The IOU's in the Social Security Trust Fund

[sad sally]

Here's a quote from a senator in 1989, a warning from another respected senator in 1990, and one from the Clinton administration's 2000 budget worth considering in today's push to "trim" Social Security.

On October 13, 1989, Senator Ernest Hollings of SC stood on the Senate floor and warned, “…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund…in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”

In 1990, Senator Daniel Patrick Moynihan of New York, a member of the Greenspan Commission, and one of the strongest advocates the the 1983 legislation, became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike. Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot. President Bush would have no part of repealing the payroll tax hike. The “read-my-lips-no-new-taxes” president was not about to give up his huge slush fund.

A lot of people speak of those IOUs as if they can be pulled out and exchanged for money to pay benefit checks. They can’t. As the Clinton administration budget of 2000 explained, the securities in the Trust Fund ‘do not consist of real economic assets that can be drawn down in the future to fund benefits. Those special-issue bonds can only be redeemed by raising taxes, cutting spending elsewhere, or borrowing — exactly what the government would have to do if the Trust Fund didn’t exist. The Trust Fund, said the Clinton budget message, ‘does not, by itself, have any impact on the Government’s ability to pay benefits.

http://ampedstatus.org/how-your-social-security-money-was-stolen-where-did-the-2-5-trillion-surplus-go/#oba?du

[ashling]

1. I like this statement

“The government’s $2.5 trillion debt to Social Security is the real reason that so many politicians want to cut benefits. They are trying to find a way to avoid having to repay the looted money…. Given the fact that much of the surplus revenue from the 1983 payroll tax hike ended up in the pockets of the super rich in the form of income tax cuts, I propose a special tax on this group of taxpayers to recoup the missing Social Security money. The government used revenue from the Social Security payroll tax hike to fund tax cuts for the rich because that was where the money was. I think the government should recover the ‘embezzled’ money by taxing the rich.”

[B Calm]

49. We should call it the Wealth Recovery Tax! It would be used

as a recovery mechanism for all the benefits and tax cuts large businesses received at the expense of 99% of the population and for protection services provided by the US government... judgment day!

[Cool Logic]

2. Off-balance-sheet accounting was bad for Enron and it is bad for the fedgov.

Enron used off–balance-sheet entities to artificially inflate profits and make themselves look more financially secure than they actually were. On the other hand, Congress (CBO) used them to mask the severity of the deficit and buy votes.

This "ingenious" way of raising taxes without explicit legislation has allowed the Beltway Bandits the use of an extra $2,6 trillion over the years. The sad part is that most people don't understand basic accounting principles, much less complicated ones. Now they will be forced to ante up the cost of their investment twice.

How about them returns...?

[sad sally]

3. It's scary to think that George Bush was telling us the truth when he

went to the basement of the Treasury, opened a file cabinet and showed us there wasn't anything there but worthless IOU's.

[indurancevile]

20. he wasn't telling the truth, but it's telling that you cite him as a truth-teller.

what he was doing was spouting the same far-right bullshit that they've been pushing since the inception of social security.

[sad sally]

36. The bs about the raid on SS isn't limited to one side.

[indurancevile]

38. let's say the balance has been heavily weighted until quite recently.

and bush is no truth-teller.

[sad sally]

42. I agree with that statement that Bush was a liar most all of the time, but

he did let the truth slip this one time: (p.s. it was unbelievable to me people, whoever they were, re-elected that asshole - he lied the country into an still going on illegal war and should be tried for treason and war crimes, plus the other too many crimes to mention that Democrats let him off on.)

David Walker, Comptroller General of the GAO, stated on January 21, 2005, “There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.” On April 5, 2005, President George W. Bush finally acknowledged the empty trust fund by saying, “There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.”

[Tierra_y_Libertad]

6. Words from the wise about our government.

"The government of my country snubs honest simplicity, but fondles artistic villainy, and I think I might have developed into a very capable pickpocket if I had remained in the public service a year or two."

"Right here in this heart and home and fountain-head of law, this great factory where are forged those rules that create good order and compel virtue and honesty in the other communities of the land, rascality achieves its highest perfection."

Mark Twain

[Cool Logic]

41. Brilliant quote...

Mark Twain remains a national treasure.

[LooseWilly]

4. Just another pension fund to raid... that was the big fad of the '80s

It's ironic how many Reagan Democrats are liable to find benefits being cut ... and to know that they are being cut because Reagan had to fund the Contras, and arms sales to Iran didn't pay for everything.

God forbid the $106K ceiling on social security taxes on income should be lifted though... :+

[exboyfil]

5. If someone had the guts to do it

they should get a bunch of 40 and 50 somethings on television stating how much withholdings were taken from their paychecks over the years, and how those Treasury Bonds represent the sweat of their brow, and they want to be repaid. I would think the graphics could be beautiful - I might turn something like this over to my two darling daughters to do for a school project. I will be the first to be interviewed.

[girl gone mad]

7. Our government can always meet its sovereign debt obligations.

It's not really an issue.

You may oppose how past spending occurred and I think we can all agree that a good deal of money was misspent, but there is no actual fiscal impediment to paying back the bonds in the Trust Fund.

[Creideiki]

8. Checks don't write themselves

Who's going to maintain the data and ensure everything gets sent out correctly?

Who's going to be able to help out Gulf Coast and Atlantic Coast States if a hurricane makes landfall?

Who's going to help the Midwest if there's an outbreak of tornadoes?

Who's going to maintain roads?

Apparently we know the answer. And it doesn't start with "O".

[scarletwoman]

9. There may be "no fiscal impediment", but there's an apparently huge political impediment.

TPTB don't want to pay back what they looted, that's the bottom line.

[The Magistrate]

13. Exactly, Ma'am....

What is going on today in Washington is quite simple. The governing elite, whether in office or in the board-room, wants to welsh on its markers. It is getting to the point where the Treasury bonds held by the Social Security Trust Fund will need to be redeemed in cash. To do so, there will need to be either some reduction in spending on other items, or some increase in taxes. Neither politicians nor those who purchase politicians in wholesale lots want to do either thing. What they do want to do is continue to use the regressive pay-roll tax as a principal source of general revenue, as they have in effect been doing with the amounts collected by this levy in excess of immediate pay-outs for many decades. The F.I.C.A. tax already amounts to over a third of taxes collected against income by the Federal government. Keep the F.I.C.A. rates going up, as rates on income and capital gains are cut further for the wealthy, and as benefits for Social Security and Medicare and Medicaid are reduced, and this proportion will only increase. The aim is to produce a Federal tax system sufficiently regressive as to shock even a medieval cleric.

[some guy]

33. Oh sure.

Take away all the smoke, mirrors, scare tactics, jibberish and lies.

How are you going to scam anyone by be so brazenly honest and straightforward?

:applause:

[scarletwoman]

45. We paid cash money out of our paychecks. They owe us cash money back, period.

Honest to gawd, we can NOT let them get away with this!

[fascisthunter]

28. exactly

[dkf]

11. There are three ways to raise funds to pay sovereign debts

Raise taxes, sell bonds, or print money.

If raising taxes and selling bonds worked in all circumstances, Greece should be okay.

Printing money to pay debts is usually the last resort because it is inflationary.

Which of these are you thinking will support any amount of ever increasing expenses?

[girl gone mad]

12. Greece does not have sovereignty over its currency.

We've just "printed" $13 Trillion for Wall Street. Where's the inflation?

You never explained why it is that you think that sending out SS checks as scheduled would be inflationary. I asked you if you also believe savings accounts are inflationary and you never answered.

You have strong opinions, but the empirical evidence does not support your irrational fear of inflation.

[dkf]

16. I'm sure you know that with the collapse of shadow banking there was quite

A bit of collapse in the money supply. The amount we printed simply reinflated closer to pre-Lehman times.

And yes savings accounts can be inflationary, as they are the basis of the money multiplier effect. Based on the savings and the required banking reserves, money is lent and therefore created.

[The Magistrate]

17. Savings, Ma'am, Are Not Inflationary, Nor a Basis for Inflation

Nor, for that matter, do they sustain much existence in inflationary conditions.

Saving are monies subtracted from the immediate demand for goods and services, and therefore tend to create an under-supply, rather than an oversupply, of money, relative to the supply of goods and services.

[dkf]

18. You need deposits to loan out funds.

At least that is how it's supposed to work. Without deposits how do you get the money multiplier effect?

[girl gone mad]

23. No. Banks need capital, not reserves, to lend.

Bank lending is not reserve constrained. Expanding reserves does not encourage more bank lending. Borrower demand and high risk tolerance are the forces which drive lending.

Increasing bank reserves has no effect on the broader money supply and is not inflationary. You've learned some bad neoclassical economics.

[dkf]

25. The reserve requirement has always been a tool to control the money supply.

Investopedia explains Multiplier Effect
The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.

The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposits.

http://www.investopedia.com/terms/m/multipliereffect.asp

That is one of the means by which China has been trying to constrain inflation. And I've seen fir my own eyes how brokerages have turned money market sweeps into bank deposit sweeps to turn money invested into money deposited.

[girl gone mad]

35. You are confusing two different issues.

First of all, 'Investopedia' is using invalid and outdated neoclassical models.

Economics is a soft science, not a hard science, therefore it's absolutely crucial to keep up with current models and analysis.

Here's a recent (2009) BIS paper which specifically addresses the role of reserves and the supposed multiplier effect.

http://www.bis.org/publ/work292.pdf?noframes=1

Does financing with bank reserves add power to balance sheet policy?

The underlying premise of the first proposition, which posits a close link between reserves expansion and credit creation, is that bank reserves are needed for banks to make loans. Either bank lending is constrained by insufficient access to reserves or more reserves can somehow boost banks’ willingness to lend. An extreme version of this view is the text-book notion of a stable money multiplier: central banks are able, through exogenous variations in the supply of reserves, to exert a direct influence on the amount of loans and deposits in the banking system.30

In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk- return trade-offs, and by the demand for those loans.31 The aggregate availability of bank reserves does not constrain the expansion directly. The reason is simple: as explained in Section I, under scheme 1 – by far the most common – in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost of intermediation and that of loans, but does not constrain credit expansion quantitatively.32 The main exogenous constraint on the expansion of credit is minimum capital requirements.

By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.33

A striking recent illustration of the tenuous link between excess reserves and bank lending is the experience during the Bank of Japan’s “quantitative easing” policy in 2001-2006. Despite significant expansions in excess reserve balances, and the associated increase in base money, during the zero-interest rate policy, lending in the Japanese banking system did not increase robustly (Figure 4).

From the footnote:

30 The money multiplier view of credit creation is still pervasive in standard macroeconomic textbooks including, for example, Walsh (2003), Mishkin (2004), and Abel and Bernanke (2005).

It's unfortunate that an investing site does its readers the disservice of stating long debunked neoclassical theories as if they were economic laws, and equally unfortunate that you would rely on this type of information to promote a wrongheaded political agenda.

As to China, you need to look beyond the headlines. If China were a fiat system and they were increasing reserve requirements to combat inflation, the experiment would fail, as the paper above makes clear. However, the yuan is a pegged currency. By raising reserves China is essentially "buying up" their own currency in an effort to increase its value against the currency basket. This is a move unrelated to raising reserves in a reserve currency fiat system such as the US.

I hope you are getting better investment advice in general than what you allude to here.

[The Magistrate]

24. A Point Comes, Ma'am, When One Runs Out Of Ways To Say, Sorry, You Are Wrong

It is true that under fractional reserve models, banks lend on the basis of their deposits, and do so in a large multiple of the total of those deposits. But as a matter of practical fact, all 'money' which is not cash physically in someones wallet is a bank deposit, at least by the end of a working day. This is as true of money spent in a store to purchase goods as it is of a paycheck deposited in a checking account; there is nothing special about a savings account in this regard. You will find no instance of a high rate of savings being associated with a high rate of inflation. Savings are money that is not expended on present consumption; savings reduce the amount of money that is available for the purchase of goods and services at any particular moment; savings make lighter the money side of the balance weighing money expended against goods and services purchased.

[dkf]

27. Hey lookie here: Bank deposits pose inflation risk for China

This time last year, when the global economy seemed to be in freefall, Wen Jiabao, the Chinese premier, described 2009 as the most “difficult” year China had faced in a decade. This year he says the conditions are the most “complicated”.

Near the top of Mr Wen’s list of challenges is how to exit from the massive monetary stimulus that China engineered last year, which saw credit expand 30 per cent while the economy grew 7 per cent in nominal terms. Mr Wen needs to move soon to prevent inflation from taking off but not so hastily that the economy slumps again.

The situation is complicated for Chinese policymakers by record levels of bank deposits. For the past few weeks, global markets have focused intently on the amount of new credit that Chinese banks are issuing, looking for signals on potential tightening.

http://www.ft.com/intl/cms/s/0/675873c8-261b-11df-aff3-00144feabdc0.html#axzz1Sq9Buxkp

[The Magistrate]

30. That Does Not Mean What You seem To Think It Does, Ma'am

The Chinese government engineered, through its Finance Ministry, a great increase in its money supply. This is the source of any inflationary risk that may exist. The fact that bank loans are running below deposits (by a ratio of about three to four), strongly suggests that either banks are not making full use of the stimulus engineered by the government, or that that stimulus was poorly calculated, and larger than was needed. If the latter is the case, then bank loans must be going into unproductive, speculative enterprises, since there is not sufficient demand for goods and services to support productive investment. This will produce an asset bubble, one form of inflation, which will crash, and wipe out the excess deposits. The bank deposits referenced are not, repeat not savings accounts cobbled together by thrifty Chinese; they are money created in the banks by the Finance Ministry, that has not yet found outlet into economic activity.

http://www.chinadaily.com.cn/bizchina/2009-11/05/content_8916420.htm

[girl gone mad]

39. Combing headlines does not impart true financial knowledge.

China is very limited in its monetary policy options, due to the peg. The Chinese government will make every effort to reassure Chinese citizens and world markets that they are taking steps to combat inflation, despite a lack of viable options.

[The Magistrate]

47. True, Ma'am: The Peg Hangs Them On A Sort Of Private Gold Standard All Their Own

With all the limitations on policy that implies.

[girl gone mad]

48. Right, and when it comes to Chinese banks..

it gets even more complex. Vanilla lending is not their mainstay.

Good to see you around more lately, btw.

[indurancevile]

21. i am learning that you are a font of misinformation.

[scarletwoman]

43. That is a dead-on accurate observation. (nt)

[girl gone mad]

22. Banks lend first, then seek reserves later..

you've got your cause and effect reversed.

As the brilliant Edward Harrison http://www.creditwritedowns.com/2011/05/banks-are-never-reserve-constrained.html">writes:

"Some people still believe in the money multiplier taught in old economic textbooks that fractional reserve banking has banks taking deposits, multiplying them as much as possible, subject to the reserve ratio, and making a much larger amount loans. That is not how it works. In practice, banks don’t wait for the reserves to be available to issue loans. They make loans first and then borrow the reserves in the interbank market. The loans come first, not the reserves.

Banks are never constrained by reserves or reserve ratios. Banks are capital constrained. In our fiat money system, the central bank uses reserves in the system to help the it hit a target interest rate. So, the central bank provides the system with enough reserves to meet any reserve ratio at its target rate. The reserves are about helping set interest rates, not about pyramiding money on a reserve base."

If you understand that government "printing" doesn't lead directly to inflation, why do you insist on bringing up inflation every time you weigh in on the topic of the government paying back its Social Security obligations? Another misstatement you've made is that SS debt is issued when the bond is redeemed. Actually, at the point of redemption there is a transfer of funds in exchange for rescinding the bond, the debt is canceled by the face amount while bank reserves are increased by the same amount.

The bonds held in the Trust Fund represent the savings of the American workers who have paid into the system throughout their working lives. These funds are already accounted for on the national balance sheet as a private sector surplus. Paying out this obligation does not represent new money creation, nor would it generate inflationary pressure.

[The Magistrate]

14. First, Ma'am, Raising Taxes Is A Proper Course

It is, after all, tax reductions that have largely put the government in its present hole, as well as war costs, and the loss of revenue owing to the looting of the economy by grifters running banks and hedge funds.

Nor is inflation necessarily a bad thing. Inflation would force into circulation the cash being hoarded at present by big business, by making it a colstly proposition to sit on cash, rather than to invest in capital assets.

Further, in times of depressed demand, inflation is not easy to contrive. Economies must be running at something near actual capacity for inflation to set in, for there must be more money generated than there are goods and services to absorb it, and until the capacity to produce goods is near its limit, more money simply creates more demand for goods, which calls into action dormant productive capacity.

Do not try and raise situations where the mulcting of an economy, by war reparations or foreign creditors wholly dominant over a country's supply of credit, which a government chooses to resist by deliberately destroying the value of its currency, as cautionary tales of what might happen here if the administration were to engage in proper stimulative policy at present.

[Wilms]

10. ^

[JCMach1]

15. So we can pay back China, Japan and the Big Banks, but not the taxpayers...

Ummmm... fk that

[indurancevile]

19. i am surprised at how many right-wing talking points i am reading on this democratic site.

[fascisthunter]

29. don't be... the President isn't exactly part of the "Left"

so it goes without saying you will see this here, especially now.

[jtown1123]

26. Please this article is very bad. It is basically supporting the idea the gov't

can steal from us. Don't legitimize this. No credible SS advocate takes this guy seriously.

[The Magistrate]

34. Unfortunately, Ma'am, The Gist Of The Article Is Sound Enough

The spin he puts on facts is a bit over the top, but the basic facts are what they are. In order to redeem the bonds held by the Social Security trust fund, the government must either divert funds from other spending, or raise taxes, or borrow on the open market. The bonds held by the Trust Fund cannot be sold on the open market for Treasury obligations. The dedicated revenues earmarked for Social Security have been treated as part of general revenue, under cover of issuing bonds to the Trust Fund. Congress can legally change the rules of the program at any time, there is no question of a contractual obligation to the people who pay in a tax; it is not like paying to a private firm for an annuity on specified terms that legally bind both parties to a voluntary transaction.

[sad sally]

40. Excuse me? I do believe the theft has already happened.

This isn't the first time in American history the government has stolen from us - it started with some of our ancestors, the Indians. Just happens we have a lot more access to information. Pretending that we have a perfect government that has never stolen from us or lied to us may suit some people, not me.

[reformist2]

31. Dems should demand we convert SS trust fund bonds to marketable bonds.

It would be easy enough to do, in theory. But I suspect there will be serious pushback from the Repugs, who never intended for Social Security to be anything other than a cash cow.

[deaniac21]

32. The trust fund is identical to the briefcase at the end of

Dumb and Dumber.

[Generic Other]

37. That doesn't mean they don't owe us the money

Inability to pay due to mismangement doesn't usually satisfy creditors.

[scarletwoman]

44. +1 We, the creditors should NOT be satisfied with anything less than full repayment. (nt)

[krispos42]

46. Can't rec, so I'll kick n/t