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Are We Going Bankrupt?

The opinions expressed by columnists are their own and do not necessarily represent the views of

In an incredible admission of failure, the Obama administration has abandoned the long term care insurance program that was part of Obama Care. The reason: The health reform act had a provision that required the Secretary of Health and Human Services to certify that the program would be solvent for 75 years before the program could be launched.

But as the Secretary was forced to admit, the program was anything but solvent. Premiums collected during people’s working years were not going to be saved and invested, the way a private insurer would do. Instead, all funds collected were going to be spent immediately on other Obama Care benefits. In short, the long term care insurance program was designed exactly like a Bernie Madoff Ponzi scheme.

But wait a minute. What if we applied the same 75 year test to Social Security? Or Medicare? Or the disability program? Could any of these programs pass muster? Not on your life. As the Social Security trustees remind us every year in their annual report, these programs have unfunded liabilities totaling tens of trillions of dollars.

According to the trustees’ latest accounting, to make it for 75 years Social Security needs an additional $6.5 trillion in the bank right now, earning interest. That is, we’re coming up short by an amount equal to about 43 percent of our annual national income. Medicare is in worse shape. It’s falling short by $22.1 trillion.

That’s why we have an entitlement program funding crisis. As The Washington Post pointed out the other day, Social Security is paying out more than it’s taking in; and the cash flow deficit will only get worse in future years.

That news story provoked outrage on the left, however. Liberal economist Dean Baker claimed that Social Security has a trust fund that can pay benefits for years. Paul Krugman, at The New York Times, insisted that there are trillions of dollars in the trust fund. You know we are in silly season when otherwise reputable economists make statements as ludicrous as these.

What is in the Social Security trust fund? Nothing. Nothing that can be bought or sold, that is. Technically, the fund holds “bonds.” But these are not bonds like the bonds that you and I can purchase in the marketplace. They are literally IOUs the government writes to itself. For Social Security, they are created on a typewriter. For Medicare, they are created electronically.

In both cases, there is no difference between the government writing an IOU to itself and calling it an asset than Bernie Madoff writing IOUs to himself and calling those pieces of paper “assets.”

Like most government-sponsored retirement programs in the world today, our Social Security system is pay-as-you-go. All payroll tax revenues are spent — the very minute, the very hour, the very day they are received by the U.S. Treasury. Most of these revenues are spent on benefits for current retirees. Any additional amount is spent in other ways. But there is no funding of future benefits. No money is being stashed away in bank vaults. No investments are made in real assets.

Most pay-as-you-go systems do not have trust funds, since there are no investments for the trust funds to make. In the U.S., we have trust funds — but they serve an accounting function, not a financial function. For example, the trust funds do not collect taxes. Nor do they disburse benefits. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury.

Technically, the trust fund bonds represent the cumulative surplus (payroll tax collections minus benefit payments). But these bonds are only important for accounting purposes. They are like bookkeeping entries. The annual reports of the Social Security trustees list the yields and maturity dates of these bonds. But the special-issue bonds are not the same as the bonds held by the public. They are not part of the official outstanding debt of the U.S. government. They cannot be sold on Wall Street or to any foreign investors. Nor can they be used to pay benefits.

Even more important, every “asset” of the trust fund is a liability of the US Treasury. Summing over both agencies of government, assets minus liabilities always equal zero.

The technical issuer of the bonds (the U.S. Treasury) and the holder of the bonds (the Social Security trust fund) are both agencies of the U.S. government. Moreover every asset of the trust fund is a liability of the Treasury. Summing over both government agencies, the balance is zero. [See the diagram.]

For Social Security, the trust fund’s special issue bonds are paper certificates held in government filing cabinets in Parkersburg, W.Va. If a fire were to burn down the building tomorrow, or if thieves were to take the filing cabinets away, there would be no harmful consequences for retirees. Similarly, if the trust funds themselves were simply abolished, real economic activity would be unaffected. The government would not be relieved of any of its existing obligations or commitments. Alternatively — as the late economist Robert Eisner suggested — with the stroke of a pen, we could double or even triple the number of IOUs the trust fund holds. But creating more pieces of paper will not help the government pay any more bills.

When Social Security runs a cash flow deficit, as it is doing today, it is paying out more in benefits than it is in collecting taxes. In the face of this deficit, the government only has three options: Raise taxes, cut benefits or borrow. These are the same choices the government would face if there were no trust fund at all.

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