08/10/2010 04:29 pm ET | Updated May 25, 2011

Social Security: The "IOU ... Nothin'" Argument Strikes Again

Allan Sloan, Senior Editor at Fortune and a frequent Washington Post contributor, is usually a smart and fair guy with a knack for seeing through the usual DC economic spin. That's why it's particularly disappointing to see him get it wrong on Social Security trust funds, and in a way that provides ammunition to those who would do the wrong thing morally. Today's piece by Sloan is an excellent example of the arguments being used to justify breaking commitments to working Americans. So, even if that's not his intent, it's important to respond.

Sloan says that the $2.54 trillion Social Security trust fund -- money that the government borrowed to offset tax cuts, a couple of wars, and a whole host of other expenditures -- is "funny money" that looks real but isn't. He mocks this longstanding financial (and moral) obligation as a "Geithner bond," complete with the picture of a Monopoly-money bond with Geithner's face on it. (It's a handy rhetorical move to pin this on ol' Tim, since he seems pretty unpopular these days, but most of this debt was incurred in previous Administrations.)

Here's the example that's used as the crux of Sloan's "funny money" argument: If he and Mrs. Sloan begin collecting their Social Security when they become eligible this year, "Social Security would have to cash in about $3,400 of its trust-fund Treasurys each month to get the money to pay my wife and me." So, argues Sloan, the trust fund's accounts aren't "real money" at all.

This is important. Social Security trust funds will have an annual surplus of $77 billion in 2010 (because of interest earnings on bonds and certificates of obligation issued by the US Treasury), but payroll taxes alone won't cover the full cost of benefits. Sloan writes that Social Security will "tap" the Treasury Department to cover the $41 billion difference between tax income and benefits paid this year, but that's loaded language. Collecting interest on borrowed funds, or for that matter the principal, is not what we usually consider "tapping" (a slang word for borrowing or asking for money). Sloan's argument, as nearly as I can tell, is that the $41 billion isn't "real" because the Treasury Department might need to borrow to pay for it.

That doesn't make sense. It's an IOU. An IOU is both a financial instrument and a moral obligation. It's wrong to say that a government IOU has no value unless you expect the government to default. Why should a financial obligation to the future recipients of Social Security be treated with any less gravity than one to a bank or other lender? Banks consider the obligations the government has toward them very real indeed. Is Mr. Sloan, suggesting a bank-held Treasury bill or debt obligation isn't "real"?

Employees and employers paid into the Social Security fund for the sole purpose of providing these benefits. Politicians raided the kitty to borrow the funds for other purposes. We as a nation have an ethical responsibility to pay it back.

Here's another problem with Mr. Sloan's argument: That $41 billion is only 6% of the total benefits of $686 billion that will be paid this year. So Social Security would only have to cash in about $200, not $3,400, to provide the Sloans with the retirement security to which they're entitled each month.

And, as the Social Security Trustees reported this year, this year's shortfall is "attributable to the recession and to an expected $25 billion downward adjustment to 2010 income." We'll probably have another year like this one, followed by a couple of years of surplus. After that the plan will need to draw down on the IOUs for a portion of its payments under current projections.

The real shocker in Mr. Sloan's piece is this line: "The trust fund is of no economic value." Let's hope that nobody takes him seriously when he says that, because it could set off a panic. Bonds from the United States Treasury are of no economic value? They are, in fact, one of the safest forms of investment. What could he mean?

Apparently he means that they're of no value in reducing the deficit, since he bases that statement on this quote from the 2009 Trustees report (presented as if it were a smoking gun): "Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new income to the Treasury, which must finance (them) through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public."

It's true that redeeming these bonds doesn't reduce the deficit -- but that's the point. It shouldn't. And given that Tim Geithner is one of the Trustees, along with the Secretaries of Labor and HHS and the Social Security Administrator (two public trusteeships are awaiting confirmation), it's hardly surprising that this reminder was included last year. (It's not in this year's report.)

Mr. Sloan says that both political parties are "wrong" -- "the Democrats financially, the Republicans morally." But the financial argument for repaying the money is perfectly sound: Government bonds -- all IOUs, for that matter -- have real financial weight. They can't just be declared invalid, or "funny money," because the borrower now has other priorities and doesn't want to borrow to redeem it, even when the borrower is the nation itself. In the end, the argument that this money isn't "real" is morally mistaken, too. It's based on the premise that government debts to the Social Security fund have no ethical, legal, or economic weight.

"Let's not kid ourselves that a fat trust fund is the solution," writes Sloan -- but a solution to what, exactly? It's certainly not a solution to the Federal deficit, any more than the government's other debt obligations are. That's why it's wrong for Alan Simpson's Deficit Commission to be going after these benefits.

I hope Mr. Sloan comes to see the flaws in his argument. Social Security is a separate trust, a pact to provide benefits to the American people. Debts to Social Security are real and valid, and if they're not honored millions of Americans will suffer. That's why we hope Mr. Sloan will come to see that the "funny money" line, and the "gag" bond illustration that went with it, really aren't funny at all.


Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Strengthen Social Security campaign. Richard also blogs at A Night Light.

He can be reached at ""