In response to yesterday’s post, Social Security Outlook Worsens. Again, a reader named Patricia comments:
The Social Security Trust Fund holds $2.5 trillion in government bonds. At the current interest rate of 4.5%, it receives around $112 billion in interest income annually.
$112 billion in annual interest – $29 billion in payouts this year = + $83 billion INCREASE in the SS Trust Fund this year. So, no, they will not be tapping the principal this year. Associated Press can’t do arithmetic. What is our country coming to?
I realize you may be ideologically opposed to Social Security, which is fine, but that is no reason to outright lie about it.
My reply: The government that owes Social Security checks to millions of retirees every month is the same government that owes the interest on those bonds.
Try this experiment: loan yourself money out of your savings account at 4.5% and see if you turn a profit. Go ahead – get that sports car you’ve wanted, cruise the Mediterranean for a month, or treat yourself to some cosmetic surgery. If you’re right the interest you’re paying yourself will pay for your indulgences.
SPOILER ALERT!!!
It doesn’t work. If it did, you’d make more money by charging yourself 45% interest or even 450% interest or 4500% interest.
An entity can’t make money by paying itself interest.
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‘An entity can’t make money by paying itself interest.’
Been saying that for years and people look at me like ‘uh, what?’
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And, of course, the supposed trust fund consists mostly of IOUs. So, try paying for stuff by writing yourself IOUs.
.-= SayUncle´s last blog ..How to deal with NFA and non-NFA firearms in a will =-.
I have looked at this. It is my opinion that there is no difference between the IOUs the Trust Fund owns and the Treasury Bonds that China (or you) own in your investment account. Both of these classes of debt are “full faith and credit” debt obligations.
It would not be possible to default on one and not the other. The “solution” (there is none) is that the amount of benefits has to be cut to the point where the IOUs can be stretched out for quite a few years.
To get balanced the Trust fund must either raise payroll taxes by ~$120b per year, Or cut benefits by the same amount (or some combo).
Both of those options stink. But something has to happen along those lines or the train is going to come off the rails, again…
BK
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Everybody is right. The AP is right that tax income into the SS fund will be less than benefit payments going out from it. Patricia is right that tax income + interest income will exceed payments out, so the dollar value of the fund will increase. Les & Uncle are right that overall government debt will increase, as we service the debt both to the SS fund and to all of our other creditors. Bruce is correct that in the (relatively long-term) future, if current trends continue, tax income and interest income will not be sufficient to fund SS benefit payments, and the fund will begin to decrease in value, until eventually the situation will exist that tax income + interest income to the fund will not be sufficient to pay benefits.
That’s a paragraph that pretty much sums it all up. Why the news media and politicians have to make it seem so difficult is beyond me. The only real difficulty are the specifics of projected tax revenues, interest income and benefit payments, the calculation of when the outgo starts to exceed the income, and the calculation of how much additional income would be required to fund benefit payments after that point (on the one hand), or how much benefits will have to be cut (on the other hand).
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Bruce: I don’t think that the Treasury will default on the notes. It’s just that the notes are a red herring.
The IOUs happen to be in the form of Treasury notes. To make good on them, the Treasury will have to issue notes and pay interest on the borrowed money. If the IOUs had been written on a beer-stained cocktail napkin it would be no different. Since we’re in permanent deficit conditions we would have also had to issue Treasury notes and pay interest on the borrowed money.
The issue is that we can’t afford to borrow money forever. We’re facing trillion dollar plus annual deficits as far as the eye can see. At some point government spending will have to be reduced. That includes but is not limited to reductions in spending on Social Security and Medicare/Medicaid entitlements.
.-= Les Jones´s last blog ..“Social Security is earning interest on those sweet, sweet Treasury notes” =-.
When one hears the words “Trust Fund” and “Social Security” in the same context, one need read no further. There is no trust fund. It is a myth.
I can loan myself money from my 401k, and using an interest rate I set myself, pay that loan back from money that is already taxed, then when I turn 65 and withdraw from my 401k I get taxed on the already taxed money that I paid as interest.
Wait, that doesn’t work either….
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