Monday, August 16, 2010

Jayhawk On Social Security

Paul Krugman is at it again in the New York Times today. “Legally, Social Security has its own, dedicated funding,” he says, “But it’s also part of the broader federal budget.” He goes on to talk about “this dual accounting” as if it were actually two sets of books kept by gangsters or something. He says that if the “second method” is used that “Social Security costs could prove unsupportable for the federal budget as a whole,” ignoring the minor issue that the second method would be wildly illegal.

He admits that Social Security is, even now, taking in more money than it is paying out and is “banking those surpluses in a special account, the so-called trust fund.” There is actually nothing “so-called” about that trust fund; it is a real entity separate from the government, and it lends money to the government.

The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

That statement is incoherent on so many levels that it’s difficult to decide where to begin dismantling it. First, to the best of my knowledge no sane person has never suggested that the Social Security trust fund will never become exhausted without some changes being made. There is debate on when that will happen, but there is agreement that the date is very distant. That date is, in any case, not part of the current debate, so I’m at a loss to comprehend why Krugman even raises it.

Second, the program will need to “turn to Congress,” not for “help” but for repayment of the money that it has lent to the federal government. There is a bit of difference between “help” and “repayment of money owed.”

And the point at which the program has to turn to Congress for that repayment is not when “the trust fund is exhausted” as Krugman says, but when Social Security begins paying out more in benefits than it is collecting in revenue. There is no question that will happen, it is currently expected to happen around 2037, and it's not really a problem for the program because the designers of the program planned for it to happen.

That point is a problem for the federal budget, however, because the payments on the debt owed to the Social Security program will constitute federal spending and as such, if we don't raise taxes, will increase the federal deficit. Not benefits, the loan payments will do that.

While payments on the debt will increase the deficit, the effect on the national debt will be to reduce it unless we don't raise taxes and are borrowing the money for payments. That is certainly possible and even likely, in which case even though the deficit would have increased the the effect on the national debt will be zero.

Personally, I find it rather ludicrous that our government would be borrowing money to make debt payments, but I seem to be alone in that. We are currently borrowing money to make interest-only payments on existing debt, and if an individual were doing that he would be pretty much toast, in a financial sense, but…

Anyway, cutting Social Security benefits does not reduce federal spending in any absolute sense, that is to say it does not reduce the total amount that the government will wind up having to pay out. All that it would do is delay the date at which we would have to begin making payments on our existing loan, or make those payments smaller. We can’t make the debt smaller, we already owe the money.

The government is like one of those homeowners who took out a home loan that had nice low payments that he could afford because he was paying interest only and payment on principal was “deferred.” Then the loan “reset” and payments went up because the lender wanted the original money back, and we had the financial crisis of 2008 because people could not meet the required payments.

If we can persuade the SSA not to ask for its money back, then we can avoid the need to repay the loan and thereby avoid increasing the deficit by the amount of those loan payments. The only way we can persuade the SSA not to ask for its money back, though, is to persuade it to renege on the promises it has made to the people for whom it holds that money in trust by reducing Social Security benefits.

And we can do that because the federal government sets the rules under which the SSA operates. It’s like a homeowner, the one who can’t make the payments, owns the bank that lent the money; he is a borrower who can dictate the actions of the lender.

Maybe we want to use that leverage to tell the SSA to renege on its promises, reduce benefits and delay the day of reckoning. Maybe the need to preserve future cash flow outweighs the promises of the past. That is a decision that needs to be made, but let’s not cloak it in the mantle of a “spending decision” when it is nothing of the sort.

Payment of benefits under Social Security is not a “federal spending decision.” It is a promise kept or not kept. The federal spending decision is one as to whether or not this nation will or will not honor its debt; whether or not borrowed money will be repaid as agreed.

Some debts cannot be honored; that happens. But to dishonor this debt so that we can maintain a global military garrison? So that we can fight purposeless and unwinnable wars? So that we can maintain a parasitical “financial services industry” that siphons off one-fifth of our wealth?

I think not.

1 comment:

bruce said...

Nice post and explaination. And yes it is ludicrous to borrow money to make any payment, especially interest only payments.

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