Real Money

REAL MONEY….One of the most common conservative critiques of Social Security is that the Social Security trust fund is a myth. Since it consists solely of treasury bonds, it’s nothing more than a promise from one branch of the government to another. It’s not real money, it’s just an IOU.

But that’s a serious misunderstanding of what money is. It’s a promise. After all, you don’t think those dollar bills in your wallet or the bits and bytes in your bank account have any real value, do you? In fact, their only value is that they’re a promise: a promise that you can exchange them at some future time for concrete goods and services. When people no longer believe in that promise (think Weimar Germany), money no longer has any value.

The trust fund works the same way: it’s a promise to the taxpayers who filled it up that at some later date it can be used to buy goods and services. The mechanism for honoring this promise ? that is, ensuring that at some point in the future the original investors get the goods and services they were promised ? is to collect taxes and turn the resulting revenue over to retirees. This promise can no more be broken than the promise that the United States government accepts dollar bills as legal tender.

Still not convinced? Try this instead: how about if we sell off the current contents of the trust fund to outside investors? They think it’s real, and they’d be happy to buy those bonds ? in an orderly way, of course. After that was done and the money was reinvested, the trust fund would be full of stocks and corporate bonds ? and voila, suddenly everyone would magically agree that it’s real money.

So yes, the trust fund is real. It’s a promise from the United States government backed up by its taxing authority, just like real money, and it’s accepted by outside investors, just like real money. How much more real can it get?