It's one of the world's biggest piles of funny money, but when the deficits get out of hand, no one will be laughing.There's real money in the world, then there's funny money -- stuff that looks real, but isn't.
Today, let's talk about one of the world's biggest piles of funny money -- the $2.54 trillion Social Security trust fund. The trust fund matters now, because Social Security revealed last week that it plans to tap it for $41 billion this year, and will begin tapping it on a regular basis in less than five years.
This year's cash deficit, the first since the early 1980s and the biggest ever, means the Treasury will have to borrow money to redeem some of the trust fund's Treasury securities. Even at a time when Uncle Sam is borrowing $1.5 trillion a year to keep his checks from bouncing, $41 billion is real money.
Here's why the trust fund has no economic value. Let's say I begin taking Social Security when I hit the full retirement age of 66 later this year. Because its tax revenues are below its expenses, Social Security would have to cash in about $3,400 of its trust fund Treasury securities each month to get the money to pay my wife and me. The Treasury, in turn, would have to borrow $3,400 from investors to get the money to pay Social Security. The bottom line is that the government has to borrow from investors to pay me, regardless of how big the trust fund is.
It's not surprising that Social Security is now running a negative cash flow -- I predicted a year ago it was likely to happen this year, and wrote in February that it had happened.
Democrats, for the most part, say everything's fine because the trust fund has a fat balance. Republicans, who were happy to have Social Security taxes subsidize tax cuts for 25 years, have suddenly developed holier-than-thou fiscal rectitude. They're both wrong -- the Democrats financially, the Republicans morally.