Last week, President Obama’s budget chief, Jack Lew, took to his White House blog to repeat his claim that the Social Security trust fund is solvent through 2037. And to chide me for suggesting otherwise. I had argued in my last column that the trust fund is empty, indeed fictional.
If Lew’s claim were just wrong, that would be one thing. But it provides the intellectual justification for precisely the kind of debt denial and entitlement complacency that his boss is now engaged in. Therefore, once more unto the breach.
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Lew acknowledges that the Social Security surpluses of the last decades were siphoned off to the Treasury Department and spent. He also agrees that Treasury then deposited corresponding IOUs — called “special issue” bonds — in the Social Security trust fund. These have real value, claims Lew. After all, “these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are.”
Really? If these trust-fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included? We measure national solvency by debt/GDP ratio. As calculated by everyone from the OMB to the CIA, from the Simpson-Bowles to the Domenici-Rivlin commissions, the debt/GDP ratio counts only publicly held debt. This means bonds held by China, Saudi Arabia, you, and me. The debt ratio completely ignores the kind of intragovernmental bonds that Lew insists are the equivalent of publicly held bonds.
Why? Because the intragovernmental bond is nothing more than a bookkeeping device that records how much one part of the U.S. government (Treasury) owes another part of the same government (the Social Security Administration). In judging the creditworthiness of the United States, the world doesn’t care what the left hand owes the right. It’s all one entity. It cares only what that one entity owes the world.
That’s why publicly held bonds are so radically different from intragovernmental bonds. If we default on Chinese-held debt, decades of AAA creditworthiness is destroyed, the world stops lending to us, the dollar collapses, the economy goes into a spiral, and we become Argentina. That’s why such a default is inconceivable.
On the other hand, what would happen to financial markets if the Treasury stopped honoring the “special issue” bonds in the Social Security trust fund? A lot of angry grumbling at home for sure. But externally? Nothing.
This “default” would simply be the Treasury telling the Social Security Administration that henceforth it would have to fend for itself in covering its annual shortfall. How? By means-testing (cutting the benefits to the rich), changing the inflation formula, raising the retirement age, and, if necessary, hiking the cap on income subject to the payroll tax.
You can plug in whatever combination of numbers you prefer for the definition of “rich,” for the slope of the sliding scale of benefit reduction, for the rate of the retirement-age increase, or for any other variable. Whatever the formula, we will ironically have been forced to adopt the very reforms needed to keep Social Security in balance for years to come — the kind President Obama’s own deficit commission recommended. Arguably, that would add to U.S. creditworthiness by finally demonstrating to the world our seriousness about bringing our unsustainable pension liabilities under control.
Invoking the “full faith and credit” mantra for those IOUs in the trust fund is empty bluster. It does not change the fact that, as the OMB itself acknowledged, those IOUs “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Yet Lew continues to insist that these “special issue” trinkets will pay off seniors for the next 26 years.
Nonsense. That money is gone with the wind. Those trust-fund trinkets are nothing more than a record of past borrowings. They say nothing about the future.
Consider: If Treasury had borrowed twice as much from Social Security in the past — producing twice as many IOUs sitting in the lockbox — would this mean the trust fund is today twice as strong? Solvent for 50-some years instead of just 26? Of course not. The trust fund “balances” are mere historical record-keeping. As the OMB itself admitted, future payouts will have to be met by future taxes and future borrowings — or by Social Security reform that, by reducing benefits, makes such taxing and borrowing unnecessary.
There is no third alternative. There is no free lunch. And there is nothing in the lockbox.
SS funds were held in, not a "lock box", but
an "unlocked box"?
A "free lunchbox"?
Somehow I don't believe the GenXers are going to accept (or believe) the empty promises of a full lockbox. The best thing Reid and others proclaiming solvency for the program have going for them, is the (in general) selfish nature of the BBoomers who will take what is "theirs" and leave the rest to deal with the mess.
Let me see if I have this right Mr Lew. According to your logic if I lend someone $5000 and they give me an iuo for $500,000 with absolutely no intention of paying it back I just cleared $495,000, now that's gubmint math at its finest.
There's a simple enough test. Tell Mr. Lew to convert all the special bonds to actual money now, today. If there is no sudden influx of non-bond assets to the fund, then the "full faith and credit" of the government isn't worth much, at least domestically. Too bad the government doesn't have to live by bookkeeping rules so simple that almost everyone can understand them. Maybe then we would all have realized long ago what was really happening. But since government tends to turn a deaf ear to complaints, I don't know that it would have done any good to have complained for the last 40 years anyway.
So "Clinton's balanced budget" were in-fact not balanced. Since they don't count the inter-government transfers as actual debt. And Social Security was taking in much more in taxes than it was paying out to retirees since the boomers were at their peak earning years and the WWII generation was just starting to retire.
As a tail end baby boomer (born in 1960) I'm saving as much as I can in anticipation that SS won't be there. Doing so will probably subject me to means testing that will preclude me getting any SS, so a self-fulfilling prophecy. My co-workers that said the heck with the 401K, I'm buying a BMW and a bigger house and taking a European vacation instead will get SS. Though admittedly a fairly dreary retirement life.
As always, CK delivers. Wonder why no one is discussing the class warfare aspect of means testing. It is so wrong that anyone pays into a system like this and cannot hope to receive their own funds back!
I wrote before that Kraut. was wrong and that the money is as real as anything other bond the gov't issues. I understand better what he is saying now.
I still think the only "wrong" thing is that the debt is not acknowledged by the gov't. SS was not meant to be a gov't slush fund or welfare program. The money IT owes to contributors, like me, is REAL, or should be. Obviously it can be changed by the congress...they could stiff me and people like me, change benefits, etc. But the PROMISE was that it was not a welfare program but a pension/disability insurance fund where what you get is proportional to what you (and your company put in).
Whether the gov't says it owest 11T in public debt or 14T in total debt doesn't matter that much. But people who put into SS, rightfully will demand their money and there's no way the gov't isn't going to pay it. They'd get voted out.
The danger in what Krauthammer is saying is that the response is "well, let's means test it", etc. Turn it from a public pension fund into welfare. The rates for SS were raised in the 1980s so build up said trust fund to pay benefits to future retirees. If SS is treated like a regular gov't welfare fund, then that was a lie.
Means testing is horribly regressive too. I make right at the SS limit or a bit over and all of my funds will be gone if there is means testing. That amounts to 12% of my salary (with company match). Meanwhile some rich guy making 1M a year loses about 1% of his salary. Yeah, that's fair.
Sid...no actually Lew's logic is the opposite. HE says that money owed to SS is real money. Thus if SS lends money to the gov't, that is an ogligation, just like if a pension fund does. That doesn't "solve" the budget deficit at all.
If you have a deficit and you borrow to cover it, that isn't "solving the deficit".
It seems a little late now for journalists to be pointing out that Social Security is a government ponzi scam and the "trust fund" is worthless.
Where was Dr. K. when politicians of both parties "fixed" social security by raising tax rates above what was needed to meet current benefits and then used the excess revenue to hide their overspending?
[Portions of this post have been removed for violating NR’s comment policy. Please refrain from making personal attacks]
Long and short of it, Krauthammer will in effect put a tax of 12% on people like me who paid into the system and will get nothing out. And he's the conservative?
"It is worthy of observation, that every case of failure in finances, since the system of paper began, has produced a revolution in governments, either total or partial. A failure in the finances of France produced the French revolution. A failure in the finance of the assignats broke up the revolutionary government, and produced the present French Constitution. A failure in the finances of the Old Congress of America, and the embarrassments it brought upon commerce, broke up the system of the old confederation, and produced the federal Constitution. If, then, we admit of reasoning by comparison of causes and events, the failure of the English finances will produce some change in the government of that country." - Thomas Paine (1796) "The Decline and Fall of the English System of Finance" External Link
There is one way the Federal government could finance Social Security, at least for a while. Start selling off Federal lands in the West and use the proceeds to pay for the amount owed beyond the amount collected.
Social Security, though, is really an intergenerational Ponzi scheme whose viability depends on succeeding generations being larger than earlier generations, and an unchanging life expectancy. Neither, though, is happening. It would seem to me that a long-term phase out of Social Security needs to be contemplated. That would be accomplished as follows: Early on, the full-retirement age would be raised to 70 (possibly in one year increments depending on a person's current age). After that, the retirement age would automatically increase one month every year for every group turning 21 in that year. For example, suppose we move the retirement age to 70 in 2014. In 2015, the retirement age for people turning 21 in that year would be 70 + 1 month; in 2016, people turning 21 would have a retirement age of 70 + 2 months, and so forth. Eventually, the retirement age would get so high that no one would be left on Social Security (unless we start living forever).
The sheer audacity of this administration to so blatantly lie to the American public highlights their elitist arrogance and disdain for the average citizen. We are so stupid in their eyes that we can’t understand robbing Peter to Paul.
Social Security has become a sad joke. I don't know one person under 45 years old who has the slightest thought that it's going to be there for them when they retire. Younger people view the taxes they pay in to the program kind of like they view paying sales taxes; not much they can do about them; shrug your shoulders and move on. As for folks slightly older like me, whatever I get will be a bonus, nothing more.
New Diet Plan: I spent my monthly food money paying interest on my house payment. I then wrote IOU's to myself in the same amount so I will have money to buy food this month.
Now I am off to the store to see if they will take my [money]. I really believe this is a diet that will work.
brainbbbb: The reason why the lockbox is a lie, is because once the SS admin starts cashing in those "bonds" that it was giving by the treasury, the treasury will have to either borrow the funds, induce congress to raise taxes, or default on the bonds.
It has no other choice.
The SS funds were stolen during the 80's and 90's to make the deficit look smaller. Now we have to pay the piper and live with a higher deficit.
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