Commentary: 2034 and the New Y2K Scare

The new report from the Social Security trustees is out, and it has the very serious people in a tizzy.  2034, oh the dreaded 2034, is the year that the "trust" supposedly runs out of money.  The results will necessarily be draconian cuts to benefits or large tax increases.  Yeah, if only that were true.  As I and countless other have shown time and time again, government budgets for nations with free floating currencies are not like private budgets.  But let's go down the rabbit hole with these crazies for a while.  Suppose we turn back the clock to before 1971 when the US severed the last vestige of the old gold standard and suspended international convertibility of the US dollar into gold.  In this case, the Federal Government, which the Social Security Administration is a part of, would be subject to the same inter-temporal budget constraint as households and firms.  Namely, that the present value of all future spending (including interest payments) must equal the present value of all future revenue.  Would the amount of money in the trust affect the capacity of the US government to pay benefits?  No!  Since the trust holds non-marketable US Treasury bonds, it could only raise the funds by redeeming these bonds.  The Treasury for its part would meet this redemption by selling securities or raising taxes.  So the the capacity of the SSA to pay benefits in our gold standard world is directly tied the capacity of US Government to tax or sell bonds.   Or in other words, the assets of the trust are a liability of the Treasury, and since both are part of the US Government, every dollar in the trust is cancelled out by a liability at the Treasury.  Similarly, it would be patently absurd to contend that moving money from my right pock to my left pocket somehow affects my capacity to pay my mortgage.  The level of the trust fund is irrelevant.  

The trust is nothing more than an intra-governmental accounting tool to track payroll tax receipts and benefit outlays. All the 2.8 trillion dollars in the trust represent is the cumulative payroll taxes collected since creation of the program minus cumulative benefits paid.  Again, even under a gold standard/neo-classical framework where the government is like a household, the trust cannot be thought of as a financial resource for the Federal Government precisely because redemption of the bonds held in it would be drawn on the Treasury! 

Hilariously, many of the lobbyists in Washington don't even understand their own flawed framework.  This whopper comes from the Committee for a Responsible Federal Budget: 

Currently, the Social Security trust fund holds $2.8 trillion in bonds — meaning the program can run the equivalent of nearly $3 trillion worth of deficits going forward before the trust fund runs out [in 2034].  

Huh? So in 2034 the computer software which manages the Treasury's payment systems will crash because there aren't any securities left in some obscure intra-government account?  Its Y2K all over again.