And About that "Lock Box" and Social Security.........

The video above is brought to you courtesy of Dr. Donald Boudreaux, Economics Department, George Mason University. An excellent two minute lesson regarding the wonderful world of social insurance and economic security. (1)

Yes, social insurance and economic security, that fun filled world of impossible promises brought to you by politicos past and present. Yes, those propositions based on "the way things ought to be" which are magic pixie dust carried in the pockets of forest nymphs in the economic pretend world of politicos.

Ah, Boudreaux is merely exaggerating to make a point. There has to be a lock box! There has to be value in that lock box! Where is that lock box and lets go inspect it!

OK! Off to see the wizard of lock boxes!

Social Security: There is No Trust Fund, Only IOU's - Don Luskin, Capitalism Magazine, April, 11, 2005

On Tuesday, President Bush had the most bizarre cabinet meeting any president is ever going to have. It was a meeting with an actual cabinet. A filing cabinet. A filing cabinet in Parkersburg, W. Va., to be precise.

Strange? Yes. But then again this is a very remarkable filing cabinet. By one way of looking at things, it contains $1.7 trillion dollars. But by another, it contains nothing at all.

Of course I'm taking about the filing cabinet in the offices of the Bureau of the Public Debt that holds the assets of the Social Security Trust Fund.

After the meeting, President Bush declared, "a lot of people believe that the Social Security trust is -- the government takes a person's money, invests it, and then pays it back to them upon retirement... It doesn't work that way. There is no 'trust fund,' just IOUs that I saw firsthand..."

In other words, there's nothing there.

The president's opponents were quick to look at it another way. Democratic congressional leaders Harry Reid and Nancy Pelosi said the same day, "It is simply wrong to suggest that the Social Security Trust Fund does not exist, or that the securities held by the Trust Fund are merely pieces of paper. For a president to even suggest that the federal government might, for the first time, default on a security backed by the full faith and credit of the United States unnecessarily misleads American workers..."

Who's right? Is the president right, that the Treasury bonds held by the trust fund are "just IOUs"? Or are the Democrats right, that those bonds are sacred obligations of the United States, just like any other Treasury bond?

Is the president raising valid concerns about the way Social Security is financed? Or, as the Democrats charge, is he threatening to default on the nation's debt?

Both the president and the Democrats are right in their own ways. But that means, necessarily, that both are wrong. I told you it was a remarkable filing cabinet.

Here's the truth about it.

The Democrats are correct that the Trust Fund's cabinet holds actual Treasury bonds, and those bonds are every bit as real as the Treasury bonds you probably have in your IRA or brokerage account. Those bonds -- the Trust Fund's and yours -- are backed by the full faith and credit of the United States, and a default on any of them would be an unprecedented and unthinkable catastrophe for our country.

And nothing whatsoever that President Bush has said should be construed as a threat to default on those bonds. So don't worry -- at least not about that. Period.

There's one very important thing, though, that makes the Trust Fund's Treasury bonds different from yours. You aren't an agency of the US government, but the Trust Fund is. That means when you invest in Treasury bonds, they represent a debt owed by one party to another -- in this case, the government to you. But when the government itself invests in Treasury bonds, those bonds represent a debt owed by one party to itself.

You can't owe money to yourself. What would it even mean to borrow 20 bucks from yourself today and promise to pay it back to yourself on Tuesday?

Here's another way to think about the problem. Social Security is a commitment by the government to make payments to people in the future. The Trust Fund exists, supposedly, to secure that commitment by setting money aside today -- so that in the future, the money doesn't have to come from taxes, borrowing, or spending cuts. Fine -- in principle. But when that money is invested in Treasury bonds, those bonds themselves will have to redeemed in the future, and the money to do that will have to come from taxes, borrowing, or spending cuts.

Of course that makes the Trust Fund's Treasury bonds no different from yours or mine -- they all have to be repaid someday from taxes, borrowing or spending cuts. But my point is that when the Trust Fund holds them, it doesn't accomplish anything. Whether the Trust Fund holds Treasury bonds or nothing at all -- or for that matter, whether or not the Trust Fund exists -- to pay benefits in the future, the government is going to have to tax, borrow or cut spending.

So in that sense, President Bush is absolutely correct when he says "There is no 'trust fund.'"

That makes the Democrats wrong when they fret that Bush's statement amounts to threatening to default on government debt. Think again about the 20 bucks you lent yourself. Suppose you refused to repay yourself when Tuesday rolled around -- is that a default? Would you sue yourself to recover the money you owed yourself?

In other words, since the existence of those Treasury bonds doesn't really affect the government's wherewithal to pay benefits one way or the other, then it would make no difference whatsoever if the Trust Fund simply surrendered them, or for that matter tore them up and threw them in the ocean.

Given Dr. Boudreaux video depiction and Mr. Luskin's analysis, we must give equal time to the forest nymphs and their pockets of pixie dust. Who better to reply then Jacob Lew director of the White House's Office of Management and Budget!

"When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due." (3)

Ah ha! We write I.O.U's to ourselves! Suppose we could call these I.O.U'S written to ourselves a real "Lew Lew". Ops! Spell check corrects it to: a real "Lou Lou".

Notes:

(1)http://www.xtranormal.com/watch/11226537/?listid=18148621

(2) http://www.capitalismmagazine.com/politics/social-security/4190-social-security-there-is-no-trust-fund-only-iou-s.html?print

(3)http://www.usatoday.com/news/opinion/editorials/2011-02-22-editorial22_ST1_N.htm?loc=interstitialskip