The previous post mentioned that Congress has already spent the entire Social Security trust fund, which as of last year, totaled $2.238 trillion. It also mentioned that current intermediate projections made by the U.S. Social Security Administration indicate that this trust fund should continue to increase in value to a total of $4.486 trillion by the year 2017, and that we the people of this great nation would be in dereliction of our duties as citizens and taxpayers if we were to let politicians spend the second half of this trust like they have spent the first.

For calendar year 2007, Social Security brought in a total income of $784.9 billion, which included $656.1 billion in cash from payroll taxes, $18.6 billion in cash from the taxation of benefits, and $110.2 billion in interest earned from the bonds in the Social Security trust fund. The program also had expenses totaling $594.5 billion, of which $584.9 billion was paid out in cash for benefit payments.

After subtracting total outgo from total income, Social Security generated a net surplus of $190.4 billion last year, but it is important to note that this surplus was not a huge pile of cold, hard cash locked away in some cavernous vault. In fact, only $80.2 billion was in the form of cash from our tax dollars, and the remaining $110.2 billion was interest earned on the special-issue bonds in the Social Security trust fund.

Each year when Congress raids the surplus, Social Security receives special-issue bonds equal in value to the money that is taken from the cash reserves in its trust fund. Like all government bonds, these special-issue bonds are backed by the full faith and credit of the United States government, and are completely legitimate treasury securities.

Similarly, when I purchase a $100 Series I savings bond at the local bank, I hand over $100 in cold, hard cash, and in return, the government issues me an interest-bearing savings bond by mail. What happens next is that the government spends my $100 in cash, and the national debt increases by another $100. A record of this debt eventually gets included in the monthly statement of the public debt, where totals for United States savings bond transactions are tallied alongside other nonmarketable treasury securities such as the special-issue bonds in the Social Security trust fund.

Like all $36.9 billion in outstanding Series I bonds collectively owned by investors, my bond will continue to earn interest each month for up to 30 years after its purchase, and during this time, the government will not actually send out checks for the accrued interest. Rather, this interest is added back to the value of my bond, and continues to compound monthly.

By comparison, when the Social Security trust fund earned $110.2 billion in interest last year, this interest did not represent a payment of cold, hard cash. Instead, this interest went to purchase more special-issue bonds for the trust fund, and the transaction was merely a mathematical calculation and an accounting entry on the part of the government, with no real money involved.

The danger is that the U.S. Social Security Administration is banking on the fact that real money will be available from the trust fund to help make benefit payments starting in 2017. All the economists, actuaries, and academics take for granted that this money will be readily available when the time comes. But where will the government actually get the cash?

For example, if I finally decide to go to the bank and cash in my $100 Series I bond, I will receive cold, hard cash in the amount of the $100 originally paid for the bond, plus the amount of interest earned over the interest-bearing period. This means that the government will actually need to come up with real money to pay me back, and my bond will no longer be financing a portion of the national debt.

However, more than likely, someone else will go to the bank and buy a savings bond that same day, and this new purchase will help offset the sale of my bond. In other words, new bonds are constantly being purchased by investors to make up for the ones that mature or are retired, and the government does not need to worry too much about replacing the lost source of financing when existing bonds are cashed.

Unfortunately, because the Social Security trust fund has been compounding for so long without its special-issue bonds ever having been refinanced or rolled over on the cash markets, and because the numbers are so very large, there is a substantial risk that existing financing sources such as the bond markets will be unable to secure replacement financing for these bonds. In other words, who will offset the disbursements when Social Security needs to start converting its $4.486 trillion in trust fund bonds to cold, hard cash?

Sources:

U.S. Social Security Administration - 2008 OASDI Trustees Report
(Section II.A, Highlights; Short-Range Results, Long-Range Results)

U.S. Social Security Administration - Office of the Chief Actuary
(Time Series: Both Funds; Income Components; Calendar Year; All Years)

U.S. Social Security Administration - 2008 OASDI Trustees Report
(Section IV.A, Short-Range Estimates; Table IV.A3, Intermediate Projections)

U.S. Treasury - Monthly Statement of the Public Debt, April 30, 2008
(Page 7, Total Outstanding United States Series I Savings Bonds: $36,948 Million)