Subway Tokens and Social Security

There is a wide-spread belief that Social Security surpluses must be “saved” for future retirees. Most believe that this can be done by accumulating a Trust Fund and ensuring that the Treasury does not “spend” the surplus. The “saviors” of Social Security thus insist that the rest of the government’s budget must remain balanced, for otherwise the Treasury would be forced to “dip into” Social Security reserves.

Can a Trust Fund help to provide for future retirees? Suppose the New York Transit Authority (NYTA) decided to offer subway tokens as part of the retirement package provided to employees—say, 50 free tokens a month after retirement. Should the city therefore attempt to run an annual “surplus” of tokens (collecting more tokens per month than it pays out) today in order to accumulate a trust fund of tokens to be provided to tomorrow’s NYTA retirees? Of course not. When tokens are needed to pay future retirees, the City will simply issue more tokens at that time. Not only is accumulation of a hoard of tokens by the City unnecessary, it will not in any way ease the burden of providing subway rides for future retirees. Whether or not the City can meet its obligation to future retirees will depend on the ability of the transit system to carry the paying customers plus NYTA retirees.


Note, also, that the NYTA does not currently attempt to run a “balanced budget”, and, indeed, consistently runs a subway token deficit. That is, it consistently pays-out more tokens than it receives, as riders hoard tokens or lose them. Attempting to run a surplus of subway tokens would eventually result in a shortage of tokens, with customers unable to obtain them. A properly-run transit system would always run a deficit—issuing more tokens than it receives.

Accumulation of a Social Security Trust Fund is neither necessary nor useful. Just as a subway token surplus cannot help to provide subway rides for future retirees, neither can the Social Security Trust Fund help provide for babyboomer retirees. Whether the future burden of retirees will be excessive or not will depend on our society’s ability to produce real goods and services (including subway rides) at the time that they will be needed. Nor does it make any sense for our government to run a budget surplus—which simply reduces disposable income of the private sector. Just as a NYTA token surplus would generate lines of token-less people wanting rides, a federal budget surplus will generate jobless people desiring the necessities of life (including subway rides).

4 responses to “Subway Tokens and Social Security

  1. Excellent analogy Prof. Wray! I will use this the next time I try to explain the difference between functional and sound finance to my peers.

  2. That makes sense.My interpretation also:When the subway has already issued tokens, the result is a liability in respect of the delivery of short dated future subway services.When the subway has a commitment to issue future tokens to retirees, the result is a liability in respect of the delivery of longer dated future subway services.That the retirees’ tokens haven’t been issued yet is equivalent to having already issued them, but with a stipulation on permissible redemption timing.The key distinction between the two types of liability is the relative timing of expected redemption.Otherwise, they are two pieces of one continuum.It’s still a good idea to keep track of the two different liability categories, somehow.Similarly, Social Security is another liability (“longer dated”, roughly), in addition to outstanding Treasury bonds held by the public. The public holds a promise rather than a bond.The Social Security Fund’s internal holding of off-market Treasuries amounts to an awkward accounting mechanism for the tracking of this liability. The mechanism is economically and operationally meaningless and unnecessary.It’s still a good idea to keep track of the liability, somehow, in addition to the “short dated” ones.In both cases, there is an effective continuum from current to “longer dated” liabilities. There’s no need for excessively artificial internal bookkeeping gyrations to keep track of the longer dated ones. The entire liability span should be viewed holistically in this sense, without operational compartmentalization of either component. That is just mental accounting error, with such consequences as the illusory subsidization of one component by the other. This in turn puts the entire portfolio on a false risk management platform, as in the case of running a current token surplus in order to “reserve” for a future token deficit, or in holding the Treasury Department’s own liabilities in order to “reserve” for future benefit payments.One does need to keep track of the aspect that, as the retiree token and social security liabilities age, they become increasingly blended in with the others in terms of expected redemption or maturity timing. That’s just part of prudent liability management.

  3. I am not sure a pension plan is a good comparison. Doesn't accrual accounting, which is required by GASB, require pension benefits to be "matched" against the period when the employee earned those benefits? Regardless of cash payments or free subway rides this is still a pension benefit. Therefore, although the tokens would not be "stockpiled" the expenses of those tokens would be accrued over the employment period of the employee who will receive the tokens as a pension benefit. Although I understand your point your argument implies pensions use cash accounting which is incorrect.

  4. Dear AnonymousThat's precisely the point . . . the sort of accounting done for private pension funds is not relevant to the issuer of the currency. In the NYTA example, they ARE the issuer of the currency as far as paying the pension described is concerned. Use any sort of accounting you like, but it's irrelevant if you are the one creating the currency, and it will mask your inherent ability to meet any future liabilities denominated in the currency you issue.Best,Scott