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The Social Security/Medicare Trust Fund Is a Pile of IOUs from the U.S. Government. The Pile Is Shrinking.
Gary North

March 22, 2011

The Congressional Research Service (CRS) is part of tghe Library of Congress. Its job is to provide information to members of Congress on a wide range of topics. The researchers are specialists.

On August 10, 2010, the CRS produced a report, Social Security: The Trust Fund. It was produced for a Senate Committee on Aging. You can read it here: http://aging.senate.gov/crs/ss3.pdf.

On page 8-9, we read the following.

Investment of the Social Security Trust Fund

The Secretary of the Treasury is required by law to invest Social Security revenues in securities backed by the U.S. government. In addition, the Social Security trust fund receives interest on its holdings of special U.S. government obligations. Each government security issued by the Treasury for purchase by the Social Security trust fund must be a paper instrument in the form of a bond, note or certificate of indebtedness. Any interest or proceeds from the sale of government securities held by the Social Security trust fund must be paid in the form of paper checks from the general fund of the Treasury to the Social Security trust fund. The interest rates paid on the government securities issued to the Social Security trust fund are tied to market rates.

For internal federal accounting purposes, when special U.S. government obligations are purchased by the Social Security trust fund, the Treasury is shifting surplus Social Security revenues from one government account (the Social Security trust fund) to another government account (the Treasury's "general fund" account). The special U.S. government obligations are physical documents held by the Social Security Administration, not the U.S. Treasury. The government securities held by the Social Security trust fund are redeemed on a regular basis. These special U.S. government obligations, however, are not resources for the government because they represent both an asset and a liability for the government.

Got that? It's an accounting procedure: ". . . when special U.S. government obligations are purchased by the Social Security trust fund, the Treasury is shifting surplus Social Security revenues from one government account (the Social Security trust fund) to another government account (the Treasury's "general fund" account)."

The piles of IOUs have no independent value. Only the Treasury is allowed to buy them.

On page 10, we read the following:

The Social Security Trust Fund as Accumulated Holdings

The Social Security trust fund can be (and often is) viewed as a trust fund, similar to any private trust fund, that is to be used for paying current and future benefits (and administrative expenses). By law, Social Security revenues credited to the trust fund (within the U.S. Treasury) are invested in non-marketable U.S. government obligations. These obligations are physical (paper) documents issued to the trust fund and held by the Social Security Administration. When the obligations are redeemed, the Treasury must issue a check (a physical document) to the Social Security trust fund for the interest earned on the obligations.

However, unlike a private trust that may hold a variety of assets and obligations of different borrowers, the Social Security trust fund can hold only non-marketable U.S. government obligations. The sale of these obligations by the U.S. government to the Social Security trust fund is federal government borrowing (from itself) and counts against the federal debt limit. The requirement that the Social Security trust fund purchase U.S. government obligations serves several purposes, such as:

• offering a mechanism for the Social Security program to recoup the surplus revenues loaned to the rest of the government,

• paying interest so that the loan of the surplus revenues does not lose value over time,

• ensuring that the Social Security trust fund (and not other government accounts) receives credit for the interest earnings,

• ensuring a level of return (interest) to the Social Security trust fund, and

• providing a means outside of the securities market for the U.S. government to borrow funds.

The public does not understand this. They have been told for 70 years that there are assets in the Trust Fund. There are no assets. These assets are no more assets than an IOU from a husband is an asset to his wife. The asset is worthless if the husband decides not to pay. It has no market value other than the willingness of the husband to pay money to her ("interest") each month.

Let's say that the wife works. She turns over 7.5% of her paycheck to her husband. Her employer does the same. He writes an IOU to her for her retirement years. He promises to pay her.

Is this wise on her part? Should she turn over the money to him or to a third party? If her income will be dependent on him, and he's getting along in years, shouldn't she find someone else to write her those IOUs?

If she thinks she has an asset if he goes bankrupt, she has a rude awakening in store.

She is not stupid enough to believe that the IOUs are independent assets that can protect her if he runs off or dies or goes bankrupt. But most Americans believe that IOUs from the Treasury are assets for Social Security.

What happens when the government goes bankrupt: "insufficient funds"? Will the retirees be paid with inflated money? Or will they not be paid at all?

Stay tuned.

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