Before anyone panics, let me again assure everyone that the debt ceiling is going to be raised, despite the rhetoric, and Social Security checks are going to go out. The catastrophe that awaits the nation if the debt ceiling is not raised is so enormous that the threat to throw the nation into default has never been credible from day one. The serious leaders in Washington all know that, despite some of the bizarre and ridiculous comments from the back benchers.

In the meantime, since Social Security has percolated into the national discussion again, the age old charge that the government has "raided the Social Security Trust Fund" has bubbled up. Now this new question about how default would impact Social Security checks has turned into a political football backed by neither side explaining why they say what they say. Here is the scoop.

The Social Security Trust Funds Have Not Been Raided

The baby boom retirement is not something that snuck up on us. That train has been headed down the track for, well, 67 years. Knowing that the baby boom retirement would be huge cost for Social Security, and knowing that the baby bust that followed would be too small a workforce to be able to pay for it, the Social Security Administration has been saving up for the baby boom retirement since the 1970's.

The question is... how does a government save up several trillion dollars? I'm not talking about budgetarily. I'm talking about, you know, where does it go? If the Social Security administration had pumped nearly $3 trillion into the stock market over the last 30 years to save for the baby boom retirement, and then reversed course and started withdrawing that $3 trillion from the stock market, the economic distortion would have been both enormous and disastrous. For 30 years stock market returns would have been inflated beyond all imagination, and for the next 30 years they would be depressed no matter what happened to the economy.

This distorting effect would have been even worse if that money was invested in something our conservative friends like to think is the only "real" money... gold. All the gold that has been mined since the beginning of time has a value of about $7.6 trillion. If Social Security had invested $3 trillion in gold, it would have inflated gold prices as much as 40% over their long term value. And for the next 30 years, as Social Security would be dumping gold onto the open market in ridiculous quantities, the value of gold would crash to nearly worthless. Not only would that be bad for people who like to own gold, but it would be disastrous for Social Security. During the entire time they were saving up they would have been buying gold at horribly inflated prices, just so they could turn around and sell it for 30 years at horribly depressed prices. It just wouldn't make sense.

So where could the Social Security Administration set aside $3 trillion?

Well, as it turns out, the borrowing needs of the federal government have been (as we are now all painfully aware) $14.3 trillion and they are still going.

So rather than "raiding" the Social Security Trust Fund, the federal government simply borrowed $3 trillion from it rather than the open market. This worked out for Social Security because it got a safe place to put its money while minimizing market distortions. This is where people got the idea that the government "raided" the trust funds. People who assume that government spends as much money as it can get rather than that it goes and gets however much money it needs to spend assume that this means Social Security enabled the government to spend $3 trillion more than it otherwise would have spent. This just isn't true. The debt to Social Security is part of the $14.3 trillion the government owes and it will be paid back just like the rest.

So even though the federal debt is $14.3 trillion, only about $11.4 trillion has been borrowed from the global public. But it doesn't matter. We're $14.3 trillion in debt either way.

The mere fact that the government debt is greater than the $3 trillion it owes to Social Security proves that the availability of money from Social Security has not been the determining factor of what government spends! It it had not borrowed it from Social Security, it simply would have borrowed it on the open market like the other $11 trillion.

The key point is that large governments have no good ways of "saving up" without massively distorting markets... inflating them while they save up and deflating them while they withdraw.

Tomorrow... Why Social Security checks might not go out if the government defaulted.