say we have a fiat money system with floating exchange rates and as long as we grow the economy to provide the goods and services without excessive inflation who cares about meaningless govt accounting.

[Steve]

Good points all. It doesn't really matter how we describe what goes on in the black box, so who cares what we call it?

Unfortunately, there's a two-dimensional answer to that: (1) politicians who understand the truth, but know they can milk fear for votes; and (2) politicians ignorant of the truth who milk fear for votes.

[Kevin]

A brilliant proposal, which I heartily endorse. I believe it was P.J. O'Rourke who somewhere said words to the effect, "Having a government trust fund is precisely the same as NOT having a government trust fund."

However, I'd prefer radical privatization -- making payroll taxes savings! That would solve the problem in your previous post about regressive payroll taxes (now it's savings, not taxes), and immediately flip around the notorious (and poorly-counted) US savings rate from -1% to maybe +13 or 14%.

Then the gov't could just borrow as needed to finance current social security, a burden that will fade in time as we young 'uns retire on our own dime.

Of course, that will never happen.

[marmico]

Huh. Without nitpicking the numbers (OK, let's nitpick to get some accuracy). Based on fiscal 2006, Source A is ~$1600, Source B is ~$250, Source C is ~$850, Program D is ~ $2050 and Program E is ~$650.

So where does the additional $600 come from to retire the intragovernmental debt? Well, uh, well, I guess it comes from increasing Source B to $850. In other words, intragovernmental debt is being forced or accelerated into publically held marketable debt. Renaming revenue sources does not impact the unified budget deficits nor accumulated debt one iota.

[Bob]

At the risk of becoming the resident curmudgeon, I'll be more optimistic this time and guess the probability about the same as winning the Powerball. Hey! It's better than zero!

Related to the "trust" fund and political trust in general I came across this:

"In the case of government, there is good trust and there is bad trust. Good trust is trust in processes that promote public service. Bad trust is trust in the virtue of leaders or the wisdom of voters."

"Trusting the virtues of government leaders is a bad thing. It leads one to cede rights and powers to government that are easily abused.

"Trusting the "will of the people" is also a bad thing. Democratic majorities can support inferior policies, infringement on people's rights, and even genocide."

"I believe that a high-trust society is one in which processes ensure that elites are subject to checks and accountability. It is particularly important for legislators, regulators, and experts to have their authority limited and their accountability assured."

Government that is accountable. Now that's novel idea. Still, I'm going to spend a buck on the Lotto
today.

You can read the whole article at:
http://www.tcsdaily.com/article.aspx?id=070207A

[Steve]

marmico:
Try this (which is what I did last night): Grow revenues at the most recent 12 month rate, grow outlays at the most recent 12 month rate, then see how many years it takes for intragovernmental debt to zero out. The answer is between 5 and 6 years.

After that, you and Bob can slug it out for resident curmudgeon honors.

[marmico]

That is a far cry from your original SSDD malarkey assertion that the intragovernmental debt (ID) can be retired painlessly in 6 years.

ID will continue to increase until the on-budget general fund surplus (GF) is equal to the off-budget social security surplus (SS). As of fiscal 2006 (and it is projected that there will be improvements in both the GF and SS in fiscal 2007) ID was $3.65T, SS was $185B and GF was negative $435B.

A balanced unified budget, and we are not there yet even with your projection, means that Treasury does not need to issue public debt but the ID continues to grow until GF=SS. If GF is > than SS, then the difference will begin to retire ID.

I would concede that that there might be some nibbling down of the ID before the SS surplus disappears as projected 10 years out but it will only be a nibble not a big bite (zero out). To suggest that GF revenues increasing 7% p.a. and GF outlays increasing 3% p.a. will totally retire the ID (which will probably be ~$4.0T in September) in 5 or 6 years is simply willful ignorance or mendacity run amok.

Truth seekers and fact finders are not curmudgeonly. :-)

[Bob]

I cede the honor to marmico.

Actually, I'm optimistic in the long term because the long term trend is always up. It's just that there will be periods in that trend that are not all that positive. I think we will enter such a period and perhaps we already have. No doomsday projections from me, can't see that on the horizon, just that we have some fairly large problems to
work out and we don't seem to be equipped to do so in a reasonable way.

And, it's not just about macroeconomics either. I see several dimensions at play.

Thus, we will get hit upside the head with the proverbial two by four after which we should emerge stronger and better. There may be a prolonged rough patch, though. We have a significant backlog of deferred problems that could hit us all at once.
decisions that

[Steve]

marmico:
I suggest you reread the blue thumbnail; you missed the key point.