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This episode aired on Bloomberg TV on Jan 28, 2013

Social Security Trust Fund

The Social Security Trust Fund is not a trust fund in the traditional sense. Instead it is a pool of 100% non-marketable inter-governmental debt obligations. Thus the SS Trust Fund is 100% invested in US debt.

Q. Everyone uses this term all the time, but maybe folks don’t understand it so well. What is it, exactly?

A. The more important question, really, is what it isn’t. It isn’t a separately segregated pool of assets standing ready to pay SS benefits in the same way, for example, that a state pension plan is… there, there are stocks, real estate, lots of alternative investments, etc. The SSTF is comprised 100% of non-marketable intergovernmental debt obligations.

Q. So, promises to pay by the US.

A. Right. So when the tax payments coming in exceed the benefit payments going out, a surplus is created. But it can only be used to buy US debt. Today, there’s something like $2.7 trillion of debt in there. Other countries also have their pension plans invested in their own governments’ debts, but nothing like 100%.

Q. And so all this plays directly into the arguments about which numbers to use when calculating the federal debt, right. The whole “external debt” vs “gross debt” debate.

A. Right. Social security has been getting a lot more money coming in than it had going out for decades. But that’s currently changing… suddenly, the number is going the other way, and the imbalance becomes huge many years out. There’s only one source of payments for all that money, and that’s the US. So it sure looks like including this number in the definition of “debt” is fair.

Q. And that, in turn, has a lot to do with the value of the dollar and gold…

A. Of course. If there’s not enough money to pay both outside creditors and internal obligations, the highly likely reaction by the government is to print more money. It’s another reason– aside from all the easy money policies of the past decade– that so many people expect the next many years to be inflationary even though its quiescent at this particular moment. Good argument for real assets.