Paul Krugman devotes his New York Times column today to promoting the lie that the Social Security system is “in pretty good financial shape.” Krugman counsels that we ignore “alarming reports generated by people who work at ideologically driven institutions” who are “itching for an excuse to dismantle the system.”
Here’s an example of the kind of “alarming report” that Krugman warns against:
In 2010 … the boomers will begin to retire … The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension … Yet if you think even briefly about what the Federal budget will look like in 20 years, you immediately realize that we are drifting inexorably toward crisis; if you think 30 years ahead, you wonder whether the Republic can be saved.
That “alarming report” was “generated” in 1996 by Paul Krugman himself, and it was published by an “ideologically driven institution” called the New York Times.
But that was when there was a Democrat in the White House, a man who pretty much never gave Social Security a second thought. Now there’s a Republican in the White House, a man who has made Social Security reform through private accounts a signature policy initiative. Can America’s most dangerous liberal pundit stand by and let conservatives rein in America’s largest New Deal-era program? Of course not! So now the “crisis” that he himself called “inexorable” in 1996 simply doesn’t exist anymore.
Krugman has completely reversed his 1996 position that Social Security’s problems are “so huge as almost to defy comprehension.” How so? Because, he says, if you consider Social Security and Medicare together, then “only 16 percent of that $44 trillion shortfall comes from Social Security.” What a wonderful example of Evasion English. “Only 16 percent” means “only $7 trillion” — about the same size as the entire gross federal debt.
Krugman now relies heavily on “the fact that Social Security, unlike the rest of the federal government, is currently running a surplus.” In other words, payroll taxes coming in are greater than benefit payments going out. The surplus goes into the Social Security Trust Fund, held in reserve to pay benefits in the future, when taxes coming in are no longer sufficient. So, no problem.
But here’s what Krugman had to say about that in 1996:
… aren’t Social Security and Medicare basically pension funds, in which workers’ contributions are invested to provide for their retirement? Hardly. A private pension fund that planned to pay the benefits these programs promise would be accumulating huge reserves. In fact, the so-called “trust funds” are making barely any provisions for the future.
He’s right. And it reads just like something from the Cato Institute, complete with the withering quotation marks around “trust fund,” and the dismissive “so-called.”
Here’s the reality, and it’s as real today as it was in 1996. When payroll tax surpluses come in today, the government takes them and issues a Treasury bond to the “so-called ‘trust fund.’” And then the government simply spends the money.
That’s right — the government has borrowed and spent all the money in the “so-called ‘trust fund.’” Every penny.
According to the 2003 annual report of the Social Security and Medicare Board of Trustees, current taxes won’t be enough to pay current benefits starting in 2018. Heading into that date with destiny, the payroll tax surplus will get less and less, so the government is going to have to find somewhere else to borrow the money.
After 2018 the Social Security system will have to start dipping into that “so-called ‘trust fund’” to pay the benefits no longer completely covered by payroll taxes. But it will find that there’s no money there. Just Treasury bonds. In order to turn those bonds into money in order to pay benefits, the Social Security system will have to redeem them or sell them. And as the old Wall Street joke goes, “Sell? To whom?”
Think of the “so-called ‘trust fund’” as a huge long-term holder of federal debt that one day decides to unload it on the market. Where’s the money going to come from to buy it?
And as if that’s not bad enough, even the “so-called ‘trust fund’” will be exhausted in 2042, according to the Social Security trustees. No wonder the trustees wrote in their 2003 annual report that “the program continues to fail our test of financial balance by a wide margin.”
The only mystery is how Krugman could have stated in the very first sentence of today’s column that “The annual report of the Social Security system’s trustees reveals a system in pretty good financial shape.”
This is a shocking misrepresentation of what the trustees actually said. But it’s not the only way in which Krugman’s analysis of Social Security’s finances is at utter variance with non-partisan expert judgment.
He asks at the end of today’s column, “Why is it so hard to say clearly that privatization would worsen, not improve, Social Security’s finances?” Why? Because it isn’t true. Steve Goss, the chief actuary of the Social Security Administration, reported late last year that the ambitious private-account proposal put forth by Peter Ferrara of the Institute for Policy Innovation, which would dedicate half an employee’s payroll taxes to private accounts, would strengthen the long-term fiscal solvency of the system.
Why all the lies, and all the contradictions? Simple. For liberals, Social Security is a fortress of New Deal collectivism and paternalism that must be held fast against conservative assaults, at all costs. What liberals fear is that, through private accounts, system beneficiaries would become real stakeholders in America and captains of their own financial fates — not wards of the state, dependent on the whims of incumbent legislators to tell them what benefits they will be permitted to receive.
The truth is that private accounts would both strengthen the integrity of the system and provide increased benefits for retirees, especially low-income and minority retirees. But that’s a truth you’re never going to read in the opinion columns of Paul Krugman, an economics professor who certainly understands the reality of the numbers in his heart of hearts — and who professes to be the champion of the “little people.”
– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.