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Your scenarios, while technically accurate, leave something out. Here's another version:

D) Your child spends his/her high-school years mowing lawns, doing part-time jobs, etc, in order to save some money to help pay their way through college. You encourage them to do so. The money earned is put in a jar. You take that money, replace it with an IOU, and use it to pay for household expenses along with more frivolous things. Now it's college time and you scramble to find the money to pay the IOUs.

True, but there's an easy solution: take out a loan in your yet-to-be-born grandkids' name.

...after all, they benefit by their mother/father having a college education......

I suppose you have no problem with the underlying assumption in this scheme, which is that adults should be treated like children.

I think government t-bills are a little more reliable than a hand-scrawled IOU note in a jar.

Maybe for an independent investor. But how can a t-bill be an investment for the government itself?

I am naively assuming that what backs the value of a t-bill is the US government's ability to accrue future tax revenue to pay it back.

What is it that makes a t-bill owed to Social security an investment rather than a tax deficit when it comes time to cut a social security check?

What backs a t-bill is the "Full Faith and Credit of the United States Government". Along with smaller amounts of gold, it's the foundation of most countries' national reserves, yes, "most", notably China. If the US gov't defaults, social security getting paid back will be the least of our worries.

"Putting money in a jar" is a very handwavy way of addressing the problem of saving billions of dollars. You don't just put billions of dollars in a "jar". In practice, amounts that large have to be invested in some way. If you rule out federal treasury bills, what does that leave? State and municipal bonds? Pretty tricky (you could make a case for it though). How about stocks? No, that's de facto nationalization of industry. Commodities? Government interference in the market. Real estate? The government has enough land. How would you actually save the Social Security trust fund?

Why do large amounts have to be invested? Is it because of inflation or large amounts of money cannot sit around without someone wanting to touch it?

Well, one way to avoid having to invest so much of the money would be to pay retirees directly out of the receipts for a given year. Then you only have to invest the surplus, which shrinks the investment problem considerably. That surplus could be invested in T-bills.

The above is roughly how the system works now, makes sense right?

Of course, you'll see various peopl with an axe to grind calling it a pyramid scheme for the pass-thru payout. And claim that the government is "raiding" the trust fund by selling it t-bills, or say that the trust fund is backed by quote "worthless IOUs". I didn't know t-bills were so disreputable! But aside from the silly rhetoric, it's a pretty sensible strategy.

It shouldn't be a surprise that the people who administer the program 40 hours a week actually kinda know what they're doing. Unless you come to the conversation pre-equipped with ideology and blinders.

Inflation/time-value of money is a big part of it, actually--not collecting interest on that scale is an opportunity cost of billions of dollars.

There's a macroeconomic issue, as well--if you just let that money sit in an account for years on end, the money supply gets fucked up. Money just disappearing into a hole is essentially deflationary, and deflation is catastrophic. Then, when the money comes back out again, you have inflation (possibly hyperinflation if the amount is big enough). Better to hold onto that money somehow while still keeping the money supply relatively constant--in other words, invest the money somehow.

For very similar reasons, it's much more difficult for the government to carry reserves of funds from year to year than it is for them to carry a debt.

Quote: The problem of course is there's no "there" there. Any funds collected today by payroll taxes, and not used for today's benefits, are lent to the general fund and spent. There are no funds being saved for next year's benefits, much less the current tax payers.

You used the word "lent". Note that that is different from the word "given with no expectation of repayment". Care to revise your second sentence in light of your first?

Better not tell the Chinese that U.S. treasury bonds are just an accounting fiction.

Don't worry, they are well aware of this fact. The people running China certainly know this intimately, and even university students know:

http://www.reuters.com/article/idUSPEK14475620090601

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

Economically, China is playing Chess, the US is playing Checkers. China is more than willing to sacrifice one or two generations of people to gain global dominance. The people controlling the US economy think in periods of 4 or 10 years.

he's talking about the government lending money to the government, not our massive borrowing.

even more obscene than this fiction is how the Federal Reserve prints money, lends it to the banks, who then lend it to the Treasury and collect 3% for doing so. Its such an obvious subsidy of that whole sector, without which would look much worse.

> he's talking about the government lending money to the government, not our massive borrowing.

The point is US T-bills are considered one of the safest investments in the world but when people start talking about SS for some reason they pretend that they are worthless.

Treasurys are "safe" in the sense that the US will never default, since the government can simply print dollars as needed to cover the debt. So yes, you're guaranteed to get your 1% interest in nominal dollars... the question is, how much are those dollars really worth?

The dollar may not enter a hyperinflationary death spiral as some believe it will, but its days as the default world reserve currency appear to be fading fast.

>The problem of course is there's no "there" there. Any funds collected today by payroll taxes, and not used for today's benefits, are lent to the general fund and spent. There are no funds being saved for next year's benefits, much less the current tax payers.

And in a short 5 years the direction changes because 2015 is when SS outflow is expected to exceed inflow and they have to start using some of the interest income off those bonds. In 2025 the inflows and interest income become insufficient and the SS trust fund has to start selling the bonds and by 2035 the assets are themselves exhausted.

The 2010 OASDI Trustees Report http://www.socialsecurity.gov/OACT/TR/2010/tr2010.pdf

> Now, it is true that the Social Security system then holds "assets" in exchange for that cash, namely, government bonds. But this is just accounting fiction.

No, there's no fiction - legally it must be paid back. That's why Social Security debt is included in the gross national debt.

9 misconceptions about Social Security: http://www.theatlantic.com/past/docs/issues/98jul/socsec.htm

The first addresses the "accounting fiction" aspect.

But there is a substantive difference between B/C and Social Security. There are many retired people today collecting Social Security (not scrambling for IOUs) who paid into the system from their first day of employment.

Perhaps you have not noticed the shape of the national debt, but yes, there is quite a bit of scrambling to pay the IOUs for past workers, both by taxing current workers, and by taking out loans (thereby taxing future workers).