"The Bottom Line
Many people believe that much of U.S. debt is owed to foreign countries like China and Japan. The truth is, most of it is owed to Social Security and pension funds. This means U.S. citizens, through their retirement money, own most of the national debt."
Counting Social Security as a holder of the national debt is nonsense. Usually the cited debt excludes intragovernmental debt, since these internal government-internal IOUs are utterly meaningless with respect to the debt the country has outstanding. Most honest brokers will never cite the meaningless number, but rather the "debt held by the public".
Intragovernmental debt isn't what gets you to "most" or anything, but it should not be counted in any situation where we're talking about the fiscal or macroeconomic situation, rather than a political point.
> Counting Social Security as a holder of the national debt is nonsense. Usually the cited debt excludes intragovernmental debt, since these internal government-internal IOUs are utterly meaningless with respect to the debt the country has outstanding.
Consider 2 situations.
1. Social Security lends the government a trillion dollars.
2. Bob lends the government a trillion dollars. Bob sells this loan on the public market. Social Security happens to be the organization that buys that loan from Bob.
What makes the former "Utterly meaningless", but the latter not?
It's not like Social Security is... Planning on forgiving that debt.
> Social Security lends the government a trillion dollars.
This is a nonsense step. There is no meaning to the social security lending the government any money, as social security is the government
> Bob lends the government a trillion dollars. Bob sells this loan on the public market. Social Security happens to be the organization that buys that loan from Bob.
This scenario is just "The government buys back some of its debt, reducing its outstanding debt." The "Social Security" part is just a random detail that doesn't add anything.
(BTW, Social Security doesn't actually do this. They hold special bonds that are not the same ones available to the public.)
Social Security is not funded by the government, it's funded by payroll taxes. Saying that Social Security loaning money to the government is meaningless is like saying that you loaning money to your brother-in-law is meaningless because you both have accounts at the same bank.
Uh, if accounting is a fiction, well, I'm not going to say there isn't a kernel of truth to that, but it doesn't help us answer the question of who has debt responsibilities to whom; the entire enterprise is predicated axiomatically on "accounting fictions".
Social Security is a government program like any other. The delineation of tax types is just branding to make people like it more, it isn't economically meaningful. When the payroll tax is higher than the SS spend, the government just spends the money. (These bonds are IOUs for all the times they do that.)
It's like saying that it's meaningless for you to loan yourself money, because it is (except when there is some other, external reason that it carries meaning, not by rules you made yourself.) We constantly ignore these internal self-debts for people and for companies.
> Most economists agree that the debt held by the public is what really affects the economy. As the Congressional Budget Office stated in its June 2009 report on the long-term budget outlook, “Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”
> Social Security is not funded by the government, it's funded by payroll taxes.
If it is funded by taxes, it is funded by government.
You could argue that the social security trust funds are loaning money to the general fund, but that’s like saying your savings account and money market account are loaning money to your checking account.
I fail to see how this debt is "meaningless" given interest is being paid and the solvency of the program is not legally guaranteed.
Congress may step in and directly fund certain SS programs through some other means once the ss trust fund fails to cover these expenses, but that outcome is far from guaranteed, so the ability of this fund to generate revenue through lending to other parts of the federal government remains material.
Both cases are meaningless debt. The interesting information is total amount owed by the government minus total amount owed to the government.
If I take a loan from the bank for $1000, but also have $1000 in a bank account in another bank, then my debt is 0. Social Security is a bit like the second bank account.
> The interesting information is total amount owed by the government minus total amount owed to the government.
That is correct.
In the case of social security, you also have to account the total amount that social security owes to its contributors.
Because at the end of the day, Social Security has to pay out benefits, this debt isn't just pointless accounting fiction.
"Social security owns government debt" very clearly communicates that the government indiscriminately defaulting on loans will mean that social security beneficiaries will have to take a haircut - just like if I replace the words "Social security" with "XYZ pension fund." Just because the government runs this particular pension fund doesn't mean that it's all that much different, accounting-wise from a private one.
It's the same party. Bob is an outside party. When my left hand owes my right hand it doesn't matter whether I have the intention of forgiving that debt or not, it is an internal matter, one that may show up on my balance sheet but it has no direct effect on my day to day affairs. Because just as it won't be forgiven it also won't be called in overnight or used to manipulate the market against me: I control both sides of that equation.
> Most economists agree that the debt held by the public is what really affects the economy. As the Congressional Budget Office stated in its June 2009 report on the long-term budget outlook, “Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”
If the Treasury defaulted on its obligation to pay the interest and principle on the debt owned by SS, the ratings agencies would downgrade US Treasuries the same way they would if they failed to pay Japan, or any other bondholder.
That means that I need to pay myself in order to be paid?
At the risk of sounding pejorative, and understanding that there are volumes of sophistries in support of the status quo: how is this not effectively a Ponzi scheme?
Any viable large-scale retirement system is going to be a Ponzi scheme, because the "old investors" (retirees) are going to be dead soon and the only way to support them is to recruit "new investors" (working-age people). Tontines, life insurance, bank deposits, the stock market, 401(k)s, pensions, cryptocurrency, whatever - when you unravel them deep enough, they're a Ponzi scheme. This applies to even safe, conventional investments like a bank savings deposit: what's really happening there is that you amass a large credit over your lifetime, and then when you need extra care and support and can't work for it anymore, you transfer that credit over to a working-age nurse/etc so that they can build the same sort of credit for their old age. People who don't budget for this properly grow old destitute and unable to convince anyone to aid them.
In this regard, it mimics life itself. At some point the body gives up on repairing all the cellular damage that's accumulated and just hopes that it's made new humans along the way.
Civilization is built on all the side-effects of humans chasing Ponzi schemes. The reason governments ban actual Ponzi schemes (in the sense of "Everybody send me a dollar and pass this on, and I'll give you a $0.50 for everyone you recruit") is because it incentivizes the citizenry to do nothing other than create and participate in Ponzi schemes. Meanwhile activities like founding startups or trading stocks - which are every bit as Ponzi as that - are legal because the pursuit of them creates beneficial social effects (like innovation, price discovery, and capital allocation).
> Any viable large-scale retirement system is going to be a Ponzi scheme, because the "old investors" (retirees) are going to be dead soon and the only way to support them is to recruit "new investors" (working-age people). Tontines, life insurance, bank deposits, the stock market, 401(k)s, pensions, cryptocurrency, whatever - when you unravel them deep enough, they're a Ponzi scheme. This applies to even safe, conventional investments like a bank savings deposit: what's really happening there is that you amass a large credit over your lifetime, and then when you need extra care and support and can't work for it anymore, you transfer that credit over to a working-age nurse/etc so that they can build the same sort of credit for their old age.
Not necessarily. One could imagine an individual storing and preserving enough food for their retirement during their working life, and then eating through that stock in their retirement - or, at a slightly more sophisticated level, a group of people buying a farm and setting aside enough gold to pay labourers to work it for them - or, at a more sophisticated level than that, owning enough valuable stuff through investments to be reasonably assured of a decent retirement. The claim that social security is Ponzi-like is the argument that there is no (or insufficient) pile of valuable stuff matching the liabilities already incurred.
When people call investments a ponzi scheme, they implicitly discount the fact that said investment is _producing_ extra stuff.
A real ponzi scheme is one which is not producing stuff, but requires new investment to pay out old investors.
Stocks are not ponzi schemes, because a stock does not require a new investor, because the company behind the stock is earning profit. A new investor is willing to buy the old stock for a higher price than originally sold, because the company is making more money (and is expected to make even more in the future).
If one must withdraw from their 401k (sell it's holdings), which they must at a certain age, without new buyers (investors) keeping demand up, the prices would deflate. New 401k and Wallstreet investors are needed to keep prices up.
If the holdings are inherently valuable then their value should be stable regardless of how many people are buying or selling.
(In reality there's a spectrum of how speculative any given investment is; basic things like food and land are certainly subject to some speculation, and even hyped penny stocks probably have a nonzero fundamentals case for why they're valuable. But that doesn't mean there's no distinction at all)
i dont know in detail how 401k is managed, but if you're nearing retirement, you do not keep such a high allocation of stocks in your account, because the volatility is going to prevent you from being able to accurately plan financially.
So it "doesn't matter" where the prices are - because a well planned retirement means you convert some % of your allocation to a more stable asset, like bonds, and live off those bonds. In the mean time, fluctuations of the stocks doesn't affect you as much, and you can strategically sell when the prices are "high".
Because unlike in a Ponzi scheme, the US government can simply choose to create more money, thus meeting the obligations of its payments.
A Ponzi scheme involves pretending a balance exists when there isn't one. When the gov't says "we will give you dollars later" and they give you dollars later, you might complain in the theoretical universe where the dollars aren't worth much/at all, but they can indefinitely match your bargain.
You can choose to opt out of this system! Go into the countryside, barter for everything. But perhaps, perhaps, there is a reason that economies that have fiscal flexibility flourish and economies that are pegged to some other store of value they don't control have bigger problems resolving economic issues.
>Because unlike in a Ponzi scheme, the US government can simply choose to create more money,
It sure can, but this doesn't go far enough.
The US Govt' can only choose to "print money". It cannot choose otherwise. This is because fractional reserve banking allows financial institutions to lend out the same $1 multiple times.
The result of collecting $1 and lending 6 people that $1 with an expected total payment of $2 per debtor results in $1 causing $13 in the economy.
The essential element of a ponzi scheme is that investors are deceived.
> A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds.
In contrast, the Social Security model is pretty transparently a wealth transfer from workers to the elderly and disabled.
everything else matches. you (old investor) are receiving profits from new investors. and in some countries retirement money is speculative matter for politicians (vote for me I will increase retirement payments).
Some other differences. Ponzis promise high rates of return on investment; Social Security promises vastly below-market returns for most workers. Investors can theoretically redeem from Ponzi investments at any time; SS is completely locked up until you're ~62. Ponzis are voluntary; SS isn't. SS is a mandatory government spending program; ponzis aren't.
Main difference is the profits come from work being performed by members of society that can work, in the form of actual problems being solved. The members of society who are working hope this will help perpetuate the cycle by allowing new members of society to work and solve problems when the previous working members are not able to work.
Ponzi schemes have a fairly specific definition, social security is just a tax that we pretend is going to yourself when you get old. In reality it is just a tax paid by workers and some amount of the government's budget is used to pay retired people money.
I had this same question when I first learned about social security and saw a non-trivial amount of my paycheck funding the program. So I wrote this comparison (it is about 10 years old but still accurate): https://www.diffen.com/difference/Ponzi_Scheme_vs_Social_Sec...
So if someone owes you money (a "debt" perhaps), but it's pretty clear that same someone won't be able to pay you and everyone else they owe --- what do you do?
I'm inclined to side with the other comment nearby: cutting payments to foreign creditors is easy, cutting payments to your own citizens is a disaster. Sure, there's this magic pixie dust of MMT, but with inflation already poking it's sharp edge into every day life, I doubt we can print our way back to prosperity.
Uncle Sam could cut payments to China or Japan in a crisis. It’s much harder to cut payments to your own people. It would instantly make any crisis much worse.
The US has excellent credit because, beginning with Alexander Hamilton, it has never ever cut a payment on debt no matter what crisis it thinks it faces. Treasury notes are as good as money because of this.
Keep in mind that debt is a liquid asset. If you were foolish enough to not pay out Chinese debt holders, they would simply sell to Americans. The notion of "lets not pay xyz" has spectacularly bad outcomes because it signals to the world that you are not a serious nation when it comes to debt.
In the long term, the US strategy has clearly paid off.
The US has excellent credit because it has largest military and is the dominant global player. That makes money parked in US T-bills safe. Liquidity and good, healthy economy (but not perfect) helps.
The big military only works in US’s favor because of the US commitment to pay.
A country with a reputation for stealing people’s money does not attract foreign investment no matter how big the military. Does a robber seem trustworthy to you just because he’s got a big gun?
If the past 2 decades haven't blown the "deficit/inflation" correlation myth out of the water, just wait until the US goes all Japan and turns up the printers even more and have absolutely nothing of consequence happen to it (especially considering the US is even more isolated from raw resource allocation cuz of all the sheer size and diversity of the economy).
Simply the evolution of the economic output moving from manufacturing driven to what it is now makes the comparison a little less jarring.
It flips the inference the author of that website is pushing on its head if you consider what those numbers are actually indicating with the context of what the definition is. Maybe it means the "Volume of input" has been greatly improved because of technological assistance, maybe it means human elements contributing to economic input have more help from advancement in sciences, maybe there are a lot more complex factors at play here than what we are aware of.
tl;dr: "Productivity" in economics is not the intuitive sense of "productivity" the word in common English usage that indicates human work.
This site goes into more detail on how productivity as shown on the famous chart is useless for telling you anything useful and worse means something different from the layman understanding of the word. With charts and basic maths.
[Shrug] Maybe this would explain the strange appeal that covid19 has for some people, think tank groups and social media that were basically driving old and gullible people to its own demise in the last years feeding them with all the wrong advice 24 hours a day.
> It’s much harder to cut payments to your own people.
You never have to when you control the actual production of the currency.
A foreign entity might demand to be paid back in actual assets, whereas joe citizen will have to accept any monkey money the USD decides to pay him back with.
LOL, no, a foreign entity can't buy a contract promising to pay X dollars and then demand to be paid in euros or something. The bond is not like a magic lamp that you rub to get wishes. If you don't like the payment terms, then don't buy the debt instrument with those terms.
Yeah, that was also covered in the first (second?) paragraph:
> Most headlines focus on how much the United States owes China, one of the largest foreign owners. What many people don’t know is that the Social Security Trust Fund, also known as your retirement money, owns most of the national debt.
Kind of repetitive, but at least it's not clickbait.
Calling the Social Security Trust Fund's bonds part of the national debt is meaningless to the point of being intellectually dishonest. It's an internal IOU, not an actual debt owed to some other party. Any time people talk about the national debt and include intragovernmental debt, stop listening to anything they are saying.
Bonds held by the Social Security trust fund have the same legal weight as bonds held by the public: defaulting on them would be a violation of federal law. The Treasury has no option to say “it’s only an internal IOU, we don’t feel like paying.”
Bonds held by government programs are real (not optional) demands on future government revenue. When Congress passes a budget each year, that budget has to cover all payments on outstanding debt, including intragovernmental holdings, not just those held by the public.
Social Security bonds, when redeemed, fund Social Security benefits, which go to real Americans. Defaulting on bonds held by Social Security would result in real reductions in income outside the government.
> Most economists agree that the debt held by the public is what really affects the economy. As the Congressional Budget Office stated in its June 2009 report on the long-term budget outlook, “Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”
I don't see where you are coming from. The debt owed to other portions of the government are no different than external debt. Both must be paid in the same way. Neither can be defaulted on.
They are different in the same way that debts between departments in a company or mental accounts of one person are different -- they mean nothing externally.
> Most economists agree that the debt held by the public is what really affects the economy. As the Congressional Budget Office stated in its June 2009 report on the long-term budget outlook, “Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”
"The Bottom Line Many people believe that much of U.S. debt is owed to foreign countries like China and Japan. The truth is, most of it is owed to Social Security and pension funds. This means U.S. citizens, through their retirement money, own most of the national debt."