(H/Ts – Dad29 and Hot Air Headlines)
Back in September, Ed Morrissey found, and I expanded upon, a dire look at the Social Security “Trust” Funds from the Congressional Budget Office that said the combined OASDI “Trust” funds would start running primary (cash) deficits in FY2010 and run them for much of the decade. Allan Sloan over at Fortune found some worse news in the January 2010 CBO budget outlook:
Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.
No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.
The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).
This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30….
If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume….
I did so, and just like in September, I found some rather “curious” claims of economic boom. In fact, the new “boom” is even more unbelievable than the old “boom” (note; the September 2009 CBO GDP estimates come from summer 2009 budget update).
Click for the full-size chart
Between this fiscal year and FY2019, instead of a cumulative Social Security primary deficit of $100 billion, we’ll have a cumulative Social Security primary deficit of $157 billion. That is, of course, if we actually do get all the economic and tax growth that the CBO seems to hope we will. If we don’t, the chart I put together back in September showing just how easy it was to turn the CBO’s hope into red ink as far as the eye can see will be rosy.
That also doesn’t include Obama’s plan for a second round of $250 checks to every Social Security recipient. That is a drag of another $13 billion on this year, which would make this year’s cash deficit somewhere around $51 41 billion.
Revisions/extensions (4:42 pm 2/4/2010) – The internal copy editor failed me, as I made a basic math mistake. Thanks to Hot Air commenter WashJeff for the catch once Ed Morrissey made the news a front page post.
[…] at No Runny Eggs looks at the recalculated projections: Between this fiscal year and FY2019, instead of a cumulative […]
Drudge and Hotair and others have called this a “bailout”. But it’s not. Here’s how Social Security’s cash-flow works. Money-In = Taxes in cash + Trust Fund Interest in bonds. Money-Out = Payments to beneficiaries + *NET* Purchases of additional Bonds.
In the past, Money-In was greater than Money-Out, and so the Trust Fund bought bonds. Now that the surplus is gone, the way the fund honors its obligation is to sell the bonds it has accumulated. It can either do so in the open-market, or it can sell them to the Treasury for the equivalent amount. Now, if the Treasury does buy the bonds with cash, it just gets that cash by issuing new debt to the open-market. In no sense does that constitute a “bail-out” – it is a simple exchange for value!
This is not to say it won’t have adverse implications for the government. Of course it will. First, the trust fund will start to shrink faster and faster. Second, to the extent that it shrinks, it floods the bond market with even more supply, which will raise interest rates for government borrowing unless the FED buys more with newly-printed cash, which risks future inflation. There are serious problems here, but a “bail-out” is not one of them.
I don’t believe that the bonds SS “owns” can be sold in the open market, but rather must be redeemed by the Treasury. Also, if Treasury issues new debt to redeem the SS bonds, there is no “exchange of value.” The federal government must acquire the cash to redeem the bonds, either by higher taxes or additional federal debt. So general fund inflows will finance the liquidation of the “trust fund,” which is not a trust fund at all.
If you started working 30 years ago and each week put money in a box to provide for your retirement, then stopped putting the money in and instead spent the money and put in IOUs, you would not now be able to sell the IOUs and finance your retirement.
Theoretically, if we had written the statute that way, Social security could either sell its bonds in the open market, or, as an equivalent alternative, it could “redeem” them with the treasury for open-marketable bonds of the same interest rate and maturity date that it could then sell. The headline should be “Treasury to pay Social Security in cash instead of debt only because a pointless law prevents this equivalent payment” and not “Treasury bails out SS”.
I agree that the “trust-fund” concept that distinguishes Social Security from the rest of the government is nothing more than a legal fiction – in the same way that fully owned subsidiaries of parent corporations are only separated through a legal fiction.
My contention is with the use of the term “bail out”. In the same way that you can’t make IOU’s to yourself, you can’t “bail out” yourself.
It is all in the definition of the word of “bailout”, with Allan Sloan beginning the meme, not Ed Morrissey or Matt Drudge. The big problem is that there is no net money, at least as of this fiscal year, budgeted for the conversion of that “interest”, or “principal”, into cash. Given that, the use of “bailout” is, in my humble opinion, fair.
I will note that, even in the flushest of months, the “Trust” Funds redeemed Treasury securities because, by law, it could have no cash at the end of any given business day. However, up until now, on a yearly basis, the OASDI taxes more than covered those redemptions.
Another point of correction – the “Trust” Funds do not hold any securities that can be sold on the open market. All of its securities are of a “special issue” available only to it and other government “trust” funds, and purchasable only by the Department of the Treasury. Of note, Social Security is guaranteed full face value plus any accumulated interest between the last interest distribution and the date of redemption.
Given the larger budget deficits, the only way for the Treasury to provide cash is to convert that “off-budget”, nonmarketable debt, into “on-budget”, marketable debt by selling additional Treasury securities. The “good” news is that would not represent an increase in total government debt. However, it would represent an increase in the publicly-held portion of the debt.
[…] Last month, the Congressional Budget Office estimated the FY2010 Social Security primary deficit to be $28 billion, with the FY2011 primary deficit at $20 billion. The bad news is the OMB now predicts a primary deficit of $33.754 billion on total revenues of $793 billion, total outlays of $708.35 billion, and $118.404 billion of interest. […]