Many smart people don't get this

It is amazing, but I am willing to bet that most people still fail to understand the fundamental nature of the American Social Security system and its vaunted trust fund. As we are told time and time again, sometime before 2020 Social Security expenditures will exceed payroll tax revenues. On the one hand, some people (many of whom are Democrats) say that this is not a problem because of the $3.5 trillion-odd trust fund that has been, and continues to be built up to satisfy these obligations. Social Security is thus good until at least twenty-fortysomething, if not longer. On the other hand, some people (many of whom are Republicans) say that the trust fund is not much of a trust fund at all, consisting entirely of "I.O.U.s," therefore the years of painful budget reckoning are nearer. Charles Krauthammer is a specific example of someone in the latter camp:

Let's start with basics. The Social Security system has no trust fund. No lockbox. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65.

Matthew Yglesias seems to reside in the former camp. Understanding, correctly, that the IOUs are Treasury Bills, he responds to Krauthammer:

By this standard, not only is my bond porfolio not real, my bank account isn't real, and, in fact, the cash in my pocket isn't real. The only "real" money, apparently, is stacks of gold bars. Now once upon a time, your U.S. currency was redeemable for gold bars and, thus, one might consider it real. Alternatively, perhaps U.S. currency in the gold standard days was a "mere I.O.U." Either way, we've been off the gold standard for some time now, and people would be alarmed to learn that this means their money is fake. Does the Post pay Krauthammer in dubloons?

Clever, no? But the big thing that Yglesias misses completely is that the paper he owns is fundamentally different from Social Security's paper. Matthew's paper money, paper bonds, and paper bank statements are legitimate, tradeable claims on money or services from others. Social Security's paper is issued by the federal government, and held by the very same federal government. Thus, the government holds a claim on itself. Social Security's paper is at best a recordkeeping aid between the Treasury and Social Security, but is no more a government asset than the notes I write myself so I remember to transfer money from savings into checking.

To summarize: When someone writes an IOU and hands it over to you, you have an asset. When that same person writes an IOU and keeps it for himself, he has a reminder. What the Social Security trust fund has in its vaults is file cabinets full of reminders (nod to David Frum).

If you grasp this concept, then you understand something that many politicians, journalists and commentators plainly do not.