Are The Government's IOUs To Social Security Really Worthless?

Challenging the Critics of the Social Security Trust Fund

Are The Government's IOUs To Social Security Really Worthless?
February 29, 2016

The argument that Social Security holds worthless IOUs took another hit in 2015. According to the recent announcement by the Congressional Budget Office (CBO), the government started to repay not only the interest but also the principal due on securities held by the program's Trust Fund.

The argument started to falter five years ago when payroll taxes stopped covering the annual expense of benefits. Since 2010, the system has used the interest earned by the Trust Fund to pay scheduled benefits. Without the Trust Fund, benefits would have been reduced 5 years ago, so it is more than an accounting gimmick.

I have never given much consideration to the argument that the Social Security Trust Fund is an accounting gimmick designed to funnel money to the general fund of the government. At best, the entire argument sounds like self-serving hyperbole designed to evoke an emotional response that will derail any sensible discussion. At worst, it sounds like a conspiracy theory.

First, let's strip out the hyperbole. All debt is an IOU. It is an agreement between parties for one to repay another an agreed-upon amount. Government securities with like terms are trading at historic highs rather than at lows, much less worthless.

So what is the point? Is the goal of this argument to make Social Security appear less stable? That is hardly necessary. Today, the system has nearly $30 trillion in promises for which it will not generate cash. The program holds $2.8 trillion in reserves or IOUs, which will postpone the crisis for a number of years.

Seriously, which number poses a larger problem? No one questions whether the $2.8 trillion will be repaid. No one seriously suggests that $2.8 trillion will offset the $30 trillion gap. If I had a bill for a dollar, and had a dime to pay it, I am unlikely to be worried about the dime.

These same IOUs are held in private pensions, and no one is complaining. Many of the sharpest critics of Social Security hold these IOUs in their own portfolio, so what is the big deal?

  1. Critics claim that the government owes the money to itself. Technically this isn't true. The government has no liability for Social Security benefits. The government is a fiduciary that collects revenue and distributes cash. If the amount collected is insufficient to cover expenses, the expenses are reduced to the level of revenue. The government does not owe Social Security benefits.

  2. Critics claim that the bonds aren't marketable. This is true – and pointless. The government securities held in the Social Security Trust Fund contain a put option, which enables the fiduciary to request immediate payment for the bonds. If the government were unable to honor this commitment, the bonds would not be marketable anyway.

  3. Critics claim vehemently that the bonds do not represent economic assets. For example, critics point to the observation made by the White House's Office of Management and Budget (OMB) that these bonds "are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures." No kidding. Yes if you borrow money, you have to repay it. What is the drama in that?

Whether the Trust Fund is held in government securities, IOUs, or gold bullion will not change the math of the system. You can't pay a dollar of promises with a dime.

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Daniel | 02.29.16 @ 18:19
It really does seem year after year these "IOUs" people count on could be worth less and less until they are near pointless. But we never know how it will pan out till it does.
Erin | 02.29.16 @ 18:19
Maybe one possible solution to this problem would be to remove the cap for paying into SS. There is a lot of income out there that is not being taxed, and while it might not solve the problem, it could certainly help.
Carla | 02.29.16 @ 18:20
This scares me as I get closer to retirement age. The government and its finances have been in the public eye lately way more than 20 years ago.
Sarah | 02.29.16 @ 18:21
It's a sad state of affairs that we even need to worry about it.
Elaine | 02.29.16 @ 18:21
This is very scary. Not sure how easy I feel about all this talk about SS issues. Getting my way to close to that age as I just hope it will not be as bad as they figure.
Jane | 02.29.16 @ 18:21
This is a murky area of understanding for citizens. $30 trillion in promises is almost incomprehensible. I wasn't aware that benefits are being paid out now by interest earned by the Trust Fund. That is a bit scar to someone like me, who will be eligible for benefits in about 10 years. Will Social Security still be here then? I think so, I hope so.
Heather | 02.29.16 @ 18:23
They definitely need to be taxing the higher income earners more and stop borrowing from it. Out generation will never see a penny of what we've put in if they keep this up.
Nancy | 02.29.16 @ 18:25
This is one of those arguments that will continue until Social Security actually goes belly up. Until it does there will be those that say it is imminent whether it is true or not.
Sara | 02.29.16 @ 18:27
Very interesting to break it down like this. And yeah seems like each year it gets worse.
Christina | 02.29.16 @ 18:29
I'm hoping by the time our kids are to start the worry about all this it's a lot better.
Bobbie | 02.29.16 @ 18:30
IOU's would not be necessary if they would quit taking from Social Security funds to pay for other projects.
Darius Slade
Health Services & Management in Richland, WA | 03.01.16 @ 13:54
I can appreciate the concerns I read and hear about social security. As many Americans are becoming eligible, and given the many opinions about the health of social security, it is reasonable that people are concerned. Use Moneytips and other helpful resources to become informed and to assist you in making plans and decisions about your retirement.
$commenter.renderDisplayableName() | 11.25.20 @ 01:45