It’s important to understand that some of US national debt is actually owed by the government, to the government. This is called intra-governmental debt. The following diagram from TreasuryDirect.gov shows the split between debt held by the public, and debt held by the government itself.
From the Committee for a Responsible Federal Budget, we see that within the Intragovernmental Debt Holdings, about 50% of the debt is held by the OASI Trust Fund, which stands for the Old Age & Survivors Insurance Trust Fund. This is basically Social Security.
$2.828 Trillion is owed to Social Security by other government agencies, specifically, the US Treasury. This means that the OASI Trust Fund owns US treasury bonds in the amount of $2.828 Trillion. Most of that debt is likely long-term debt, meaning that the duration of the bonds owned are in the 10-30 year range. The reason why is because Social Security’s retirement obligations are long term.
What does it mean that the obligations are long-term?
Basically it means when you graduate from college and get your first job, the OASI Trust Fund gets some money out of your paycheck (Social Security deduction) and buys 30 Year Treasury bonds with it. It’s considered an investment for your retirement; retirement investments are long-term investments. They buy 30 year bonds because they are supposed to have a higher yield, and it allows for interest collection over a longer period of time.
Why has there been so much talk about Social Security going bankrupt, and statements like, “Social Security won’t be able to pay out to millenials when they get to retirement age”?
It’s partly because of how low interest rate yields have been on 30 Year Treasury bonds. An investment in a 30 year treasury bond sucks; the interest rate on that bond has been extremely ever low since the 2008 Financial crisis.
Below you can see the yield on the 30 year Treasury bond, since 1989. The reason why I chose to show you a chart going back to 1989 is because if you joined the workforce back in 1989, your Social Security deductions were buying 30 Year Bonds yielding 9% per annum in interest. Those bonds are about to come due, meaning the Social Security fund will hopefully get paid by the US Treasury the last interest payment and the original principal/face value of the bond/loan, in 2019.
The Social Security fund will use that money to pay retirees, the ones who started working 30 years ago. At 9% interest, just interest payments on the Social Security holdings were enough to pay out retirees.
Today, at 2% interest on a 30 year Treasury bond, that’s no longer the case. Given that wages have not increased (in real terms, adjusted for inflation) since 1970, as the Pew Research Center details, Social Security payroll deductions have not been going up (in real terms) to compensate for the low yields. This is why sooner rather than later, the OASI Trust Fund will have to sell bonds in order to raise cash to pay out retirees. According to the Committee for a Responsible Federal Budget, Social Security Fund holdings are,
“…projected to fall to $5.2 trillion by the end of the decade, as some major trust funds will soon be forced to begin selling off the debt they hold in order to continue covering their expenses.”
If that doesn’t sound concerning, it should. If you don’t understand why, think of it this way.
What happens when you don’t have enough money to pay your bills? You start selling things you own. That’s exactly what the above says; OASI will soon be selling its Treasury holdings in order to raise cash to pay its bills. This will only decrease OASI interest income even further, meaning monthly income to the fund will drop. What does that mean? Somehow they will have to compensate. The easiest way? Take a little more out everyone’s paycheck.
The Social Security deduction from your paycheck will most certainly be going up.
It’s a precarious situation for the Government, when different agencies within it owe each other money. Note that some of the money that the Treasury owes is to the Military Pension Funds. Who’s the arbitrator if there’s a dispute between US Treasury and the Military Pension Funds? I don’t envy the president who would have to deal with that.
One way to solve the problem the OASI Trust Fund (Social Security) is facing is to allow them to invest in higher yielding bonds. One option would be to allow them to invest in GSE debt. GSE debt is primarily mortgage debt; its also known as Government Sponsored Enterprise debt. The two agencies that issue and hold that debt are Fannie Mae and Freddie Mac. They buy mortgages from private banks and hold onto them as debt securities. They are the governments cash cows; US Treasury is making a ton of money on those bonds because they yield much higher interest. And, added bonus, they are backed by a hard asset: American real estate. In addition, the government nationalized Fannie and Freddie when mortgage bonds were trading for pennies on the dollar. A huge upswing in housing prices since then made the 2008 investment in mortgage bonds by the government a huge, huge win.