Tuesday, January 15, 2013

Wherein Tim Geithner Admits the Social Security Fund Does Not Have Any Money Saved Up and the Treasury Will Have to Borrow to Make Payments

Many hold the mistaken belief that the Social Security Trust Fund has a pile of money saved up that will protect the fund for many years.  The Social Security Trustees help promote this myth. In their most recent report, they write:
After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033[...]
The lapdog MSM and regime economists eat up this nonsense as though it is caviar. But, what is being discussed here are book entries with the Treasury, not cash flow. Last year, the Social Security went cash flow negative on an operating basis, which means they took in less money than they paid out. The difference was made up by SS liquidating some of their Treasury securities. Does this mean the Treasury has this money tucked away, on call, for when SS needs it?  No. Of the $2.5 trillion on SS books that are held in the form of Treasury securities, the Treasury has exactly zero dollars and zero cents held in the form of cash, or any other manner, to back up the securities. Got that? ZERO DOLLARS, ZERO CENTS.

This is very scary. It means that in addition to expanding the Treasury debt for financing current deficits, the Treasury, in the future, will have to finance SS shortfalls by borrowing.

The SS Trustee report has a chart demonstrating how this demand on the Treasury will grow:

SS explains this chart this way (my highlight):
Chart D shows the excess of scheduled outgo over dedicated tax and premium income for the OASDI, HI, and SMI trust funds expressed as percentages of GDP. Each of these trust funds’ operations will exert rapidly rising pressure on the Federal budget in future years. General revenues pay for roughly 75 percent of all SMI costs. From now through 2024, interest earnings and asset redemptions, financed from general revenues, will cover the shortfall of HI tax and premium revenues relative to expenditures. In addition, general revenues must cover similar payments as a result of growing OASDI deficits through 2033.
Keep in mind, "the interest earnings and asset redemptions" the SS is referring to are money payments it expects to receive from the Treasury, money the Treasury does not have. Last Friday, Treasury Secretary Geithner spilled the beans on this in his letter to House Speaker Boehner, when he wrote to the Speaker about the debt ceiling. He included, in plain as day language, the fact that the Treasury doesn't have the money and will need to borrow the money to make payments to Social Security so that SS can make payments to recipients:
The U.S. government makes approximately 80 million separate payments per month. These include payments for Social Security; Supplemental Security Income; Medicare; Medicaid; national security needs, including military salaries, military retirement, veterans' benefits, and defense contractors; income tax refunds; federal employee salaries and retirement; law enforcement and operation of the justice system; unemployment insurance; disaster relief; goods and services sold to the government under contracts with small and large businesses; and many others. If Congress does not act to extend borrowing authority, all of these payments would be at risk. This would impose severe economic hardship on millions of individuals and businesses across the country.
Bottom line: Don't think for a minute that the Treasury or SS has money tucked away to meet all SS obligations. There is no money tucked away. As Treasury Secretary Geithner spells out, the Treasury is dependent on its borrowing ability to make payments. While the current borrowing problem is a legislative debt ceiling problem, a ceiling, that, after much drama, I expect will be raised, the long term problems, will be problems resulting from market forces, that Congressional windbags won't be able to reverse. Those market forces will develop as the Treasury borrows more and more, and ultimately puts upward pressure on interest rates, which will result in the deficit ballooning. The upward pressure on interest rates will then likely result in the Fed buying bonds to ease the pressure, which will result in price inflation and ultimately even higher interest rates. It's a tiger by the tail situation that won't end pretty. Among those that will ultimately be hurt will be Social Security recipients, who will see their payments cut and price inflation eating away at the smaller payments they do receive, as government will manipulate the price inflation data, at that time, so that payments won't be fully adjusted for the price inflation that will roar. Not pretty, not pretty, at all.


  1. Repeat this over and over:

    "Fleming vs, Nestor, Helvering vs. Davis".

    Repeat until exhausted, then go look these 2 cases up on the Int'Net.

    Have a beer, then repeat again...and again...and again...


  2. Ok...OK...

    "FLEMMING vs. Nestor".

    Apologies for typo.