No News Here Folks…Move Along Please

October 30th, 2011 at 9:00 pm

I keep hearing this argument, including on the front page of my home town paper today: there’s something risky, fishy, corrupt, dark, and secret about the $2.6 trillion Social Security trust fund.

No, there isn’t.  It’s a saving mechanism that was intentionally created years ago to prepare for the increase in costs to the retirement system due to the predictable aging of the baby boom.  But instead, we read:

Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees…

…unless Congress acts, its finances will continue to deteriorate as the rising tide of baby boomers begins claiming benefits. The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.”

10 years of escalating debt have crippled the government’s ability to repay the trust fund.”  [my bold]

To cast the argument this way intimates that the US Treasury will default on its debt.  They are exactly analogous—Treasury bonds held in the Social Security trust fund carry the same guarantee of repayment as Treasury bonds held by private investors and sovereign governments around the globe.  You could plug the words “China” or “major American banks and pension funds” for “Social Security trust fund” in the article and the meaning would be the same.

If the editors believe that holders of Treasuries face default risk, then they should probably run articles everyday warning that the end is near.  If they do not believe that to be the case—which I am sure they do not—then I don’t understand the news here.

Note that I am not saying Social Security’s finances are fine or should be ignored by policy makers.  To the contrary, I have listed many of the ideas on the table to address the financing shortfall, and recommended the ones I think make most sense.  Nor am I cavalier about the extent of our own sovereign debt.

But unless you’ve got a good, solid, evidence-based reason to believe a US default is in the works here, I can’t see how this is anything but fear mongering.

On the other hand, the graphic in the piece is interesting and worth a close look, especially the alternative benefit-payment scenarios.

Update: Dean Baker goes into greater detail on what’s wrong with the WaPo analysis.

 

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2 comments in reply to "No News Here Folks…Move Along Please"

  1. Robert says:

    Jared,

    IMO Social Security is one of the most misunderstood of all government programs. It basically is nothing more than the redistribution of some goods and services from workers who produced them to non-workers. It is also important to understand that the production and consumption of those goods and services cannot be time-shifted.

    The idea that it is necessary for the U.S. to stockpile financial resources to ensure it can provide goods and services required for an elderly population in future years is ludicrous. It is simply wrong to state the problem as subject to a financial constraint but even if such a stockpile was successfully cached and secured there would still be no guarantee that there would be real resources in the economy available to satisfy beneficiaries in the future.

    The inability to time-shift demand or production makes the current system of accounting for and paying for Social Security beyond useless and serves no economic purpose. The real solvency of Social Security is the ability of all the current workers to produce enough goods and services to raise their standard of living as well as provide a reasonable standard of living for those who are not working. The solvency level of the Social Security trust fund is a non-issue and simply a political side-show.

    Finally, the argument that Social Security is broken because it has made promises that it will never be able to afford is just not true. There is no operational constraint on the government’s ability to meet all Social Security payments in a timely manner. It doesn’t matter what the numbers are in the Social Security Trust Fund account, because the trust fund is nothing more than record-keeping, as are all the accounts at the Fed and Treasury. When it comes time to make Social Security payments, all the government does is make a credit entry in the beneficiary’s accounts, and simultaneously make a debit entry in the trust fund accounts to keep track of the transaction. It’s as simple as that.

    So IMHO the issue is really about social equity, not government solvency because the government will always be able to pay its bills. The question that should be asked is what level of real resource consumption are we willing to allocate to our elderly? The amount of goods and services we allocate to our seniors is the real cost to society, not the actual payments, which are nothing more than numbers in bank accounts.


  2. Th says:

    Well, Robert, now we allocate about 5% of GDP and to keep paying at promised levels we need to bump that up to a little over 6%. Let the debate begin as to whether 6% is too much.

    The charts do show what I keep telling people which is that projected benefits assuming exhausted trust fund (the middle bar) is higher in inflation adjusted dollars than current recipients get today. I thought the cross over happened about 2040 but this shows sometime after that but before 2060. So, to Robert’s question, if we think the current 5% is the correct amount, future beneficiaries will still receive benefits comparable to today’s retirees. Their incomes will just be lower relative to people currently working.

    My question is whether the trustees have sufficiently incorporated the stagnation/decline of middle class incomes into their projections of future benefits. The charts show continued increases in real income and thus higher promised real benefits.


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