This post is dedicated to those who believe the U.S. government can run short of its sovereign currency, the dollar.
The Continental Congress met in New York in 1785, and on 6 July, the dollar was established as the official currency of the new United States of America.
Congress decided on a decimal system, i.e., 100 cents to a dollar. However, disagreements among the members of Congress meant that a mint wasn’t established in America until 1792.
It was another 70 years—1862, in the middle of the Civil War—before the US Treasury was able to print dollar bills—black on the front, green on the back, so colored because of the chemicals used to prevent counterfeiting.
And so the dollar (or greenback) as we know it today came into being.
Keep in mind that all of this was accomplished simply by passing laws, which are created from thin air. So long as the U.S. government has the infinite power to pass laws, it has the endless power to create U.S. dollars.
Former Federal Reserve Chairman Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”
Former Federal Reserve Chairman Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. It’s not tax money… We simply use the computer to mark up the size of the account.”
Fed Chairman Jerome Powell: “As a central bank, we have the ability to create money digitally.”
Statement from the St. Louis Federal Reserve Bank: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”
All of the above statements rely on the fact that the U.S. government is Monetarily Sovereign; it is sovereign over the U.S. dollar.
The statements are true for all Monetary Sovereigns. For example, the European Union is sovereign over the euro. So long as the EU can pass laws, it can create euros.
Mario Draghi, President of the European Central Bank: “We cannot run out of money.”
As you read this post, keep in mind the U.S. government’s infinite ability to create dollars out of thin air.
Charles Schwab Brokerage published an article titled “The Future of Social Security and Medicare?” on August 14, 2024.
The subhead was: “Medicare and Social Security are projected to run out of money by 2036. Mike Townsend discusses possible solutions to the shortfalls and the likelihood of each.”
The clock is ticking on two pillars of retirement planning.
Barring major overhauls, projections indicate that Medicare’s Hospital Insurance trust fund, which covers hospital benefits, will be unable to pay full benefits after 2036, and the Social Security trust fund, which covers retirees and their survivors, will be unable to pay full benefits after 2033.
We’ll pause here to remind you that Medicare’s Hospital Insurance trust fund and the Social Security trust fund are not real trust funds.
They are just bookkeeping line items 100% controlled by Congress and the President.
If Congress and the President decide to add a trillion dollars to each of the so-called “trust funds,” they will vote, and each “trust fund” line item instantly will be a trillion higher.
Strangely, Mike Townsend, the managing director of legislative and regulatory affairs at Schwab, doesn’t seem to understand Monetary Sovereignty and the federal government’s unique and infinite ability to create U.S. dollars.
Seemingly, Townsend equates the federal government with monetarily non-sovereign state and local governments, which do not have this infinite power.
We talked with Mike Townsend about the most likely solutions, whom they’ll affect, and when.
Q: Let’s start with Social Security. What potential fixes are on the table?
Mike: There’s a universe of possibilities, including extending the full retirement age, raising the payroll tax rate, and increasing the amount of income subject to the payroll tax.
But no one in elected office is enthusiastic about promoting any solutions that might prove politically unpopular.
Townsend doesn’t mention the real solution: Eliminate the fake trust funds and simply pay for Social Security and Medicare the same way we pay for Congress, the White House, the Supreme Court, all the branches of the military, and almost every other federal agency and federal project: by creating dollars ad hoc.
Q: What might raising the full retirement age look like?
Mike: During the last major Social Security overhaul, in 1983, the age at which you could collect full benefits was gradually increased, from 65 to 67. (You can collect reduced benefits as early as age 62.)
We’re seeing similar proposals now, with one pushing for a full retirement age of 70 for those born after 1977—the rationale being that people are generally living longer and therefore also working longer.
This is at or near the top of the list of proposals, and it’s likely that the full retirement age will go up at some point—though I expect it will include a long and slow phase-in when it does happen.
This solution, called the “work ’til you drop” idea, and other “solutions” Townsend mentions, involve taking dollars from the poor and middle classes, the very people for whom Social Security and Medicare were invented.
The rich receive most of their income from sources not subject to the FICA tax.
It truly is a disgrace the people who are paid to know better pretend the federal government needs to take dollars from those who rely on them most.
Q: Have there also been proposals to change the payroll tax that funds Social Security?
Mike: Currently, the payroll tax that funds retiree benefits is 12.4% of workers’ earnings, split evenly between employer and employee. There are many proposals to increase that amount, such as by a fraction of a percentage point annually over several years to lessen the impact on the average worker.
Townsend fails to tell you that in reality, all of the money comes from salaried employees.
Every business treats the payroll tax as a cost associated with employees’ pay. This cost is one of the considerations when determining how much to pay salaried employees.
That is why so many businesses prefer to classify workers as independent contractors rather than as employees. FICA is in reality, a head tax on businesses, paid for by salaried employees.
Q: How else could the payroll tax structure change to increase revenue?
Mike: For 2024, only the first $168,600 of income is subject to the Social Security payroll tax. One proposal suggests starting to collect the tax again for income over $400,000, while another suggests collecting above $250,000.
On the political left, that’s probably the most popular proposal, because it impacts higher earners; but on the right, it’s among the least popular proposals because conservatives generally oppose tax increases of any kind.
Q: Any other ideas floating around?
Mike: There’s a bipartisan group in the Senate trying to come up with alternatives. For example, Social Security funds are now 100% invested in U.S. Treasury bonds, which are very safe but offer a relatively low rate of return.
One idea is to put some portion of Social Security taxes into a newly created sovereign wealth fund that would invest in stocks and have the potential to earn a higher rate of return.
The above is an example of the federal government pretending it isn’t Monetarily Sovereign and is helpless to increase the balance in the “trust funds” or, better yet, to do away with them and simply pay for the costs.
Q: Let’s turn to Medicare. What can be done to sustain the Hospital Insurance trust fund?
Mike: The Medicare payroll tax of 2.9%, which is split equally between employers and workers, finances this fund. For wages above $200,000, there’s an additional Medicare tax of 0.9%. Raising the tax is one way to help shore up Medicare, so it’s definitely in the mix. But again, in a divided Congress the more conservative members are unlikely to vote for a tax increase.
Q: How does the Net Investment Income Tax factor into the equation?
Mike: Currently that tax is 3.8% on investment income for those making a total of more than $200,000 ($250,000 for married couples filing jointly).
Right now, that money goes into the general coffers rather than Medicare.
However, President Biden has proposed not only an expansion of the tax—to 5% above $400,000 in income ($450,000 for couples filing jointly)—but also to apply the money to the Hospital Insurance trust fund. That proposal is also going nowhere in a divided Congress, but it’s nevertheless on the table.
It’s all ridiculous hocus-pocus. There are no “general coffers.” The federal government creates all its payment funds ad hoc. It sends instructions to each creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account.
What the bank does as instructed, new dollars are created and added to the M2 money supply measure.
Further, a tax increase is entirely useless. The federal government neither needs nor uses tax dollars. When you pay your taxes, you take M2 dollars from your bank account and send them to the U.S. Treasury.
When your dollars reach the Treasury, they cease to be part of any money supply measure because the Treasury has access to infinite dollars.
Thus, all federal tax dollars are destroyed upon receipt, and new dollars are created to pay all bills.
Q: What’s the timing on any of this?
Mike: The closer the government gets to the insolvency deadlines, the less time it has to raise the necessary funds.
Congress can continue to kick the can down the road, but the math is only going to get more difficult. That said, there continues to be a lack of urgency on Capitol Hill, and it may be a few years before momentum for action builds.
The Monetarily Sovereign federal government doesn’t “raise” funds. It creates all the funds it needs and destroys all dollars coming in.
Congress can continue to kick the can down the road, but the math is only going to get more difficult. That said, there continues to be a lack of urgency on Capitol Hill, and it may be a few years before momentum for action builds.
From a beneficiary’s perspective, any proposed solution likely would be phased in over many years—and people approaching or already in retirement would almost certainly be exempt.
After all, many Americans have been planning their retirement with certain assumptions around Social Security in mind, and it would be unfair to upend those assumptions without adequate time to adjust.
Townsend does not seem to understand the fundamental differences between Monetary Sovereignty (i.e., the U.S. government) and monetary non-sovereignty (i.e., you, me, state/local governments, and businesses).
The astounding lack of factual information promulgated by one of America’s largest brokerages truly is sad.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell
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