Spendthrift teenager Billy Jones sits at the kitchen table, proudly examining a piece of paper.
“Why are you so happy, Billy?” asks his skeptical eight-year old sister, Suzy.
“Because today I am updating the balance on my Social Security Trust Fund and my Social Security credit card,” replies Billy.
“Wait, I thought you had terrible credit,” asks Suzy. “Is this a real credit card, like the one you use when your allowance runs out and you keep spending money?”
“Well, no. Technically this is more like an American Express card. It looks just like a credit card, but I have to pay the full balance immediately every time I use it. There’s no credit line attached to it, and it doesn’t let me borrow. But I like to pretend it’s a real credit card.”
Suzy sighs. “You have this AmEx-like card, and you call it your Social Security Card, right? asks Suzy.
“Right,” says Billy. “And once a year I figure out how my Social Security financial picture looks, and I issue a report I call the Social Security Trustees Report. Today is that day.”
Suzy shakes her head. “And you’re smiling. I was afraid of this. Let me review the situation to make sure I understand it. You typically get an allowance from Mom and Dad of about $18,000 per year. That’s money that the rest of us in the family don’t get to spend, it’s all for your purposes. You typically spend more than your allowance, about $20,000 per year, and you’ve been gradually accumulating credit card debt (on a real credit card that lets you borrow money from others). Lately you’ve been spending much more – like $25,000 this year and running up a huge amount of new credit card debt. Two days ago we looked at you lobbying Mom and Dad to allow your allowance to increase by about $500 per year on January 1st. I complained because that’s $500 less each year for the rest of the family.”
“Right, but you’re an irresponsible little sister who won’t let me have a bigger allowance when I have this enormous credit card debt.”
“Yes, but you have a bad habit of taking your allowance increases and spending them, as you did with that health care thing. But let’s not rehash Tuesday’s argument. As I understand it, you have two expensive spending habits, both centered on your iPhone: you spend a lot of money buying both music and movies. For some reason that I don’t understand, you call the music “Social Security,” and the movies you call “Medicare.”
“These two spending habits are growing rapidly. This year you’ll spend $4,800 on ‘Social Security’ music, and another $3,600 on ‘Medicare’ movies.”
“So far, so good,” says Billy.
“Right. And you always charge the music you buy to your ‘Social Security Card,’ and you charge the movies to your ‘Medicare Card.’ But these aren’t real credit cards that let you borrow. They work like American Express cards that require you to pay the full balance as soon as you incur the cost.”
“Now of the $18,000 per year that you get in total allowance from Mom and Dad, some of that is for specific chores that you do. This year about $4,400 of that $18,000 total allowance is compensation for mowing the lawn, and you dedicate that portion of your allowance to your Social Security music spending. You call that your Social Security payroll tax allowance.”
“And this year another $1,200 or so of that $18,000 annual allowance is compensation for shoveling the snow off the driveway. You dedicate that portion of your allowance to buying Medicare movies. You call that your Medicare payroll tax allowance.”
“Doin’ great, sis.”
“Thanks. Now today let’s focus just on Social Security. Since this card doesn’t actually let you borrow, you have to immediately find the cash you need when you buy Social Security music. This year you will spend $4,800 on Social Security music. You’ll take the $4,400 of dedicated Social Security payroll tax allowance you got because you mowed the lawn, and use that to pay for most of the music. That’s real cash you’re spending. But you need to find another $400 of cash to pay for the rest of the Social Security music costs incurred this year. That $400 comes from the rest of your allowance, from money not for any particular chore and not dedicated to any particular purpose. We can call that big stream of allowance money from which the additional $400 per year comes your general revenue allowance.”
“You project your future music spending will grow faster than your lawn mowing dedicated revenues, so next year you’ll take more than $400 from your general revenue allowance to close the gap between your Social Security payroll tax allowance and your Social Security spending.”
“Right, but it wasn’t always like this,” says Billy. “I used to buy less music, so I was actually making more in dedicated Social Security payroll tax allowance from mowing lawns than I spent on Social Security music.”
“And in past years what did you do with the extra money you made from lawn mowing that you didn’t spend on music? What did you do with that money that was supposed to be dedicated for Social Security spending?”
“Well, I carefully kept track of how much extra I made in Social Security payroll tax allowance that I didn’t spend on Social Security, and I wrote down those amounts on this piece of paper. I call this piece of paper my Social Security Trust Fund. Today I’m issuing my Social Security Trustees’ Report, which shows that I have a balance of $17,400 in my Social Security Trust Fund. I do the same thing for Medicare, sort of. That’s actually a bit more complicated.”
Suzy looks quite puzzled. “This is messy enough, so today let’s stick to just Social Security. You kept track of past Social Security payroll tax allowance that you didn’t spend on Social Security music, and that has accumulated to $17,400.”
Billy, “Well, actually, less than that, but I gave myself credit for interest.”
Now Suzy looks worried. “You gave yourself credit for interest. But I’m confused. What did you do with the actual money in those past years?”
“What money?” Billy asks.
“The portion of your allowance that resulted from your lawn-mowing that in past years you didn’t spend on music. Your extra Social Security payroll tax allowance. Where did the cash go?” asks Suzy.
“Well … I … um …” Billy stutters. “I spent it on other stuff.”
Suzy shakes her head. “Like what? Oh you know, everything. I spent it on boxing lessons so I could defend myself, and I bought an awesome Trapper Keeper notebook with it. I bought a new bike for transportation, and I spent some of it going to museums and movies and parks. I even spent some on my online farm…”
“OK, stop, stop.” You’re telling me you spent on other things the extra allowance that in the past you had dedicated to spend on Social Security music, but you also wrote down those amounts on this Trust Fund paper and said that it should go to future spending on Social Security music. This piece of paper you call a Social Security Trust Fund isn’t actually money. It’s just an accounting convention you created to keep track of how much of those past dedicated Social Security payroll allowance dollars you didn’t spend on Social Security, but you did spend on other things.”
“Plus interest,” adds Billy, nodding.
“Plus interest,” sighs Suzy.
“But this is interest you’re crediting on non-existent money. Now that your Social Security music spending has increased, each year you’re spending all your dedicated Social Security allowance on Social Security music, and you’re tapping into your general allowance to pay for the rest of your Social Security costs. You’re also subtracting this general allowance contribution from the ‘balance’ on your ‘Social Security Trust Fund’ piece of paper, even though there’s no real cash involved here. Subtracting from this so-called Trust Fund balance is pure optics, just like adding to that balance was in the past when you were spending the extra cash for other purposes.”
“You’ve got it,” says Billy proudly. And I am announcing today in my annual report that my Social Security Trust Fund will be depleted in 2037.”
“Riiiiiiight. Why does that matter?” asks Suzy. “That piece of paper that you call a Trust Fund has no actual resources behind it. There’s no money there. But it shows how much I should be able to draw from my future general allowance to spend on Social Security music, above and beyond my dedicated Social Security payroll tax allowance from mowing the lawn! You can tell yourself that, but where does the money come from? You can make whatever promise you want about how much you will spend on music in the future, but the cash is going to have to come from somewhere. In fact, you’re taking $400 away from other needs just this year to pay for this year’s Social Security music spending.”
“Let me ask you this,” continues Suzy. “Suppose we doubled that number on your piece of paper.” Suppose we just cross out the $17,400 balance on your so-called Social Security Trust Fund, and instead we write in $35,000. We’ll round up.”
Billy says eagerly, “Suzy, that’s fantastic! Now I won’t run out of money for music spending any time soon! With $35,000 in my Social Security Trust Fund, it will take decades to draw down that balance.”
“That’s exactly what worries me,” replies Suzy. “We haven’t actually created any more money by doing this. We have just changed an accounting balance for an imaginary account. You can tell yourself that you have more money to spend on Social Security music, but you don’t actually have any more cash, now or in the future. It’s not like a bank account balance, or even like the real credit card debt you have been accumulating.”
“I’m really worried that this Trust Fund balance and your Trust Fund reports are giving you a false sense of security, and they are preventing you from taking a hard look at how much you spend each year on Social Security music. You don’t have enough dedicated allowance this year to pay for your Social Security music spending this year. You have an immediate cash flow problem, in that you’re having to sacrifice $400 of other stuff just this year to make up the difference between what you collect in dedicated Social Security payroll tax allowance, and what you spend on Social Security. And that $400 gap will be bigger next year, and the year after that.”
“Billy, this is a problem for you right now. You need to slow the growth of your Social Security music spending. When you combine that with your spending on movies that you call Medicare, over time it’s going to grow to consume most of your $18,000 annual allowance. It will squeeze out your ability to spend your general revenue allowance on those boxing lessons, those school supplies, those museums and movies and parks and even your online farm.”
“You forget, sis,” says Billy with a grin. “While this Social Security Card isn’t a real credit card, I do have a real credit card. I can just borrow the extra money I need and run a bigger deficit this year. I promised myself I’d spend this $17,400 on Social Security music over time, and I can’t break that promise. I’ll just keep increasing my borrowing on my real credit card to do so.”
“And next year, and the year after that, …” cries Suzy.
“Yep. I plan to increase my spending each year on Social Security music. I’ll draw more from my general fund allowance to pay that which is not covered by my dedicated Social Security payroll tax allowance. If that threatens to constrain my other spending, I’ll just borrow and run up my credit card debt.”
“And you’ll keep doing this until …”
“By my calculations, I’ll need to do something by 2037, when my Social Security Trust Fund runs dry.”
“But there’s no money there! And if you keep telling yourself you’re OK for another 27 years, you’re not going to do anything about the real problem, which is that you can’t afford this growth rate of your Social Security spending. At some point this cash flow problem is going to cause your real credit card debt to get so high that you’ll bump against your credit limit. Then your only options will be to drastically cut back on your Social Security spending, or slash the amount your spend on other stuff, or …”
Suzy gasps. “Oh, no. Or you’ll wait until it’s too late, and then demand a bigger allowance, leaving even less money for the rest of the family.”
Billy sits quietly, failing to suppress a smirk. “And we haven’t even discussed Medicare.”
(photo credit: veganstraightedge)