BUDGET BABEL: Removing gorilla dust!

THURSDAY, DECEMBER 13, 2012

Part 4—Transactions become more clear: Is Social Security adding to the deficit this year?

It all depends on who you ask within the Babel we describe as our “budget discourse!” In the past few weeks, three major voices have weighed in on that question:
Charles Krauthammer, Washington Post, 11/30/12: “In 2012, Social Security adds $165 billion to the deficit.”

Glenn Kessler, Washington Post, 12/2/12: “In 2012, the cash flow deficit was $58 billion.”

Senator Richard Durbin, 11/27/12: "Social Security has not added one penny to the deficit."
We’re back to the famous tale about the unsighted men and the elephant. In the Babel surrounding Social Security, the program added $165 billion to the deficit in 2012. Or it added $58 billion—or it added nothing at all!

When it comes to Social Security, our Potemkin public discourse has functioned this way for decades. The liberal world has made little attempt to address this vast conceptual chaos.

In the process, the public has come to believe wild and crazy things about this seminal program.

It takes a very unintelligent people to let such a Babel continue. We Americans are such a people—and that very much includes us liberals, who have gotten our brains beaten out on this topic, for decades, as this Babel continues.

That said, who is right? Is Social Security adding to the deficit this year?

Krauthammer says it is—but he has become a reliable purveyor of almost all right-wing lines. But Kessler isn’t a movement conservative. He is instead a high-ranking journalist who writes the Fact-Checker blog at the Post.

On December 2, Kessler critiqued that statement by Durbin in a Fact-Checker report. In our view, he produced a tremendously woolly piece. But he rather clearly seemed to judge that Social Security has in fact started to add to the deficit.

Is that a reasonable judgment? Phrased a bit differently, is it true? Is Social Security adding $58 billion (or perhaps $165 billion) to the deficit this year?

Given the screeching and yelling surrounding this topic, inquiring minds should want to know the answer to such questions.

In our view, Kessler’s piece was terrible work. (Over the years, we have often been fans of his work. We even suggested at one point that he might be “The Man.”) In large part, the confusion found throughout his piece is a tribute to the power of the right-wing frameworks which have long been dumped on this program.

That said, why did Kessler seem to judge that Social Security is adding to the deficit? It all began with this woolly account of the way the program works—a woolly account which includes some data about fiscal year 2013:
KESSLER (12/2/12): Social Security is a pay-as-you-go system, which means that payments collected today are immediately used to pay benefits. Until recently, more payments were collected than were needed for benefits. So Social Security loaned the money to the U.S. government, which used it for other things, which in effect masked the overall size of the federal budget deficit. In exchange, Social Security received interest-bearing Treasury securities, which now total more than $2.7 trillion.

As we have repeatedly explained, the bonds held by Social Security are backed by the full faith and credit of the U.S. government. The bonds are a real asset to Social Security, but—here’s where it gets complicated—they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt.

So what is happening today? The Congressional Budget Office tracks the flow of money in and out of the Social Security fund, and below is a summary of the data for fiscal 2013. To keep things simple, we will include transfers made for the payroll tax holiday as part of “other income.”

Social Security Income (in billions of dollars)
Revenues 675
Interest 110
Other income 70
Total income 854

Outgo
Total outgo 819

This looks like surplus, worth about $36 billion after rounding.
Who but a ranking journalist would write that final sentence? Do those numbers really “look like [a] surplus” of “about $36 billion?”

Rather plainly, that looks like a surplus of about $35 billion—$854 billion in income minus $819 billion in outgo.

Are we picking nits at this point? Two paragraphs later, Kessler uses another number which doesn’t seem to match the figures in this chart. These bumps in the road slowed us down on our first several readings of his piece. Who but a ranking journalist would fail to smooth this pointless confusion?

(Here’s what Kessler could have written to help his readers: “This looks like a surplus, of roughly $35 billion—$854 billion in income versus $819 in outgo.”)

That said, Kessler’s piece is larded with elements which add to the long-standing air of confusion surrounding this Babelist topic. Irrelevant facts are interjected, adding to the air of gloom. Eye-glazing technical terms are used where they aren't needed.

When these terms are replaced by everyday language, the situation may become more clear. At this point, let’s make just one minor adjustment to that second paragraph:
KESSLER’S ACTUAL PARAGRAPH: As we have repeatedly explained, the bonds held by Social Security are backed by the full faith and credit of the U.S. government. The bonds are a real asset to Social Security, but—here’s where it gets complicated—they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt.

KESSLER REWRITTEN: As we have repeatedly explained, the bonds held by Social Security are backed by the full faith and credit of the U.S. government. The bonds are a real asset to Social Security, but—here’s where it gets complicated—they also represent an obligation by the rest of the government. Like any entity that borrows money, the government has to pay the money back.
We have no idea why a writer would talk about “issuing debt” and “making good on obligations” when he could use the common language which shows the real relationship here:

Over the years, the government has borrowed money from Social Security. In future years, just as was planned, that money will be paid back.

Below, we’ll rewrite the first three paragraphs by Kessler. In our view, a great deal of gorilla dust obscures what Kessler is saying in that passage. But essentially, he is saying three things:

(1) The government has borrowed several trillions of dollars from Social Security. (2) Eventually, the money will be paid back. (3) When that money gets repaid, those payments will add to the deficit.

That logic isn’t exactly “wrong.” But it’s a type of logic which gets applied to the Social Security system—and to nobody else. Consider:

The federal government has borrowed money from many sources in the past thirty years—from Chinese banks, for example.

All that money gets paid back! But we rarely say that those Chinese banks are “adding to the deficit” when they accept repayment for the money they loaned us.

That would be a strange thing to say—and no one ever says it.

Needless to say, our balance sheet would look much better if those banks forgave those loans—if they said, for some strange reason, that they don’t want their money back. But no one expects them to say such a thing—and no one writes articles about how much better our balance sheet would be if they’d get off their assess and do that.

Is Senator Durbin’s statement true? Is it true that “Social Security has not added one penny to the deficit?”

It’s obvious why Durbin would say that:

As Kessler notes in needlessly technical language, Social Security has taken in trillions more, in the past thirty years, than it needed to make its annual payments. Each year, the extra money was loaned to the government, as was required by law.

It’s hard to see why someone would think that a program performing that way had somehow been “adding to the deficit.” It’s obvious why Durbin might say what he said.

But Kessler adopts a strange perspective as he judges that Social Security has started adding to the deficit now. In this passage, he pretends to tell us what “Democrats see” when they look at the Social Security trust fund—when they consider the $2.7 trillion Social Security is owed:
KESSLER: As we noted before, this is partly a matter of theology. Democrats look at those trust funds and see actual assets, built up over time, that must be honored.

In their view, the general fund—which is now making payments to Social Security to cover the cash flow shortfall—has benefitted greatly over the past 30 years from annual Social Security trust fund surpluses that were invested in Treasury securities. In other words, Social Security has helped finance deficit spending in the rest of government—rather than contributing to those deficits. So any cash flow problem should be viewed as a deficit in the general fund rather than in Social Security.
Please note: In this passage we quoted earlier, Kessler says, in his own voice, that “the bonds held by Social Security” actually are “a real asset.” In this passage, he seems to say that that’s only what “Democrats see.”

So it goes when major journalists try to explain this seminal program! But how about Kessler’s full explanation of what “Democrats see” when they look at the trust fund? (We note that no Democrat is quoted.)

Is that really what “Democrats see?” Translating his work into everyday English: Do Democrats really think that “the general fund has benefitted greatly over the past 30 years” from the money it borrowed from Social Security?

Has the general fund “benefitted greatly” from the money it borrowed from Social Security? That’s an odd way to put it—and we will guess that no Democrat ever put it that way.

In fact, that sounds more like the way you would describe annual gifts to the government. If a generous benefactor made annual gifts to the government, you might well describe his or her action that way.

But those annual Social Security surpluses were never given to the government. That money was borrowed, with the promise that it would be paid back. (This allowed the federal government to borrow less money elsewhere.) The same types of transactions occurred with those Chinese banks and with a range of other sources from which the government has borrowed.

In all those cases, the government borrowed large sums of money and promised to pay it back. Only in the case of Social Security do clouds of gorilla dust appear to confuse the nature of the transaction.

It’s true: The government’s balance sheets would look better if the government refused to repay the money it borrowed from those Chinese banks.

But no one considers doing that. The only loan which gets treated that way is the money which was borrowed from the Social Security system.

Let’s return to our basic question: Will Social Security “add to the deficit” in future years when its money gets paid back? In one sense, yes—of course!

The government would always be better off if it refused to repay its loans! The deficit gets worse every time the government pays a bill. The deficit also gets worse when the government repays one of its loans.

That said, the government keeps its deal with everyone else. The Chinese banks get their money repaid, as do a wide range of others. The Krauthammers only appear and start yapping when it’s time for the government to keep the deal it made with a bunch of tax-payers back in 1983.

In that one case, the Krauthammers start reciting the misleading lines they’ve been pimping for thirty years. (The money isn't there—we've already spent it! It's the dumbest thing that has ever been said.)

The government made a bunch of deals with big Chinese banks when it borrowed money from them. Similar, the government made a deal with a bunch of tax-payers back in 1983.

Money was borrowed from those Chinese banks. And money was borrowed from a whole bunch of tax-payers, with the promise that it would be repaid when it came their turn to retire.

Krauthammer wants to repay the Chinese banks—and he wants to stiff the American citizens! Journalists spread confusion about, as has been done for years.

Tomorrow: Why do these transactions remain so confusing?

Rewriting all three paragraphs: If we were Kessler’s editor, we would have rewritten that three-paragraph passage found near the top of our post. We are omitting extraneous material and replacing technical language.

Please note: As we make his passage easier to follow, much of its punch disappears:
KESSLER REWRITTEN: Social Security is a pay-as-you-go system, which means that payments collected today are immediately used to pay benefits. Until recently, more money was collected than was needed for annual benefits. So Social Security loaned the extra money to the U.S. government, which was running budget deficits.

In exchange, Social Security received “interest-bearing Treasury securities,” which now total more than $2.7 trillion. That is the amount of money Social Security is owed.

As we have repeatedly explained, the bonds held by Social Security are backed by “the full faith and credit of the U.S. government.” Like any entity that borrows money, the government will have to pay it back!

So what is happening today? The Congressional Budget Office tracks the flow of money in and out of the Social Security fund. Here’s a summary of the data for fiscal 2013.
We’ve removed a lot of gorilla dust. Is the nature of this transaction perhaps a bit more clear?

14 comments:

  1. "That would be a strange thing to say—and no one ever says it."

    Please, just give David_In_Cal a minute -- He'll get around to it!

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  2. Republicans are advocating what they have been advocating for over three decades; remove the tax burden from the wealthy and instead take the money from various groups that individually do not form powerful voting blocks. Who might these groups be that should bear the burden for the wealthy? Veterans, the disabled, senior citizens, the working poor and the middle class have accepted or submitted to unfavorable tax manipulations for decades; therefore they should continue to do so. Once a sucker, always a sucker is the "plan," nothing more and nothing less.

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  3. The government is not a private citizen. It can issue money and it is in fact the source of money. If we want to continue a tight money policy and maintain the legal fiction of SS as a pay as you go system there are simple fixes such as removing the income cap.

    If we would prefer to use a more open (and generous) money policy this solution will do:

    http://my.firedoglake.com/letsgetitdone/2012/12/09/what-does-the-trillion-dollar-coin-do/

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    1. Yes, I think Anonymous has hit the nail on the head. The easiest way to deal with SS deficits, not to mention Medicare deficits and all the other deficits, is to simply print large amounts of money. This is what I expect our politicians to do.

      History tells us that printing money creates a boom for a while then leads to economic disaster. E.g., a book everyone should read is Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

      Read the chapter on John Law.

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    2. Shut up, you thoroughly discredited douchebag.

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  4. "Will Social Security 'add to the deficit' in future years when its money gets paid back? In one sense, yes—of course!"

    No, that's not right. The government takes the money it had borrowed from the SS Trust Fund out of the general fund to pay back the loan, at the same time it extinguishes a debt in an exactly equal to Social Security. The act of paying back a loan, any loan, does not in any respect add to the deficit. It remains exactly the same.

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    1. Sentence correction: "When the government takes the money it had borrowed from the SS Trust Fund out of the general fund to pay back the loan, at the same time it extinguishes a debt in an exactly equal amount to Social Security."

      Think of it this way: the government borrowed an asset, and now it is giving it back. To say that adds to the deficit in any sense is really absurd, because the money in the hands of the government -- an asset of the general fund -- was offset penny-to-penny by the debt to Social Security. The effect on the deficit of giving up the asset and extinguishing the debt has zero impact on the deficit.

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    2. The primary point is where does the money come from to pay back the Trust Fund (plus interest)? Higher taxes, other government cuts? Yes, paying back the Trust Fund reduces the outstanding debt. It's where they get that money that's the key.

      MGO

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    3. Let's say that our government does nothing to correct the impending shortfall in benefits when the trust fund runs out in say, 2035.

      SS must then cut benefits, by say, 25%. Everything is fine. SS survives.

      But will politicians face their constituents and tell them that's all their going to get, or will they maintain promised payments by taking money out of the general fund?

      Republicans say they will use tax revenues THEN, so SS will add to the deficit, therefore SS DOES add to the deficit.

      Democrats say politicians will fix the problem before 2035, therefore SS will still be pay-as-you-go after the trust fund expires, so no, SS does NOT add to the deficit.

      Both sides are exhibiting wishful thinking because politicians today won't cut benefits NOW, and can't agree on a fix NOW.

      Meanwhile, we sit around waiting for Mighty Mouse to come and save the day.

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    4. I think you're missing the point gravymeister. The Federal government already owes the Trust Fund the excess FICA taxes that were invested into Treasury bonds. While Social Security needs some minor adjusting even when including those Treasury Bonds that is relatively minor. The SS doomsday talk is about finding the money to redeem those Treasury bonds or to find some way to renege on them. The FICS withholding was increased in 1983 to build up a reserve for the Boomer retirements. Some in Congress think that money has already been spent on other things.

      MGO

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  5. People in Congress who think the money has been "spent" are simply wrong. Social Security didn't spend it, it lent it, which is completely different from spending it, and received an asset of equal value in exchange. The money, therefore, is still in the Trust Fund. Once again, the deficit includes money owed by the general fund to the Trust Fund. This isn't just "accounting tricks," it is an obligation as a matter of law just as the obligation to pay you when you redeem your Treasury bond exists only because it is established by law. Once again, when the general fund pays money back to the Trust Fund, while it has less money in its fund it has at the same time extinguished the equivalent in debt. It's financial position is exactly the same as it was. When you make a payment on your mortgage, the amount going to paying down the loan does not change your net worth at all.

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    1. It does, however, reduce the amount of money you have available to spend on things. And if you were in the red to begin with, paying that mortgage payment means you have to borrow even more money.

      The issue is not the nation's "net worth." It's where does the money come from to extinguish that debt, to use your term. The government can just print more money, reducing everyone's buying power, instead of going to the Chinese to borrow more. Or it can raise taxes, using today's dollars to pay for yesterday's spending of the money borrowed from SS. Neither option is palatable to those with great wealth, because those options reduce their net worth. It's far preferable to them to welsh on the debt, forcing SS to cut benefits. That's what Krauthammer is proposing. Technically, the money has already been spent and the SS Trust Fund is a bunch of IOUs, like all securities are. But they're only "worthless" IOUs if people like Krauthammer get their way and cause them to be so. That's the part that doesn't get stated often or clearly enough.

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  6. It’s true: The government’s balance sheets would look better if the government refused to repay the money it borrowed from those Chinese banks.

    But no one considers doing that. The only loan which gets treated that way is the money which was borrowed from the Social Security system.


    The Social Security system doesn't have nuclear weapons and a huge pool of military-age manpower to enforce their claims. Also, I may be wrong but the 2.7 trillion owed to SS is only a fraction of the 14 trillion total "national debt." If the Chinese hold even half of that, they hold 2-3 times as much of our debt as SS does.

    It's a lot easier to stiff the American taxpayer than the Chinese government. Heck, half of us want to stiff ourselves!

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