Election 2010: Teabaggin' the Ds & Rs

[Adder]

Originally Posted by Cletus Miller

And, yes, the SS Bonds are covered in the debt ceiling.

So thus on balance sheet, no?

ETA: BTW, another thing I have been wondering about but haven't bothered to look up is how the size of the trust fund compares the the expected future shortfalls. I occassionally find myself thinking about it as though the fund is a measure similar to an unfunded pension liability, but it isn't, as in fact there isn't any real relationship between its size and what will be owed.

[Cletus Miller]

Originally Posted by Adder

I don't see how this relates to Burger's question. Today, before my fantasy world, the trust fund redeems the bonds (i.e. has them repaid by treasury). There is currently a deficit, so treasury issues new bonds to pay for it (oddly enough, likely at lower rates, but let's leave that aside). But net change in the $14T in debt is zero, no? Instead of owning the trust fund, new bond holders are now owed.

Okay an example, using made up numbers.

SS has a FY revenue deficit of $100B:

Option 1: SS redeems $100B of bonds. The $100B is paid to SS out of the general fund. The Gov't sells $100B in new bonds to the public. This adds $100B to the FY deficit.

Option 2: SS sells $100B (+/-, depending on the applicable coupon) of bonds on the open market. The $100B is paid to SS by China. The Gov't issues no new bonds, but loses the power to cancel them. The deficit is the same as it would have been without the redemption.

True, it's a wash on total debt. But that doesn't mean it's the same thing.

[sgtclub]

Originally Posted by Mmmm, Burger (C.J.)

Maybe I'm misunderstanding you, but as the SS trust fund redeems the Tbills it "owns" to pay benefits (i.e., its net purchases become negative) then Tbills will have to be sold instead to the private sector to finance the debt. But it's still debt, just to someone different. FWIW, the "debt" that is widely cited ($14T and growing) includes the debt to the SS trust fund.

This

[Cletus Miller]

Originally Posted by Adder

So thus on balance sheet, no?

ETA: BTW, anothering I have been wondering about but haven't bothered to look up is how the size of the trust fund compares the the expected future shortfalls. I occassionally find myself thinking about it as though the fund is a measure similar to an unfunded pension liability, but it isn't, as in fact there isn't any real relationship between its size and what will be owed.

No, not on balance sheet for *deficit* purposes.

The calculations of when SS is "insolvent" always include draw down and repayment of the SS Bonds.

[sgtclub]

Originally Posted by Cletus Miller

Okay an example, using made up numbers.

SS has a FY revenue deficit of $100B:

Option 1: SS redeems $100B of bonds. The $100B is paid to SS out of the general fund. The Gov't sells $100B in new bonds to the public. This adds $100B to the FY deficit.

Option 2: SS sells $100B (+/-, depending on the applicable coupon) of bonds on the open market. The $100B is paid to SS by China. The Gov't issues no new bonds, but loses the power to cancel them. The deficit is the same as it would have been without the redemption.

True, it's a wash on total debt. But that doesn't mean it's the same thing.

What do you mean it's not the same thing? Either way, the Government has an obligation to pay $100B + interest. The only thing that is different is the payee. What am I missing?

[Cletus Miller]

Originally Posted by sgtclub

This

So, everyone expects SS to sell the bonds on the open market? Assuming that these have higher coupons than the current-issue bonds, doesn't that mess with our current year general fund debt issuance?

Also, note that the $14T does *not* include the $5T+ of mortgage debt held by GSEs which ain't worth anything close to that. There's genuine potential of that being a backdoor $1T plus in additional federal debt.

[Mmmm, Burger (C.J.)]

Originally Posted by Cletus Miller

I was under the (possibly? certainly? mistaken) impression that SS wouldn't be selling the bonds, but having them repaid. If they are actually going to be selling them on the open market, (1) they will recover less than face and (2) that will likely have some unexpected/unintended consequences.

When a given bond matures the SSTF can do one of two things. Take the cash or reinvest the cash in more bonds. Obviously the SSTF is doing this on a large scale with many bonds maturing at any given moment. So long as the SSTF has net income it will continue to invest in more tbills. Once it has net payments to make some bonds when they come due will go to SS payments.

But none of this is really relevant to anything--when the SSTF stops running a surplus, the deficit will grow even more rapidly and the government will need to finance that deficit spending by selling bonds in the market, which presumably will have whatever effects running a higher deficit will have.

In terms of government accounting, all this means is that the deficit will go up. I also imagine that we'll switch accounting so that there's a separate deficit that does not include the social security deficit and that will be the one cited by politicians.

[Adder]

Originally Posted by Cletus Miller

No, not on balance sheet for *deficit* purposes.

The calculations of when SS is "insolvent" always include draw down and repayment of the SS Bonds.

Gotcha

[Adder]

Originally Posted by Cletus Miller

So, everyone expects SS to sell the bonds on the open market?

No, I'm actually fairly sure that won't happen.

[Mmmm, Burger (C.J.)]

Originally Posted by Cletus Miller

SS is in deficit this FY. To pay all benefits in FY-11, SS will need to draw on the bonds..

Is that long-term or unique result of the 4.2% FICA tax rate for this year and 2012?

[Cletus Miller]

Originally Posted by Mmmm, Burger (C.J.)

When a given bond matures the SSTF can do one of two things. Take the cash or reinvest the cash in more bonds. Obviously the SSTF is doing this on a large scale with many bonds maturing at any given moment. So long as the SSTF has net income it will continue to invest in more tbills. Once it has net payments to make some bonds when they come due will go to SS payments.

But none of this is really relevant to anything--when the SSTF stops running a surplus, the deficit will grow even more rapidly and the government will need to finance that deficit spending by selling bonds in the market, which presumably will have whatever effects running a higher deficit will have.

In terms of government accounting, all this means is that the deficit will go up. I also imagine that we'll switch accounting so that there's a separate deficit that does not include the social security deficit and that will be the one cited by politicians.

It HAS stopped running a surplus.

If you think the level of current deficit matters not, then I respectfully disagree. If we were talking about $0 v. the amount of SS redemption, sure, that's nothing to concern anyone. But it's $500B v. $700B (soon enough) and current account matters to *some* in the global bond market. And, it's also the stated principal concern of many of our dear political leaders to reduce the *deficit*, not the *debt*.

[Adder]

Originally Posted by Mmmm, Burger (C.J.)

Is that long-term or unique result of the 4.2% FICA tax rate for this year and 2012?

Let's not forget near 10% unemployment too.

[Cletus Miller]

Originally Posted by Mmmm, Burger (C.J.)

Is that long-term or unique result of the 4.2% FICA tax rate for this year and 2012?

Where I had read it, that was for FY-11 BEFORE the (serious) proposal of the FICA reduction. It's going to be a substantial, rather than a rounding error, deficit b/c of the reduction.

[Cletus Miller]

Originally Posted by Adder

No, I'm actually fairly sure that won't happen.

That's what I thought/think, too.

Should we ask Hank to break the 2-2 with a rhetorical question?

[Mmmm, Burger (C.J.)]

Originally Posted by Adder

So thus on balance sheet, no?

ETA: BTW, another thing I have been wondering about but haven't bothered to look up is how the size of the trust fund compares the the expected future shortfalls. I occassionally find myself thinking about it as though the fund is a measure similar to an unfunded pension liability, but it isn't, as in fact there isn't any real relationship between its size and what will be owed.

You can read up here:

http://www.cbo.gov/ftpdocs/104xx/doc...ity_Update.pdf

Basically in about 25-30 years we reach a relatively steady state under current law where there is a "deficit" of about 1% of GDP between SS revenues and outlays. Obviously that needs a fix, but it's a bit easier since it doesn't blow up the way medicare does.