The $3 Trillion Question That No One Wants to Answer


The media is not covering the problem looming in Social Security, one which will fall on millennials much sooner than 2033. The $3 trillion question is: Where will the government get the money to repay the Trust Fund?

This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker. 

When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.

The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.

This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.

In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.

If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.

The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.

The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world.  The terms of 1 3/8% are fairly generous.   Social Security is projected to need to start redeeming bonds in 2021.  Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.