It must be fantasy finance month. In my previous column, we discussed how on July 4, New Jersey Gov. Chris Christie created $13.5 billion out of thin air and credited it to the state’s troubled employee pension funds, making them look far less bad.
But Jersey Math, of which more later, is a rounding error compared with the Federal Fantasy Math that lets Social Security’s retirement and disability programs look better on paper even as their financial situation gets worse.
If you dig into the Social Security Trustees Report released last week, you find that over the past seven years, the retirement and disability programs have run through a total of more than $400 billion of cash — money the Treasury had to borrow to give to the funds to keep benefit payments from bouncing. But during the same period, the assets of the programs’ trust funds rose by more than $300 billion.
How can this be? Fantasy Math. From the end of 2009 through the end of last year, the trust funds were credited with more than $700 billion of interest on the Treasury securities they own — securities that pay interest by giving the funds more securities rather than cash.
No, this isn’t fake news. It’s real, live math. It’s based on numbers you can find by making your way to Table VI.A3 on pages 160 and 161 of the 261-page trustees report. The whole report is here: ssa.gov/OACT/TR/2017/tr2017.pdf.
Before we proceed, please note that these numbers, which cover the operations of the retirement and disability programs, have been disclosed in the trustees’ annual reports each year. But the numbers aren’t summarized the way I’ve just done. And they’re certainly not called Fantasy Math.
Please also note that I’m not blaming this situation on the people who run Social Security, for whom I have enormous respect. This isn’t their doing, it’s a situation that they inherited.
The major problem giving rise to Federal Fantasy Math is that Social Security’s bookkeeping is opaque and misleading. That’s why most people seem to think that everything is fine with the programs as long as their trust funds are growing.
A secondary problem is that most people — including those in the news media — focus on the trust funds’ projected expiration date (currently 2034 for the retirement program and 2028 for the disability program) rather than getting to the heart of what’s going on. To wit: that although Social Security’s programs are self-sufficient on paper, in reality they’re running into major problems.
By comparison, the Jersey Math that I discussed last week is small change. Christie got the Jersey legislature to put the state Lottery, which makes about $1 billion a year, into state pension funds for 30 years. A firm the state hired said that today’s value of the Lottery’s projected 30 years of future profits is $13.5 billion. Putting that number on the asset side of the pensions’ balance sheets is like moving a dollar from your left pocket to your right pocket, and saying that your right pocket has $13.50 in it. It makes things look better, but doesn’t help them get better.
Now, let’s look at some key Social Security numbers.
From the start of 2010 through the end of 2016, the retirement and disability programs took in a combined $5.320 trillion of cash. I’m including the $217 billion the Treasury put into the trust funds in 2011 and 2012, when Social Security taxes were reduced in the name of economic stimulus. I’m also including the $190 billion of income tax that higher-income Social Security beneficiaries paid on their benefits.
Cash outlays totaled $5.736 trillion. That nets out to a cash drain of $416 billion. The Treasury borrowed that money in the financial markets to redeem trust fund securities so Social Security had the cash to pay benefits.
So how does a $416 billion cash drain end up adding $307 billion to the combined trust funds? Easy, the funds earned a combined $723 billion of interest on their Treasury holdings.
Now look. I’m not saying that Social Security is about to go under, which it isn’t; or that its programs are a fraud or Ponzi scheme, which they aren’t.
My fear is that people will decide to “solve” Social Security’s problems by increasing the interest rates on the trust funds’ non-cash-paying $2.85 trillion of Treasury securities. Or by creating securities out of thin air, a la Jersey, and putting them into the trust funds.
But preserving Social Security in anything like its current form for our kids and grandkids involves sacrifice, not financial subterfuge. We have to put in more cash and slow the growth in benefit outlays. Trusting in trust funds and ignoring reality won’t end well. You can trust me on that.