Skip to comments.Itís Still an Empty Lockbox. A Response to Jack Lew, Obama's Budget Chief on the Trust Fund.
Posted on 03/18/2011 7:30:46 AM PDT by SeekAndFind
Last week, President Obamas 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 Lews 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.
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 doesnt care what the left hand owes the right. Its all one entity. It cares only what that one entity owes the world.
Thats 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. Thats 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 Obamas 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.
Charles Krauthammer is a nationally syndicated columnist
Add up all the debt owed by every level of government in the US including all unfunded pension promises and you get around 140 trillion dollars. There is NO WAY even a fraction of that can be paid.
Burn the bonds. It might shake the country out of it’s dream world.
If SSA was a separate entity and not a government agency, you couldn't still call it an empty lockbox, even though nothing would have changed.
The government would then have to include the SSA debt in it's debt ratio. But it's not like the government doesn't report it. The information is available on the web from both the SSA and Treasury department's sites. And in the footnotes of the US financial statements. It's normal accounting for corporate entity to exclude intracompany debt between subsidiaries, so there is nothing sinister about the government treating it the same way.
And if SSA was independent, then holding government securities, would be considered an investment. That's despite the fact that government would still spend the money as soon as they borrow it.
In fact if an independent SSA held corporate bonds instead of government securities, you could say that the corporations spend the money as soon as they borrow it. They don't borrow money unless they have a need for it and plan to use it.
In fact, you could say that about corporate equities too. When a company issues stock to raise funds, they spend those funds that they raise. Of course a company usually spends funds, because they expect to earn funds in the future. And government should be spending funds to protect our country and raise our prosperity.
And that's the crux of the problem. Government securities are still considered the safest investment around. It's entirely appropriate for SSA to invest in them. But government spending is currently too wasteful and needs to be corrected.
It is empty of money and full of IOU’s that the goverment has stuffed it with since they voted (Democrats) voted to direct the SS funds intot he general fun in 1965(?) right about he same time the great society idea appeared.
It is empty of money and full of IOU’s that the goverment has stuffed it with since they voted (Democrats) voted to direct the SS funds into the general fund in 1965(?) right about he same time the great society idea appeared.
But it's not. So what was the point of the rest of your post?
Having about a $ quarter mil personally in this deal, I know it’s not gonna go well, and I accept that fact.
But what really p*sses me off is the fact that the Democrats who did this will never get blamed for it.
Neither will the Republicans who did it with them, so there's consolation.