As though arithmetic (never mind basic accounting) were a dark mystery, confusion continues about the status of the Social Security and Medicare trust funds, specifically the claim that Social Security and Medicare contribute to the debt of the United States government. The claim is untrue.

The following document from the Office of Management and Budget is the most recent spreadsheet listing total debt of the United State government by year.

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist07z1.xls

Column B is "Gross Federal Debt" (commonly referred to as the "national debt"), the primary object of discussion these days -- estimated to be about $15.48 trillion dollars through the end of Fiscal 2011.

Column C is the portion of that total debt that is owed to "Federal Government Accounts," including Social Security and Medicare, about $4.62 trillion. Note that this IS part of the "Gross Federal Debt." Like the amounts in subsequent columns, "Held by the Public," it clearly is counted as an obligation of the Federal government.

The portion of the "Federal Government Accounts" represented by the "fund balances" of the Social Security ($2.64 trillion) and Medicare ($0.30 trillion) trust funds through the end of Fiscal 2011 is detailed in the following OMB document:

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist13z1.xls

All of this debt is represented by Treasury certificates held by the parties to which the debt is owed -- "Federal Government Accounts" and the "Public." All of the money represented by this debt has, of course, been spent or is in the process of being spent. That's why it was borrowed. This includes not only the money borrowed from "Federal Government Accounts" but also that borrowed from the "Public." Therefore, we can not say, as do some, that the former is "gone" because it was borrowed but the latter is...what? "not gone"?

Transaction A: A "Federal Government Account" -- say, Social Security -- wishes to cash in $1 million of the Treasuries it holds. The government, having no spare cash, borrows $1 million from the "Public" and uses that to pay off the Treasury being cashed in by the "Federal Government Account." There is no increase in debt; the "Gross Federal Debt" in the spreadsheet remains exactly the same. One Treasury was issued (to the "Public") to pay off another Treasury held by the "Federal Government Account." They offset each other, cancel each other out.

Transaction B: A member of the "Public" -- say, a mutual fund -- wishes to cash in $1 million of the Treasuries it holds. The government must borrow $1 million from ANOTHER member of the "Public" -- say, a municipal retirement fund -- to pay off the debt held by the mutual fund. But this is not regarded as having increased the debt, because, obviously, it was NOT increased.

Why is Transaction A regarded, in political rhetoric, as "adding to the debt" when Transaction B is not? How does a Treasury certificate held by a "Federal Government Account" differ, in arithmetic, from one held by the "Public"? If the government had simply taken the cash pouring in from payroll taxes as "general revenue" and spent it, it would indeed be "gone." But it didn't. It BORROWED it by issuing Treasuries to the trust funds, officially recognizing the obligation to Social Security and Medicare.

Posted July 16, 2011