At the link below is an article from a fellow at the Brookings Institution with a Ph.D. in economics from MIT, in which he claims there's no immediate problem in Social Security collecting less in tax payments than it pays to beneficiaries. Why? Because the interest income on the trust fund is NOT being counted, and that the nation's private pension system is also normally in this 'cash negative' situation.
Notice that the author correctly describes the Social Security interest earnings as an expense to the U.S. Treasury, thereby cancelling out the interest earnings as a source of income to taxpayers. He then contradicts himself by calling it a 'plain fact' that the interest earnings 'add to Social Security's spending power just as it does in the case of a private pension plan.'
But the author doesn't mention the obvious point that Social Security's interest income is paid by the same people contributing to the plan (U.S. taxpayers), since the so called Social Security 'trust fund' holds government treasuries (as the author also points out), so any Social Security income is yet another expense that must be paid by future taxpayers — that is, the so called income from Social Security's 'investment' must be paid by the plan participants — this is not the case with private pension plans holding real investments that generate income that is in no way paid by the plan participants --
http://www.brookings.edu/research/opinions/2011/11/16-social-security-burtless
...
The investment income of a private pension plan is regarded as a legitimate and uncontroversial way to pay for pension benefits. Curiously, however, the investment income of Social Security is widely believed to be a dubious, almost fictional source of funds. This is mainly because all the investment income of Social Security is earned on U.S. Treasury bonds, which is the only asset held in the Trust Funds. Interest on Treasury bonds is also a source of income for private pension plans, of course. In fact, Treasury securities are generally considered the safest assets in a pension fund’s portfolio. Why, then, are Treasury bonds thought to be such an unreliable source of revenue for Social Security?
The simple explanation is the treatment of Social Security interest earnings in the federal budget accounts. The interest earned on Social Security reserves is an income entry in the Social Security accounts, but it is a spending item in the U.S. Treasury accounts. The positive entry for Social Security is exactly offset by a negative entry in the Treasury accounts. When the two items are summed to calculate the unified federal budget balance (including both Social Security and the Treasury), the interest income essentially disappears. The only Social Security items that remain are the program’s tax collections and its benefit and administration outlays – in other words, the program’s “cash balance.”
The plain fact, however, is that the investment income of Social Security adds to the program’s spending power just as it does in the case of a private pension plan. If the Social Security Trust Funds earn $117 billion in interest income, as they did last year, the Social Security Administration has the authority to spend an additional $117 billion on benefit payments, either this year, next year, or in any future year when the Trust Funds still hold positive reserves.
...
The real 'plain fact' is that it's correct to cancel out the Social Security interest earnings by the expense of that interest to the U.S. Treasury — unless you want to pretend that you can become richer by moving money from your left pocket into your right.
Of course, the interest income does add to the spending power of the Social Security program — but not before it has reduced the spending power of the U.S. Treasury by the same amount.
It's absurd on its face to claim that an interest expense to taxpayers is somehow increasing their spending power.
What is it about the relationship between government securities and taxpayers that makes it so hard for people to understand that the citizens of a given nation do not profit when their government issues debt, since the citizens are responsible for paying back the principle, as well as making the interest payments on that debt? Government debt is always a net loss to taxpayers, since taxpayers must make the interest payments on the debt.
In essence, government debt is equivalent to a home mortgage with a huge principle where all taxpayers share the mortgage payment. There are different kinds of government debt securities — Treasury Bills, Treasury Bonds, etc. — that all work in slightly different ways, but they all share the essential feature of making a promise to a lender (the purchaser of a given security), to pay back the original loan principle, along with a certain amount of interest. A home mortgage works the same way — a lender puts up the bulk of the purchase price of a borrower's home purchase, under the agreement that the borrower will make payments to the lender to return the original loan principle with interest.
A home mortgage is an asset to the lender, and a liability to the borrower. A home mortgage is a net loss to the borrower, because the borrower must pay back more than they borrowed (the interest), in order to incentivize a lender to make the loan.
In the same way, a government security is an asset to the lender, and a liability to the taxpayer (borrower). A government security is a net loss to the taxpayer, because the taxpayer must pay back more than they borrowed (the interest), in order to incentivize a lender to make the loan.
A borrower may purchase an asset with a loan (like a home, or, for taxpayers, a new highway), and that asset may appreciate or provide economic gain beyond the interest cost of borrowing the money, leaving a net gain — but that's a separate issue, that doesn't remove the cost of the interest. And this certainly doesn't apply to Social Security, which is a transfer payment — not an asset purchase. Taking a payroll deduction from a worker, and paying that money to a retiree, is a zero sum game.
Whatever the result of spending borrowed funds, interest payments reduce that result, since interest payments are a cost over and above the amount of money borrowed, that must be paid from a borrower's income, thereby reducing the living standard of the borrower.
Here's another person with a Ph.D. in economics who doesn't understand that all government securities are claims on future tax receipts, which means they are a claim on the future earnings of taxpayers, since, again, debt payments must be made from the taxes collected from the earnings of taxpayers --
http://zfacts.com/node/141
Who’s behind zFacts, oil companies or what? Nope. I’m Steve Stoft and this is my web site. I’m building it with a little help from my friends and volunteers, but so far, it’s mostly my work. I’m a Ph.D. economist and my day job is consulting for public electricity markets—California, PJM, ISO-NE, some private generators, and occasionally the World Bank, DOE and the UK Department of Energy and Climate Change.
...
What are your biases? At heart, I’m a scientist; that means I’m a skeptic. I don’t trust easy answers especially from politicians. I also don’t trust extremists, either left or right. But I don’t think these are biases; they’re based on observation. It’s hard to know your own biases, but I believe openness, information, and clear thinking are helpful—maybe those are my bias. I tend to be hard headed and soft hearted.
Note that even with the impressive credentials described at the previous link, including an advanced degree in economics, this author doesn't seem to understand that a Treasury bond represents money spent by government, that it must pay back from taxes, including interest. The author does also make the comment that the money is spent once borrowed, but he still insists the debt is an asset to taxpayers. A U.S. Treasury bond, or any other government security, in no way represents money that has been saved by the U.S. government, as stated here --
http://zfacts.com/zfacts.com/p/477.html
Is the Trust Fund Fake? It contains $2+ trillion saved for our retirement from our paychecks (FICA) and by our employers. The White House says "There is no Trust Fund, just IOUs." It's just paper. But those papers are Treasury bonds. What gives? Who could steal this much hard earned money?
Here's more confusion from the same author --
http://zfacts.com/zfacts.com/p/336.html
The Whitehouse says: There is no trust fund, just IOUs that I saw firsthand, that future generations will pay. –Bush, April 5, 2005 
• We take your payroll taxes; we pay out the benefits to the current retirees; and with the money left over, we pay -- pay for other programs. And there's nothing left but file cabinets with IOUs. –Bush, April 26, 2005
• I went to West Virginia the other day to look at the filing cabinets, to make sure the IOUs were there — paper. And it's there. ... not a very encouraging sight. –Bush, April 18, 2005
• Now, about $1.7 trillion of that is in the so-called trust fund; that is, money -- that's money that's been collected that's not there as cash at this point. –Cheney, March 22, 2005
Hey, wait a minute!
• What about the Federal Pension Trust Fund? It's just the same—all $800 billion of it. You mean there are no military pensions?!
• What about the $280 billion in Medicare Trusts—are those fake?
• And, the highway trust and all other government trusts? $3.1 trillion all told.
And what's their problem with "paper"? A thousand dollar bill is paper, the check I write, my stock certificate, my government bond—all paper. Did they expect the trust would be made of diamonds?
What of the millions of Americans who own Treasury bonds, all paper? Seven trillion dollars of national debt has been spent on government programs, and there is "nothing left." Has the US of A defrauded the world of $7 trillion?
Oh brother. Notice again the same confusion, and the failure to distinguish between government agencies holding debt that they issued, and private citizens holding that debt.
Of course, there are government trusts, and the U.S. Treasury hasn't defrauded the world of $7 Trillion (at least not yet).
The problem is in pretending a government, any government (or any entity, for that matter), can generate income by paying itself interest.
A private citizen (from any country) can profit from purchasing U.S. treasuries, or the debt of the country in which they live, since in that case the individual acts as the lender, not the borrower, and receives interest payments from the taxes the respective government treasury collects. In other words, when an individual acts as a lender by purchasing a government security, they have a claim on the future tax receipts of other taxpayers to that government — whether they live in the country that issued the debt or not.
But when governments hold their own debt as part of some government program, that debt is a marker for how much that government must collect in future taxes. If you're a citizen of a country whose government holds debt it has issued, that debt is a claim against you — there's no reasonable way citizens under such governments can view such debt as an asset, any more than they can view a mortgage on their home as an asset.
And notice this absurd quote, again, from the same author at zfacts.com --
http://zfacts.com/zfacts.com/p/336.html
...http://zfacts.com/p/318.html
Is the national debt so big we can't pay it back? Compared to the size of our economy it's smaller than in World War II, and we paid it down after that. There is only one danger to social Security, and that's Congress.
...
So supposedly we don't have to worry, because we paid down the debt from the unusual expense that resulted from WW II — an expense that went to ZERO when the war ended — even though our debt is now approaching the same level that occurred during a full scale world war, while nothing comparable is happening, or has happened since. So what big one time expense is supposed to end, to reverse the trend shown in the chart above?
It's also interesting to note that someone who describes himself as 'a scientist and skeptic' who 'doesn't trust extremists', would create a chart that pretends that U.S. Presidents can unilaterally pass budgets without congressional approval (referring to the comment in green in the chart above).
And note that there was a Republican majority in the Senate for six of the eight years that Reagan was in office, but the House had a Democratic majority the entire time Reagan was in office, from 1981 to 1989.
And it was even worse for George H. W. Bush — there was a Democratic majority in both houses of Congress from 1989 to 1993, when George H. W. Bush held office —
https://en.wikipedia.org/wiki/United_States_presidents_and_control_of_congress
So the chart below is a little more objective, in that at least it doesn't pretend that the country would have a dramatically lower level of debt, had a couple of Republican presidents tried to do something different with the budgets that were passed during their tenure --
http://www.truthfulpolitics.com/http:/truthfulpolitics.com/comments/us-federal-debt-by-political-party/
http://www.truthfulpolitics.com/images/us-federal-debt-percentage-gdp-by-president-political-party.jpg
No comments:
Post a Comment