No Runny Eggs

The Associated Press praised the AlGore “lockbox” in its story discussed earlier, and Glenn Reynolds and Andy McCarthy asked where the “lockbox” was, so I figure it’s time to explore what creating said “lockbox” would do for the current cash-negative situation. The very-short version is that while there would be actual money in the “Trust Funds” to pay for the cash shortfall, which still would exist at the same level with or without the “lockbox”, that same money would have already needed to be borrowed on the open Treasury securities market. The longer version is a bit lengthier.

First, let’s take a look at Social Security as it was at the end of January 2001. The Old-Age and Survivors Insurance (OASI) Fund was “worth” $945 billion, with the weighted average interest of the securities held at 6.640% and the average time to maturity at 6.914 years (note; while most of those securities have since matured and been rolled over into new securities, some of those securities don’t mature until 2015). The Disability Insurance (DI) Fund was “worth” $121 billion, with the weighted average interest of the securities held (which included some since-retired public-issue debt) of 6.426% and average time to maturity at 6.828 years.

Since then, the OASI Fund has taken in $630 billion more in cash than it has paid out (i.e. primary surplus) with $776 billion in interest credited to it, giving it a “value” of $2,350 billion. Meanwhile, the DI Fund has had a primary deficit of $10 billion with $93 billion in interest credited to it, giving it a “value” of $203 billion. Between February 2009 and January 2010, the OASI Fund has had a primary surplus of $23,504 billion (down from a $71,637 billion primary deficit between 2/2008 and 1/2009) with $107.901 billion in interest credited to it, while the DI Fund has had a primary deficit of $23.611 billion (up from $10,687 billion primary deficit between 2/2008 and 1/2009) with $10.467 billion in interest credited to it. Signifcantly, that’s an overall 12-month deficit of $13.144 billion for the DI fund.

Now, let’s try to define the “lockbox”. There’s actually several different flavors possible, involving what gets put into the “lockbox” (just the taxes received after creation, the “new” taxes and interest, the entirety of the “Trust Funds” immediately upon creation, the values of the various securities as they mature), and on what interest gets paid (just those items in the “legacy Trust Fund”, everything). Some of those scenarios are beyond my ability to model, so I’ll just take four of the relatively-easy-to-model scenarios, while noting that while economically it makes no sense to credit interest to funds in the “lockbox”, it would also be political suicide even as it would require cash that the Treasury doesn’t have.

First, I’ll take just “future revenues” locked away, with no interest credited to them, and the current “legacy Trust Funds” along with interest credited to them rolled over into fresh Treasury securities as they are now. I’m likely overestimating the interest that would have been credited to the “legacy Trust Funds”, which would get put right back into the Treasury as it is now, but it’s close enough for government work. The “lockbox” amounts would have been the 9-year amounts listed above (+$630 billion for OASI, -$10 billion for DI). That’s right – that DI “lockbox” would have been emptied by this point. Meanwhile, the “legacy funds” would have been about $1,520 billion for OASI and $179 billion for DI, bringing the total nominal OASI fund amount to about $2,150 billion. That would have moved up the fund-exhaustion dates by a couple years. Assuming nothing in the budget would have been cut, the 9-year deficit spending would have increased by $640 billion, or an average of about $71 billion per year.

Next, I’ll add the interest earned by the “legacy funds” to the lockbox as cash. Since it no longer would have compounded, that interest would have been a bit less than in the first option, or about $470 billion for OASI and about $57 billion for DI. However, since it would have been added to the “lockbox”, both OASI and DI “lockboxes” would have been in positive territory (+$1,100 billion for OASI, +$47 billion for DI). However, since the “legacy funds” would have remained at the January 2001 levels, that would have left the total nominal funds at $2,050 billion for OASI and $177 billion for DI. Again, that would have meant the funds would be a bit closer to exhaustion, and it would have increased the 9-year deficit spending by $1,157 billion (or roughly $129 billion per year).

Third, I’ll look at the full-on “lockbox”, immediately liquidating the entirety of the “Trust Funds”, putting everything in the “lockbox”, and foregoing all future interest payments. Because interest earned in January 2001 would have been paid out, the total amount going into the “lockbox”, would have been about $956 billion for OASI and $122 billion for DI. That would have created a rather massive deficit for 2001, as to create that “lockbox”, the federal government would have needed to come up with $1,078 billion. With only primary surpluses and deficits affecting the “lockbox”, that would have left the balances at $1,586 billion for OASI and $112 billion for DI. That would have really cut into the lifetime of the funds, but they would at least have been fully-funded until exhaustion. Further, the 9-year deficit spending would have further increased by the same $640 billion as the first scenario.

Finally, I’ll take that full-out “lockbox” in scenario three, but still credit the interest. As I noted above, while it would fly politically, it would make no sense economically, as the Treasury, and by extension, we the taxpayers, would be paying for the use of money that we wouldn’t be able to use. The only difference between that scenario and the current scenario is that instead of $2,554 billion in unfunded IOUs, there would be $2,554 billion in cash. Of course, that would also mean the 9-year deficit spending increase would have been that same $2,554 billion.

(H/Ts – Ed Morrissey and Owen)

The Associated Press finally noticed that the cash Social Security is taking in won’t cover its current obligations:

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg’s municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn’t be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

I give the writer, Stephen Ohlemacher, credit for remembering that even the net interest paid on the bonds is, if it needs to be paid out in cash, something the Treasury Department doesn’t have so much as a penny to pay out. A few points of order:

• Those 12-month primary (or cash, if you prefer) deficits actually began in the February 2009-January 2010 period, when Social Security ran a $114 million primary deficit. An estimation using numbers from the Febraury 2010 Monthly Treasury Statement, which shows a $7.59 billion “gross” deficit (including the interest paid out on securities cashed in February) and a $7.71 billion primary deficit, bumps that 12-month primary deficit to $6.47 billion (between March 2009 and February 2010).
• That nearly-$29 billion cash deficit for FY2010, or $34 billion if one prefers to go with the Office of Budget and Management numbers, tells only half the story. The FY2010 budget counted on $21 billion in primary surpluses from the Social Security “Trust Funds” to spend on other items in the budget, which makes the total amount of unplanned borrowing on the open Treasury market $50 billion-$55 billion.
• Also from the OMB, for at least FY2010, the Old-Age and Survivors Insurance Fund is expected to run a primary deficit. It would join the Disability Fund, which began running primary deficits in 2005 and running gross deficits (i.e. shrinking its “Trust Fund” and entering the final stage of collapse) in 2009.

A quick note about the February 2010 numbers – while they are not the final numbers from Social Security’s Office of the Chief Actuary, they are rather reliable. They also represent, outside of the anomalous month of August 1990, when almost all of September 1990’s benefits were shown as paid out in August, the second-largest primary deficit (behind December 2009’s $11.307 billion primary deficit) and the largest gross deficit since monthly records have been kept in January 1987.

Even if we had taken Al Gore’s suggestion and put it the “Trust Funds” into a “lockbox”, it would, at best, only delay the inevitable. Between March 2001 and February 2010, the funds accumulated $869 billion in interest, and the primary growth was $607 billion, which together masked $1,475 billion in deficit spending over the last 9 years. Given the current problem is converting the “Trust Funds” to cash, and the problems both parties have had in saying no to spending, I don’t see how that “lockbox” would have helped any.

Revisions/extensions (3:19 pm 3/15/2010) – I really need to pay more attention to my feed reader over the weekend – Owen had it up yesterday.

R&E part 2 (7:00 pm 3/15/2010) – First, thanks to Ed for linking to me. Sorry about the problems that you may have experienced in loading this site; StatCounter had some issues.

Since Glenn Reynolds wanted to know what happened to the “lockbox”, I decided to take a somewhat-quick back-of-the-spreadsheet look at what would have happened had a “lockbox” been in existence the last 9 years. Do note that it would not have affected the primary deficits in the least, but it would have put at least some actual money into the “Trust Funds” for the future.

Revisions/extensions part 2 (10:16 am 3/8/2010) – I originally posted this on February 22 using estimates from the January 2010 Monthly Treasury Report to fill in the numbers for January 2010. The Social Security Office of the Chief Actuary has now released the final numbers for that month, and the news is worse. The original post is below the fold (unless you’re reading just this post, in which case it’s below the update). I decided to append to this and bump it up to today’s date.

Between February 2009 and January 2010, the combined OASDI Social Security “Trust Funds” spent $112 million more than it took in in taxes. As noted in the original post (below), the 12-month primary (or cash) deficit is the first since monthly records were kept in 1987, and likely the first since the “forever” fix of 1983.

The estimate using the Treasury’s numbers was a $91 million primary deficit, which instead of proving too pessimistic based on recent analysis of the difference between the Treasury Monthly Statements and the OACT final numbers, proved to be too optimistic.

To contrast, just last year, the Obama administration expected the FY2010 primary surplus in the combined “Trust Funds” to be $21,028 million (or $21.028 billion – I will use a single base to make sure the numbers hit home) as part of its FY2010 budget. Now, it’s estimated to be a $33,754 million deficit, a shift of $54,782 million to the red. That’s $54,782 million that, thanks to the well-over $1,000,000 million (or $1 trillion) deficit that was already planned for this year, needs to be borrowed by the Treasury on the open market.

The situation is not yet as dire as it was between 1975 and 1981, when the combined funds ran overall yearly deficits, or 1982, when the Old-Age and Survivors Insurance fund borrowed from the Hospital Insurance (Medicare Part A) fund to stay fully-capitalized. However, raising the withholding tax 14% and the self-employment tax 64% isn’t exactly going to play well, and like the previous time, it will only slow the inevitable.

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