Why the SS Trust Fund is Partly Like a Car Loan

Following up on a previous post, it may be helpful to understand the SSTF by comparing it with a car loan.

If you take out a 5 year, 60 monthly payment, loan on a new car, then your discretionary income is reduced by, say, $400 per month for the life of the loan. This is likely to be a significant financial burden.

Somewhat analogously, the US Treasury starts to have to redeem the pseudo-bonds held in the SSTF when payroll tax receipts start to fall short of the mandated SS payouts, probably in the early 2020's, plus or minus. As long as this shortfall continues, the Treasury will have to keep redeeming the SSTF pseudo-bonds as long as some remain unredeemed. This is a very significant burden on the Treasury, which must be met by the selling of new debt to the public, assuming no tax changes of any kind.

When you finally make your 60th payment, you now own the car, free and clear. You no longer face a $400 per month payment burden. This is a good thing, for you. You certainly haven't gone bankrupt. Neither has the financial institution to whom you were making payments. True, it no longer gets payments from you, but that was expected from the beginning. It got everything it was owed at exactly the right time that it was supposed to. As long as your 5 year old car continues to run satisfactorily, you're in good shape.

When the SSTF becomes exhausted, this just means that the Treasury has completed redeeming all of the pseudo-bonds in the SSTF. This is a good thing for the Treasury, by itself, since a burden has been lifted. If the unlikely happened, and payroll tax rceipts were to cover SS payout mandates for all future years, that would be the end of it.

More realistically, your 5 year old car is likely to drop its engine on the expressway 2 weeks after you complete your loan payments, with the 60th. You may now have to take a new loan for a new car. However, if your new loan is once again $400 per month, you are now no worse off than you were before you completed paying off the previous loan.

As far as the Treasury and the SSTF go, it is likely that the payroll tax shortfall will be much the same as it was just before SSTF exhaustion. This means that the Treasury will have to continue selling new debt to the public at just about the same level as before. The only difference is what the new borrowing is called. Before the SSTF was exhausted, the pseudo-bonds in the SSTF would be converted to new public debt. After the exhaustion, the new borrowing from the public would be used to make up the payroll tax shortfall directly. Because the level of new borrowing does not significantly change, the Treasury is no worse off after the SSTF exhaustion. SS itself is no worse off either, because the mandated SS payments are still being fully made.

The only difference is that a different set of political promises is being met. Since the Treasury sees no increased burden whether it is redeeming pseudo-bonds or it is making up for the shortfall directly, it is almost unthinkable that Congress will not authorize the new borrowing required when the SSTF becomes exhausted.

The key takeaway point is that the exhaustion of the SSTF is an event which has both positive and negative effects which net out to zero. The exhaustion is no more of a negative event than completing the payments on your car loan and immediately buying a new one with a new loan with the same size payments.


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Kip, All true. The important


All true.

The important analogy is that the 60th payment and the redemption of the last remaining pseudo-bond both represent the completion of a specific obligation and the corresponding removal of a specific financial burden. The car may in any case no longer exist at the time of the 60th payment.

Regards, Don

"When you finally make your

"When you finally make your 60th payment, you now own the car, free and clear."

There's just one small problem with this analogy as it applies to Social Security: There is no car! The Social Security "trust fund" is more akin to borrowing cab fare every day and pretending it's a "car loan."

The better analogy is a husband and wife who "loan" each other money year after year and "issue" each other IOUs but who still end up spending all their joint income while pretending that, since they each have a "trust fund" filled with IOUs from the other, that they are somehow saving for their retirement. In the end, however, they have nothing.


The SSTF amounts to a

The SSTF amounts to a promise for future support, in exchange for your money now supporting those who get benefits now.

On a practical level, the fact that massive sums of money are not accumulated somewhere specifically "tagged" as mine and mine alone, is an advantage. History has shown us that politicians and businessmen cannot keep their hands off money sitting in a big pile somewhere. Look how large corporations gutted pension plans during the tech stock bubble and were legally allowed to do so, only to now whine that these plans are now massively underfunded.

When allowed to do so, the stage will be set to reneg on promises.

Greg, The SSTF amounts to a


The SSTF amounts to a promise for future support, in exchange for your money now supporting those who get benefits now.

It's much worse than that. Everything in the SSTF is the result of excessive current payroll taxes relative to current benefits. The excessive payroll taxes are then overspent by Congress by 1.76 times for things that have nothing to do with SS.

In theory, 100% of the excess could be used to reduce Federal debt held by the public. This is the only way in which excessive current payroll taxes can serve to effectively assist future SS funding. In practice, the debt held by the public is increased by 76% of the excess and general Federal spending is increased by 176% of the excess.

Regards, Don