The Lincoln Plawg - the blog with footnotes

Politics and law from a British perspective (hence Politics LAW BloG): ''People who like this sort of thing...'' as the Great Man said

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Thursday, April 07, 2005

The social security trust fund Big Lie grows like Topsy

It's politics. Just like the Congressional Schiavo Circus organised by Tom DeLay a few days ago: a thoroughly sordid and reprehensible charade designed to dupe the uninitiated, excite the base and turn an electoral trick or two down the line.

It's why pols and hacks are the most despised forms of life outside the ostensibly criminal professions.

Little surprise, therefore, that the Dems have been making hay with their Big Lie about the social security trust fund [1].

They are exploiting a natural mental block the layman faces in understanding the nature of government debt.

One might compare the similar problem of understanding how banks create money - and the difficulties that result in crashes when depositors rush to get 'their' money out of a bank. (There is no such thing as 'their' money: there would be no banking if there were.)

Bush says (April 5)
There is no "trust fund," just IOUs
and Dems are yukking it up with monkey shines about how the President has just told foreign investors their T-bills are worthless, and a whole lot of (I suspect, ill-informed) expatiation on the the full faith and credit clause of the Constitution.

Bush is - in this instance [2] - perfectly correct: as I took pains to explain in my earlier piece, what are called trust funds in the social security legislation lack several crucial features of trusts as known to private law. Use of the term trust is in the highest degree misleading; and, the legislation being the work of politicians and lawyers, I beg leave to assume that that the deception was, and is, deliberate.

And, as for the IOUs - the questions are, by whom are they held, and from whom is the money owed?

For instance, suppose Microsoft Corp decides to buy a billion dollars worth of US Government stock. It hands over the equivalent of a billion bucks [3] and receives (I'm assuming) certficates showing the amounts of interest and principal owed by Uncle Sam and the due dates of payment thereof.

The stock is an asset of Microsoft Corp, duly booked in its balance-sheet; the company could use the stock as collateral for borrowing, or to back sales of call options or a thousand other financial transactions I haven't heard of.

Now, imagine that the billion dollars is owed to Microsoft Corp, not by the US government but by a 100%-owned subsidiary of Microsoft. What value does that debt have to the parent company as collateral for a loan?

Zero. If the Chief Financial Officer went to a bank and offered the loan from the subsidiary as collateral, the bank would tell him to take more water with it!

Why? Because the loan is not in any real sense an asset: because the subsidiary is wholly owned by Microsoft Corp, it's as if Microsoft Corp owed itself the money! It doesn't represent any real-world assets: it's just a bookkeeping entry.

If Microsoft Corp were to sell the subsidiary to IBM (work with me...), with the loan still outstanding, that would be a different matter: now, effectively, IBM owes Microsoft $1bn. Same loan: completely different consequences.

Same goes for those IOUs that Bush was talking about: because the social security trust funds are the equivalent of 100% subsidiaries of USG [4], the US government bonds it holds are of no economic value (just like the loan made to Microsoft Corp by its wholly-owned subidiary in my example).

If those bonds were sold on the market to - Mitsui Bank, say - they would immediately become assets with legal and financial substance.

Transferring stock to the 'trust funds' is, as I pointed out before, like a guy transferring change from one pocket to another. No person can owe himself money - even the US government!

One might ask [5] what use these trust funds are: legally speaking, I would say, none. Contributors have no vested interest in the benefits they are expecting: if those benefits were reduced - by increasing the retirement age, for instance: something that has been talked of a good deal as an element in an alternative to Bush's privatization - contributors have no legal action against USG (so far as I'm aware).

What they do have is the enormous political imperative on administrations not to reduce benefits.

The closest in private law would, I suppose, be a revocable trust - a trust whose founding document provides that it can be terminated, or have its terms varied, by the settlor. But even such a trust, so long as it was not revoked, would create genuine legal relations between settlor, trustees and beneficiaries which are absent in the case of the ficititious social security trust funds.

However, a revocable trust has this in common with the social security 'funds': no one would lend money on the strength of any beneficiary's expectations from the fund.

Will Franken and the left bloggers continue bamboozling with their IOU shtick? You betcha. They, as we all do, remember the Swifties...

  1. Explained at length here on March 24.

    It would be misleading not to credit the antics of George Bush in giving credence to the Dem lies by purveying his own on social security.

  2. Savour the moment!

  3. Using the banking system - but let's not get into that complication...

  4. Even less substantial: as the Clinton budget paper I quote in my earlier piece points out, these trust funds are just bookkeeping entries.

  5. As Falstaff asked about honour in Henry IV Part 1.


That Bush is right on the (lack of) substance of the trust funds does not, needless to say, imply anything about the suitability of his proposals (whatever they are) for social security. My hunch is that the whole social security privatization thing is misdirection to attract attention aware from the far bigger and more pressing problems with Medicare - which Bush, aided and abetted by a couple of dozen contribution-whore Democratic senators, made a whole lot worse with his God-awful prescription drug benefit bill in the 108th.

But that's all I can manage on the substantive question. And a suggestion: more actuaries, less ass-talking might help the debate veer solutionwards.

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