What Rush Does Not Know: Social Security
Rush Limbaugh is my favorite radio personality. I agree with him about 90% of the time. Still, on some issues he is just plain ignorant. So, I’ve decided to write a few articles about what Rush does not know. This article explains how Social Security system functions, and why we need Social Security. To save money for the retirement, as Rush suggests, will not work.
Monetary Savings Vs. Real Savings
Creation of the Social Security system was one of the greatest accomplishments of FDR. Some public officials argue that people should save for their retirement and depend less on the government. People believe that the concept of savings means to save money. That is true for individuals, but not for the economic system as a whole. The more money an individual, or a family, or a business entity save, the higher are their savings, and the more purchasing power they have as a result. But monetary savings of the economic system are not a sum of monetary savings of individuals and businesses. For example, if one person buys a pen for $1, his monetary savings go down by $1, but monetary savings of the pen seller go up by $1. Total monetary savings do not increase in the economic system, because monetary spending of one party equals to monetary savings of another party. It’s a zero sum game, but none of radio personalities are aware of this fact.
If all consumers stop spending, then the total amount of money in circulation will end up in the hands of consumers and in their bank accounts. Most businesses will go bankrupt. The whole economy will be ruined. The nation of savers will become one of the poorest nations in the world.
A country can not get rich by saving it’s own money. If that were true, the government would drop bags of freshly printed money from helicopters, so that everyone could save more money. Then, of course, everyone would save more money, but people would not have more purchasing power. The only way to increase savings in the economy is to create long-term productive assets. Factories, commercial and residential buildings, roads and bridges are productive assets. Productive assets represent real savings in the economy. Unlike monetary savings, accumulation of productive assets is not a zero-sum game. If, for example, everyone buys a house or an apartment, it will increase total savings in the economy.
Social Security Trust Funds
The Social Security system is primarily a pay-as-you-go system. Government collects taxes. Tax income is deposited on a daily basis and is invested in “special-issue” securities.
By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future.
A government bond is a promissory note. Government borrows money in return for an “I Owe You” note, or simply an IOU. Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the federal government.
Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When “special-issue” securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.
Assets of the trust funds consist of real economic assets that can be drawn down in the future to fund benefits. Federal government owes Social Security Trust Funds principal and interest at some future date, and cash inflow in the future has present value. But the real question is not whether Social Security Trust Funds own assets that have real value. The real question is what is the purpose of the trust funds.
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