February 22, 2011

Froma Harrop Says Don't Believe that Spending More on Social Security Than it Takes In Drives Up Deficits. And Then it Gets Worse.

Carroll Andrew Morse

Undeterred by fiscal or economic realities, Projo op-ed columnist Froma Harrop continues to argue that there is an actual "trust fund" backing the Social Security system. Here is the analogy made in her Sunday column, where she criticizes Ohio Congressman Rob Portman for expressing concern that Social Security now pays out more money than it takes in...

Portman’s assertions are like parents saying that when they tap their college savings account to pay tuition that they couldn’t afford with that year’s earnings, they are spending money they don’t have.
What this rationale fails to acknowledge is that, in the case of social security, long before it comes time to pay out the benefits that the program was created to pay, the trust fund has already been spent and therefore cannot be spent again.

The reality is painfully obvious if you walk the college-fund analogy all the way through. Begin with a set of parents who decide that 15% of every paycheck should be dedicated to the college fund -- but who don't act that way. As each paycheck arrives, the parents spend everything that comes in on non-college related expenses while placing an IOU in a secure location to remind themselves to pay back the 15%. Maybe the immediate spending is necessary, maybe the spending is frivolous, it doesn't matter from a fiscal perspective. The point is that the money is spent.

Now, years after the parents began writing themselves IOUs, the time comes to start making payments to a college. The parents look over the history of their pay stubs and their IOUs and say "the records in the trust fund say we have 15% of our lifetime income to spend on college". But can they hand the box of IOUs they wrote to themselves to a college bursar? No, they have to go get real money from someplace to pay back the IOUs they wrote themselves. And if they hadn't written themselves the IOUs, or created their mythical "trust fund", there would be no difference. IOUs written to yourself don't mean anything, whether you are an individual or a government or anything in between.

When the government has to go to get money to pay benefits that it has not saved real assets for, there are only a few choices; they have to raise taxes, cut programs, or borrow the money. The exact same actions would have to be taken in the absence of the "trust fund" accounting gimmick.

Harrop goes on to punctuate her flawed description of social security with a whole new level of fiscal insanity, arguing that Rep. Portman's making accurate statements about the nature of the mythical "trust fund" equates to a desire to "stiff" (Harrop's term) the taxpayers. Apparently, in the worldview of Froma Harrop, politicians who inform the public how the finances of Social Security actually work should be looked at with suspicion, while politicians who promise benefits without concern about whether the government has the resources to pay them are the ones to be trusted.

If nothing else, understanding this thought-process does provide some insight into the Projo editorial board's decision to support a candidate like David Cicilline for Congress, despite the fact that during his tenure of Mayor of Providence, he was famously untroubled by such concerns as government spending more than it was taking in, or whether government accounts actually contained the money that they were supposed to. If Sunday's column is any guide, these were amongst his positive quantities in the eyes of some! (Of course, the real lesson to take from all of this, as always, is that progressives and public finance don't mix).

Finally, the analogy between a college fund and social security raises an ethical question: Is it honest for parents who are not saving real money into a college fund, to tell their children that they are, while the real plan to pay for college depends on getting money from some source in the future? I wonder, is there a specific name for this kind of scheme?

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Here's the AP last month...

(AP) Social Security's finances are getting worse as the economy struggles to recover and millions of baby boomers stand at the brink of retirement.

New congressional projections show Social Security running deficits every year until its trust funds are eventually drained in about 2037...

For much of the past 30 years, Social Security has run big surpluses, which the government has borrowed to spend on other programs. Now that Social Security is running deficits, the federal government will have to find money elsewhere to help pay for retirement, disability and survivor benefits...

Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. Benefits will be safe until that money runs out. That is projected to happen in 2037 - unless Congress acts in the meantime. At that point, Social Security would collect enough in payroll taxes to pay out about 78 percent of benefits, according to the Social Security Administration.

The $2.5 trillion surplus, however, has been borrowed over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment with interest.

Social Security supporters are adamant that the program will be repaid, just as the U.S. government repays others who invest in U.S. Treasury bonds.

So let's get this straight the trust fund is as safe as U.S. Treasury bonds (let's leave aside how dishonest it was to use that money to "balance" budgets in the first place - who did that I wonder?).

You seem to be arguing that a parent who saves for their children's college by purchasing U.S. Treasury bonds hasn't actually saved any money. Yeah, OK.

Posted by: Russ at February 22, 2011 4:12 PM


Ah-ha. Everything's OK then. It's a good thing the Treasury Department has $2.5 trillion sitting in a vault somewhere... oh, wait.

Posted by: Justin Katz at February 22, 2011 5:12 PM

So buy gold or stuff your mattresses with cash. But you guys don't seriously think any corporation or government on earth works that way, do you?

Robert Reich sums this one up well enough...

But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan's Social Security commission was supposed to have fixed the system for good - by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they're 67.)

Greenspan's commission must have failed to predict something. But what?...


Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission's fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income.

It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

Presto. Social Security's long-term (beyond 26 years from now) problem would be solved.

Posted by: Russ at February 22, 2011 5:29 PM

btw, people like me would take you Teapublicans more seriously if you showed even a smidge of budgetary concern with regard to the trillions we've spent on the invasions and occupations of Iraq and Afganistan.

The true cost of the Iraq war: $3 trillion and beyond

Posted by: Russ at February 22, 2011 5:38 PM

I'm pretty sure that individuals or corporations that tried to double count their assets by loaning them to themselves would get into legal trouble, i.e. we just loaned ourselves $10,000 out of a personal or a corporate account, so we now have $20,000: the $10,000 we loaned out, plus the $10,000 we promised to pay ourselves back -- but apparently there are those who have no objections to government engaging in this kind of fictitious accounting.

It doesn't matter whether the underlying asset is cash, gold, baseball cards, etc. You can't create resources by loaning yourself money. And that's true for Democrats, Republicans, Tea Partiers, Council Communists, Iraq and Afghanistan War supporters, and pacifists alike.

Posted by: Andrew at February 22, 2011 6:39 PM

These stupid liberals kill me. Yeah, Russ & Froma, I gave my IRA money to some drug addict to hold and it went up his nose. But, when I go to retire, I just know he'll give it back to me.
You are whacked!

Posted by: Mike Cappelli at February 22, 2011 8:02 PM

Don't these op-ed's get reviewed before they are published? The flaws in the economic reasoning are pretty glaring here.

Posted by: Dan at February 22, 2011 8:06 PM

"I wonder, is there a specific name for this kind of scheme?"

Oo! Oo! Mr. Cotter!

Posted by: Monique at February 22, 2011 8:11 PM

In 1970, the rock group "The Who" released the antiwar anthem "Won't Get Fooled Again" To most in my generation, the song conveyed a sense of betrayal by the nation's leaders, who had led our country into a costly, foolish and unnecessary war in Vietnam. Its lyrics evoked a feeling that we must never again stand by quietly while those ignorant of and casual about war lead us into another one and then mis-manage the conduct of it. Never again, we thought, would our military's senior leaders remain silent as American troops were marched off to an ill-considered engagement. It's 40 years later, and the judgment is in:"The Who" had it wrong. We have been fooled again

Thanks to the draft-dodging, right-wing-nut... cowards

Posted by: sammy at February 22, 2011 8:57 PM

Fool me once shame on you; fool me twice, shame on me...you stupid liberals will never get it.

Posted by: Mike Cappelli at February 22, 2011 10:27 PM

It was Lyndon Johnson who devised the scheme of using SocSec money to balance the federal budget.

But even in Roosevelt's time many people realized that it was a Ponzi scheme.

Posted by: BobN at February 22, 2011 10:31 PM

sammy-you lying ass-it was "great Society'Johnson who fabricated the Gulf of Tonkin incident to ramp up the Vietnam War-I recall sending in my mail ballot for Nixon in November 1968 right after my 22nd birthday from Vietnam and the war was at it's height,so stop trying to mislead readers here about who got us into that jackpot-Kennedy and Johnson-Democrats both.Nixon was the Taveras of the situation-handed a bag of horrors.

Posted by: joe bernstein at February 23, 2011 5:47 AM

I don't see where Sammy blamed Vietnam on any one person or party. He's saying that it was Bush who "got fooled again". Is that not true? Or is his original premise wrong, and you feel the US didn't get fooled by going to Vietnam?

I fully support and supported Bush going into Afghanistan. However, I think most can agree that the reasoning for going into Iraq was flawed.

Posted by: Patrick at February 23, 2011 6:34 AM
I'm pretty sure that individuals or corporations that tried to double count their assets by loaning them to themselves would get into legal trouble...

I see, so companies never buy their own stock and no government agency can invest in T-bills? Interesting take. And I hate to tell you, but many individuals borrow off their own 401k (I guess some don't because they expect the police to show up).

This logic gets more convoluted with each turn. Please tell us more!

Posted by: Russ at February 23, 2011 9:01 AM

Patrick-we did get lured into Vietnam under some bad circumstances-starting with the French leaning on us to make up for them staying there as colonialists to long.
Vietnam was essentially a civil between a unified North and a very disunified South.
Too long to go into here.
Sammy was ragging on "right wing nuts"as the cause of all misfortune and he's full of sh*t on that.
Iraq was an absolute mistake,and cost us a possible resolution of the situation in Afghanistan by drawing off so much in resources and incidentally putting the US economy in the crapper(at least to some significant degree)and now Afghanistan looks to be too far gone for us to saty there.
Interestingly,we never lost a battle or campaign in Vietnam-just the war.The South was split between Catholics and Buddhists and also had powerful local political movements which were at odds with every other movement-it was a real f**kin' mess.
The "domino theory"didn't prove true because as an example Thailand was never in serious danger.
In any event,the people who go deal with these wars should never be blamed for the results-they deserve respect for giving the country a blank check on their lives.
Buffy St.Marie may be a good singer,but she was wrong in "Universal Soldier".
Not Jane Fonda wrong (as in traitor),but her premise that individual soldiers could do anything to stop wars they are sent to.
If it were up to me,we'd withdraw most of our ground forces from around the world and depend on naval,air,and special ops to deal with specific events in the campaign against international terrorism.
How do we manage to "win"in a place like Helmond Province where most of the people have no clue about 9/11?
Afghanistan ahs always been such a Babel like place that even Alexander the Great despaired of founding cities there,as he did everywhere else he conquered.He said "f*ck it" and headed home.
I studied Alexander in my younger days-fascinating historical fighure.

Posted by: joe bernstein at February 23, 2011 12:24 PM

I'd be curious to know how you think T-bills equal "double count [of] assets." Last I checked, they're still considered part of the national debt.

The United States public debt is a frequently reported measure of the obligations of the United States federal government and is presented by the United States Treasury in two components and one total:

Debt Held by the Public (net public debt), representing U.S. Treasury securities held by institutions or individuals outside the United States Government;

Intragovernmental Holdings, representing U.S. Treasury securities held in accounts which are administered by the United States Government, such as the OASI Trust fund administered by the Social Security Administration; and

Total Public Debt Outstanding (gross public debt), which is the sum of the above components.[1]

Posted by: Russ at February 23, 2011 12:29 PM

From Accounting principles:

Treasury stock is the term that is used to describe shares of a company's own stock that it has reacquired..Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted from stockholders' equity..The effect of treasury stock is very simple -- cash goes down and so does total equity by the same amount. This result occurs no matter what the original issue price was for the stock. Accounting rules do not recognize gains or losses when a company issues its own stock, nor do they recognize gains and losses when a company reacquires its own stock.

Russ - I think Andrew is right about double counting. You can borrow (tax issues aside) from your 401K; but your net worth has not changed ( + on kind of asset and equally - on another). If you leave an IOU and count that as an "asset", you have an offseting amount as a liability. You still don't have anymore net worth than you had prior to the transaction - just like the corporation that buys or issues its own stock.

The government can of course "borrow" from itself; it's merely (legislated) accounting and budgetary rules to put revenue and spending into certain categories. As taxpayers, we might appreciate that "gas tax revenues" are used only for "transportation related expenses." You can debate the merits of the social security "trust" fund as a self-contained pot where only "FICA taxes go in" and only SS related spending "goes out." So you raise or lower FICA taxes each year (or the income level) to pay as you go. Alternatively, you may act as if it's all "one big pot of money in and money out" and we elect representatives to determine how to raise it and where to prioritize how to spend it.

However, I do fail to understand how you don't get the difference between an entity loaning to itself vice an external party.

Posted by: RJ at February 23, 2011 12:30 PM
"I wonder, is there a specific name for this kind of scheme?"

Oo! Oo! Mr. Cotter!

Well, those of us with actual business experience in this area call it "i-n-s-u-r-a-n-c-e" (I know Monique's background is in quantum physics, yes?).

"In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment."

Posted by: Russ at February 23, 2011 12:36 PM

"I do fail to understand how you don't get the difference between an entity loaning to itself vice an external party."

I get it (for instance, see "intracorporate transfers"). What I don't get is what that has to do with the price of tea in China. It's a debt or an investment depending on which side of the deal you look at. As an investment, what large retirement plan doesn't have T-bills in the mix?

Let me get this straight, your problem with SSI is that it is a creditor for other government spending like say defense spending which doesn't rely at all on government issued debt, right?

Granted Reagan was totally underhanded in claiming fiscal responsibility while raiding SSI funds, so we're in agreement about that I suppose. Was that the point of all this?

Posted by: Russ at February 23, 2011 12:51 PM

Russ - I actually agree with this line of reasoning, although you are moving away from the central topic that Froma Harrop wrote a column with a flawed analogy that leads to dubious assertions and conclusions.

I wish our elected leaders would resoundingly make the point you do. Social Security is forced insurance to cover only those who make bad choices or, for a variety of other reasons, fail to have some *minimal* stream of resources in case they reach an advanced age where the value of their labor in the market can not meet this minimal requirement. It is not a *retirement* plan (or a "leg" of one's retirment stool). It was designed to cover mainly widows in an era where societal rules severely disadvantaged women economically.

However, that concept is not how successive administrations and congresses have touted the program nor how the public writ large has come to think of social security. I pay in and I get to collect, regardless of my economic situation. If the program was true to its original intent, its solvency would not be an issue and the debates would merely focus on where to draw the "coverage" line. However, as it stands now, Monique is right, except the schemer has the power by force or seignorage to keep it going.

In the same spirit, I wish the debate over public sector pensions would follow the same thinking. Although not quite the same "insurance", pensions are a form of risk management where workers provide (in theory) a "public" good generally at lower income (whether that's true anymore is also debateable) than those providing private goods. However, the risk management should never skew where the annual pension in real terms *exceeds* the income or the adjustment grows more in real terms than actual inflation.

Posted by: RJ at February 23, 2011 1:17 PM

"...as it stands now, Monique is right..."

I disagree. T-bills are not a "fraudulent investment." My that definition every bank is commiting fraud because my money is not in the vault somewhere in the back. The fact that some folks don't understand that isn't the same as saying bank deposits are a "scheme."

The right applies pretzel logic to arrive at that one, evident when one looks at private sector plans like 401Ks (also invested and yet still an asset from my perspective, for instance I can borrow off of it... whether or not there is a pile of money somewhere that is mine is irrelevant).

Posted by: Russ at February 23, 2011 1:34 PM

RJ, I wanted to point out where this started...

"When the government has to go to get money to pay benefits that it has not saved real assets [sic] for.."

It's just nonsense, unless you're one of these folks who also think paper money isn't a "real" asset (I put that in quotes because I don't think he means that SSI should be investing in equipment, etc). By that logic, every bank in the U.S. is insolvent because they hold so many of these "imaginary" assets the rest of us call bonds. Fair enough if that's what Andrew is saying, but that's pretty out there in my book.

btw, I'm really not trying to make this into a debate about the gold standard (as much as I wouldn't mind talking about "The Wonderful Wizard of Oz" that my daughter and I just finished).

Posted by: Russ at February 23, 2011 1:57 PM

Nobody is saying that t-bills are a fraudulent; the difference is, no what the saving vehicle, when the borrower and investor are the same entity.

In your example, the bank has deposits as liabilities, but either cash on hand/reserve (minimal as you note) or loans as assets. If the bank has to pay off all the liabilities (depositors want their money back), then it has to call in the loans and hope the borrowers can pay them back. If the bank put it all in t-bills, then they would cash them in with the government -- the point is the bank is loaning to an external party, whether an individual, business, non-profit, or government organization.

However, to use the social security comparison, then the bank (the investor) would also be the borrower. If they kept it as cash, well then the money would be there (although not a great business model). If they spent the money themselves, then when the call the loan in, who is going to pay? The bank in this case can only pay by getting more people to deposit money and hope those people don't want their money soon -- and eventually the losers are the last bunch of depositors.

The simple point is when the SS administration "calls in" those treasury notes, who is going to pay? - another part of the same organization. And they will pay it by taxing or external borrowing (unless the Fed monetizes the debt) - which can go on until there is insufficient tax revenue or a lack of willing lenders.

Sounds an awful like what Monique hinted at..

Posted by: RJ at February 23, 2011 2:08 PM

One would think that since russ cannot understand the difference between the Treasury floating debt and calling it an asset, and a company buying back their stock, he would heed this advice: "Better to be thought a fool than to open one's mouth and remove all doubt"

Posted by: Mike Cappelli at February 23, 2011 2:52 PM

"And they will pay it by taxing or external borrowing.."

Yes, of course. Quite a different thing though than a family with a bunch of paper in box for collateral. You guys can pretend that's not the case, but that's what's at the core of a flawed argument.

Republicans had no qualms borrowing that money from the Social Security trust fund to finance tax cuts for the wealthy or to fund foreign wars. Now there's something to be upset about.

Posted by: Russ at February 23, 2011 5:27 PM


The situations are only different because the government can compel people to provide it with money (through taxation), while the family cannot. This feature of government leads some within government to make promises that will be paid for with future taxation, forcing the burden onto future generations.

On the other hand, if you actually created a "trust fund", you could be offering relief and not a burden to future generations (or at least a break even deal). But today's Social Security promises have to be paid with resources taken from future generations, which is why believing there is a "trust fund" associated with the program is absurd.

Posted by: Andrew at February 23, 2011 5:50 PM

Are there any morons left that really believe there is a trust fund?

Posted by: Mike Cappelli at February 23, 2011 7:50 PM

The difference is related to cash flow. Yes, IOU's or Tbills in the SS trust fund are assets, but to actually pay people benefits there must be an executable way to convert the nonliquid into cash in time to keep the checks flowing.

Like having a house you can't sell when you want to.

Posted by: David Cann at February 23, 2011 9:33 PM

I guess you should have voted for Gore!

The news media had given extensive coverage to the Social Security debate in the 2000 election campaign, and to President Bush's early promises to not raid the trust fund. However, Bush's failure to honor his promises, with regard to Social Security, just never seemed to get much news coverage, leaving most Americans to believe that the raiding of the trust fund ended after George W. Bush took office. On the contrary, Bush raided and spent a total of $1.37 trillion of Social Security surplus during his eight years as president. In his last year, he spent $192.2 billion, which averages out to more than $526 million per day.

During a speech on April 5, 2005 in Parkersburg, West Virginia, Bush openly admitted to the fact that all of the Social Security surplus revenue had been spent. He said, "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." Bush's words in this speech bore little resemblance to what he had said about Social Security during the 2000 campaign. But his motives were different in 2005. He was trying to sell his privatization plan, and he thought that by spilling the truth he might further his effort to privatize Social Security.

There would be no Social Security funding problem for at least the next 25 years, if the government had not raided the trust fund. If the trust fund held the $2.5 trillion of surplus Social Security revenue, in the form of real marketable bonds, as it should, it could continue to pay full Social Security benefits until at least 2037. So the obvious solution is for the government to make arrangements to repay the $2.5 trillion it owes to the trust fund.

You say "Spending More on Social Security Than it Takes In Drives Up Deficits." That's flatly false. SS continues to run surpluses and will continue to do so for more than a decade.

I say financing wars and tax cuts for the wealthy by raiding the trust fund are the real culprits.

Posted by: Russ at February 24, 2011 7:02 PM

Uh, Russ,

This has been reported in numerous news outlets:
"The Congressional Budget Office reports that Social Security will effectively run a $45-billion deficit in 2011 and continue to run deficits totaling $547 billion over the coming decade."

The deficits are new, but we've been on this road for a long time.

The Social Security "trust fund" is effectively invested in future tax collections. This is not new, it's a several decades old bipartisan problem which, like a lot of other problems, is made enormously more complicated by the outsized federal deficit.

Posted by: Ralph at February 24, 2011 7:55 PM
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