More On The Trust Fund Myth

Megan McArdle has an excellent post on why the Social Security Trust Fund isn’t really a trust fund:

It’s time for another argument with liberal defenders of social security who argue that the social security trust fund is too real, because it’s got government bonds that have the Treasury secretary’s signature right on them! Any attempt to say that it isn’t real is a scurrilous attack on the sacred person of our government, denying that Our Fine American Politicians can be relied upon to pay their IOUs.

This is reductionism at it’s worst. In case anyone thought it was in any doubt, I do, in fact, believe that there are bonds, and that the government will note the interest rates on those bonds in its account books. But the failure to understand that there is a difference between IOUs written to yourself, and IOUs written to someone else, strikes me as willfully obtuse. Upon even a moment’s reflection, it’s obvious that the trust fund does not exist in the way that its proponents are claiming — as a guarantee of benefits — because the bonds are not obligations to Social Security beneficiaries. They are obligations to the Social Security Administration. And the Social Security administration has no legal obligation to turn the accounting entry representing interest payments from the federal government into cash. According to the supreme court, Americans have no property right in their social security benefits, as they would as creditors of an underfunded private sector pension plan.

She then offers an example of why the Social Security “trust fund” wouldn’t even remotely pass muster if it were a private-sector system:

Moreover, liberals understand this difference very well. If some conservative jackass proposed a plan to, say, let companies top up their underfunded pension plans by stuffing them with their own bonds, liberals would be justifiably outraged, because that’s not funding the pension plan; it’s promising to fund it at some later date, provided there’s money around to do so. When it’s companies doing these sorts of things, liberals understand very well why such “trust funds” aren’t, in any meaningful sense, real.

Of course, the US government is less likely to fold than a company is. On the other hand, if a company issued bonds like those, it would at least have to record the size of the liability on the financial statements it issues to its shareholders. Why we don’t demand that sort of accounting from our government, I’ll never know.

The Social Security Trust Fund isn’t like a T-Bill or another federal bond. In the latter case, Uncle Sam is making a promise to pay you a set amount. The Social Security Trust Fund doesn’t work that way. As McArdle points out, the bonds in the Trust Fund aren’t paid to recipients, they can only be redeemed by the Social Security Administration.. Flemming v. Nestor already extablished that there is absolutely no legal guarantee to Social Security benefits. Social Security could be legislated out of existence, and the money in the “trust fund” would simply be “paid back”by the SSA to the federal government (ie the obligations inherent in them would basically be wiped off the books). It’s a convenient legal fiction, and it’s essentially meaningless in real financial terms.

Social Security might as well be a religion to the left, they’re as dogmatic about it as any Jesuit. They’re even willing to simply make up figures to denigrate private accounts.

The facts of the case remain. Social Security will start going into the hole in 2017, and by that time it will be far too late to reform the system without painful cuts. The only way to put Social Security in a real “lockbox” is to ensure that the government cannot touch the assets designated for beneficiaries. The only way to do that is to get it out of the hands of government. Hoping that the mythical Social Security Trust Fund will save us from the impending fiscal crisis is about like hoping Superman will swoop to the rescue – it simply isn’t going to happen.

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