For about 30 years, the Social Security taxes collected from employees, employers and the self-employed have exceeded the benefits that were paid to retirees and the disabled. What did the government do with the excess taxes it collected?
The excess taxes were invested. But where? Surely they had to be invested in the safest possible investment. And what would that investment be? Oh Yes; Of Course. What could be safer than U.S. Treasury Bonds?
But now, USA Today tells us that in 2010 " the (Social Security) retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more." But why worry about that? After all, there are trillions of dollars sitting safely in the Social Security Trust Fund. (http://news.yahoo.com/s/ap/us_social_security_ious)
But how does the S.S. Administration get that money out of the trust fund? Well, U.S. Treasury bills and bonds are debts of the U.S. Government. In the vernacular, they are I.O.U.s. In order to pay off any of those I.O.U.s, the Treasury Department has three choices.
1. It can borrow the money from someone else -- like the Japanese or Chinese.
2. It can raise taxes.
3. It can borrow the money from the Federal Reserve.
The Chinese have already begun to diversify where they invest their foreign exchange reserves -- away from the dollar. Other countries like Japan are as broke as the U.S. And some of the recent policies of the U.S. Treasury and the IRS are likely to drive a LOT of foreign investment away. So borrowing from foreign investors isn't as easy as it used to be.
President Obama has already told us he wants to raise taxes on the folks who make more than $250,000 a year and he wants to eliminate some alleged loopholes in the tax rules for U.S. based multi-national corporations. But he has promised not to raise taxes on the "middle class" -- which presumably means everyone making less than 250k per year. As I've indicated in other articles, the folks and companies that are targets of these tax policies won't be cooperative lame ducks. They will be doing everything the law allows to avoid or to postpone having to pay more taxes.
So that leaves the third choice. The Fed is always the lender of last resort for the U.S. government. But when the Fed buys debt obligations from the Treasury, it pays for the debt with newly created money. It isn't really necessary to physically print the money. The Fed just makes a bookkeeping entry and more money is magically created.
But -- for those like myself who agree with the Austrian school of economics, when the Fed creates new money it filters through the economy and increases prices. Sometimes the new money increases the price of consumer goods. Sometimes it gets invested in stocks or real estate or things like gold and silver bullion. And in today's economic environment, a lot of the new money is likely to be used to pay off some consumer debts or business debts. But over time, it will add to the total amount of money in the economy which will result in inflation. (See http://en.wikipedia.org/wiki/Austrian_School)
Those are the choices available to the Treasury Dept. to deal with existing obligations.
The Congress and the President have a fourth choice. They can renege on some of the promises of previous politicians who transformed Social Security from a reasonably sensible program for those who lived far beyond their productive years into a program that provides benefits for the low income beneficiaries far in excess of what a real insurance program would provide in exchange for the same contributions or premiums. Those who earned the maximum income during the past 40 years and therefore paid the maximum amount of taxes won't get as generous a return. They could have done better if they were allowed to invest the taxes they paid in a conservative mix of investments. But Social Security benefits are highly regressive -- meaning they provide proportionately more benefits to the lower income participants.
So, we can reasonably expect the Government to borrow as much as they can, to raise taxes as much as they can and to reduce benefits as much as they can (without extreme push-back from the retired and near retired). Once those sources have been tapped out, they will borrow the money from the Fed and we will pay for the benefits with funny money that will reduce the real value of our investments and will increase prices on the goods and services we need.
Vern
For more see http://money.cnn.com/2009/07/29/news/economy/fixing_social_security.fortune/
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