Tuesday, October 15, 2013

Social Security and the Debt Limit

Two years ago, when the debt limit was in the news, I had a post pointing out that the limit had no effect on the government's ability to make Social Security payments. I have just come across another scare story (in the New York Times) assuming the opposite, so thought it was worth repeating my explanation.

When the Social Security system runs a surplus, as it did from 1984 through 2009, the money is lent by the Trust Fund to the Treasury in exchange for Social Security Trust Fund special bonds. Those bonds count as part of the national debt. If Social Security revenue is less than payments due, the Treasury pays some of the money back to the Trust Fund, redeeming some of those bonds. 

The crucial point is that redeeming the bonds lowers the national debt and so permits additional borrowing. Consider the following simple scenario:

1. The government hits the debt ceiling and can no longer borrow.

2. The Social Security Trust Fund asks the Treasury for ten billion dollars to pay Social Security recipients.

3. The Treasury takes ten billion dollars of revenue which it was planning to spend for something else, such as salaries for government employees, and gives it to the Trust Fund, redeeming ten billion dollars of the bonds representing its debt to the Trust Fund.

4. The national debt is now ten billion dollars lower, so the Treasury can borrow ten billion dollars and use it for the salaries it was planning to spend the first ten billion on.

This procedure is only workable until all the bonds are redeemed, but since the Trust Fund is currently over 2.7 trillion dollars, that is going to take a while.

For more details, see this 2011 article by Thomas Saving, who served two terms as a trustee of the Social Security and Medicare Trust Funds.


susupply said...

The argument works for any bond that comes due. The Treasury pays it off with tax revenue, drops below the debt ceiling and can borrow back up to it. 'Look, Ma, no default.'

David Friedman said...

Except that these bonds "come due" only in the sense of being payable when Social Security revenue is less than its obligations.

Anonymous said...

OT- Can I find the answers to the questions in your 'Price Theory' anywhere? I get that they were there to provoke thought among intelligent young economists, but us dumb oldies like your book too.


Patrick Sullivan said...

True, the SS problem is trivial to manage because SS tax revenues cover 98-99% of the benefits to be paid. But, the problem of ordinary Treasuries coming due is still manageable using traditional cash flow management techniques.

As long as you can pay coupon interest and redeem mature bonds, you aren't 'in default'. The arguments being made by the likes of IMF officials and the CEO of Blackstone that we're on the edge of catastrophe are silly special pleading. The financial markets aren't panicking.

LornMmm said...

Except that the debts are being 'paid' with fiat currency printed by the FED, which are soon-to-be WORTHLESS!

David Friedman said...


Email me and I can send you the files with the teacher's manual.


Tibor said...

David: Since someone has already started an off-topic discussion about Price Theory - there is the puzzle with the hero who has a bow and arrows and is followed by villains...who are ordered "as described in the picture"...

well, there is no picture in the online version. Is it perhaps a copyright problem as is one other picture there which is missing? If so, could you describe it in words?

I migh also want to look at the teacher's manual to check my answers. Could I get too? :)

Thank you.

David Friedman said...

Tibor: The picture shows the villains lined up behind the hero they are pursuing, so one is in the lead, another after him, and so forth.

Email me and I'll send you the manual.

Milton Recht said...

Also, nothing stops the Treasury from asking bondholders at redemption if they want to rollover to a new bond with same maturity lenght at a current rate. A rollover would not increase the debt.

Tibor said...

David: So I thought :) But that seemed just too easy. I will send you an e-mail, thanks.

Anonymous said...

My ideas blog, I invite you. Comment posts. :)


Will McLean said...

"Right, new plan! Lufbug, slow down and let the others catch up. Garn, too late...Trashbag, *you* slow down and let the others form on you, column of fours. Second rank is to stab any laggard in the front rank. Every twenty paces, first rank drops back to the tail of the column, third rank becomes new second rank. Also, next time we bring bows too."

David Friedman said...

Will: What prevents the second rank from lagging?

David Friedman said...

Tibor: Note that this is the same principle by which the graduated income tax holds income down. The equivalent case would be a marginal rate of 100% at the top of the scale.

Jetgraphics said...

Wait, Title 12 USC Sec. 411 defines dollar bills as debt. IOUs. Minus value.
There have been no dollars circulating since 1933. And the dollar bills have been worthless, too.
So exactly what is going on?
Congress is kiting bad checks that we co-signed... via FICA.
If the government defaults, we're [censored].

Will McLean said...


The second rank is prodded forward by the third, and so on. The back rank is prodded forward by the NCOs, who in turn are urged forward by the fear of the savage punishment inflicted on orcs who fail.

Tibor said...


If I am the first orc in a row, I will consider my chances and rather fight through the other orcs (almost certain death) than face certain death from the hero. Or, it is not said that the orcs can't talk to each other...ther second one also dies for sure, so does the third and I think the half of their number actually, it is best for them to agree to try to push back, or they would probably simply do it spontaneously...even if the half in the back commit themselves to a strategy of pushing the first half forward, because that way they will be safe (as long as the first half does not realize how bad the deal is for them and rebel), our first half has a good chance against them and no chance against the hero.

So, yeah, the viable options for the orc group are either bows, or yet better - a fate worse than death for those who hesitate :)

Also, what are NCOs?

David: You mean that noone bothers to make any income if it is all taken away anyway?

Will McLean said...


I think we are using different terminology, or something.
The orc formation is four orcs wide and ten deep, with the narrow end facing the hero. The four closest to the hero are the first rank. That means that there are four files of ten orcs each. Each orc in the front rank has nine behind him.

Somebody in the front rank will die, but nobody knows who, because they are all about the same distance from the hero.

They are ordered to cover 20 paces before they drop to the rear. US Army double march covers about three paces a second, so the hero has less than seven seconds. He can certainly kill one in the front rank in that time, but probably not two. (I have read estimates that a good bowman can loose twenty aimed shots a minute, but I don't believe them. If this is universe where a hero can, and hit every time while retreating on horseback, the orc commander relaxes the advance minimum for the front rank accordingly.) By orc standards, those are fighting odds.

Also, as you say, the orc commander can credibly offer that if the hero gets away any slackers will die in pain and get eaten, and only if they're lucky will it happen in that order. The hero doesn't have that option.

NCO=Non Commissioned Officer

Will McLean said...

I see that the last post I post I responded to was from Tibor Mach, not you. Sorry.

Tibor said...

Will: I see...well, I think the idea was that the orcs are in a single line. Let's say it is in a corridor where only one person can fit (otherwise the orcs are extremely stupid not to spread out...but hey, they are orcs, so why not? :) ). Then they know who gets killed. If they can arrange themeslves in other ways, then the poor hero is doomed to having to create a new DnD character :)

Anonymous said...

Thank you very much for emailing me the teacher's manual.
When I was a little kid I thought computers would someday make it easy to get in contact with the top minds in each field, you know, to ask them to explain stuff. Well, sometimes it works!