Pretty phony. The NY Times Magazine has a long article on Social Security by Roger Lowenstein which both Kevin Drum and Paul Krugman endorse, so we know there will be trouble. Ducking the argument about the "reality" of the Social Security Trust Fund is just one of the article's distortions. Here we go:
IS THE TRUST FUND TRUSTWORTHY?
The second debate concerning solvency is over whether the securities in the trust fund will be honored or whether, in Moore's pointed imagery, the fund will resemble a bank ''after it's been robbed by Bonnie and Clyde.'' This seems an odd preoccupation. Social Security does not own junk bonds or third-world debt; it invests in U.S. Treasuries, considered the safest investment on the planet. Since 1970 there have been 11 years in which Social Security has operated at a deficit; each time, it redeemed bonds from the trust fund without a fuss. Goss, the agency's actuary, says he has no doubt it will be able to do so again. ''Absolutely,'' he said when asked if the trust-fund bonds are sound.
This isn't what some conservatives have said. Paul O'Neill, the former treasury secretary, went so far as to say that Social Security has no assets. In anti-Social Security literature, the ''no assets'' contention isn't even debated; it's treated as gospel. According to Michael Tanner, head of the Cato Institute Project on Social Security Choice, the agency's pauperism has turned America's seniors into ''supplicants'': after working and paying taxes their entire lives, ''they earn the privilege of going hat in hand to the government and hoping that politicians decide to give them some money for retirement.'' The implication is that the money isn't there: graybeards will have to beg for it.
"Treated as gospel". Well, I suppose so, in the same way that "2+2=4" is treated as gospel. And the "conservative" view, properly characterized, is not even in dispute amongst serious economists. But to be clear upfront - responsible conservatives are not saying that the Trust Funds assets will not be honored by the US Treasury.
Let's roll through this: the "conservative" complaint is not that the trust fund assets are "worthless"; it is that they have virtually no legal or economic significance.
Imagine that we come to 2018, and Social Security payroll tax receipts are less than legally mandated benefits. Because we have a trust fund, what happens? The Soc Sec Administration collects interest from the Treasury on its "assets", turns around, and says, we need the cash to cover the benefit checks we are writing. The Treasury then makes a payment to the Soc Sec Administration from the general fund. To cover this, the Treasury must, working with Congress, either (a) run a surplus in other funding; (b) increase outstanding debt, (c) reduce other spending, or (d) raise new taxes.
Now, imagine that we did not have a trust fund. Congress has still mandated a certain level of benefits for 2018, and the payroll tax will not be sufficient to cover them (under current projections). Consequently, the Soc Sec Administration will go to the Treasury to cover the shortfall. And to cover the shortfall, the Treasury, working with Congress, will either (a) run a surplus in other funding; (b) increase outstanding debt, (c) reduce other spending, or (d) raise new taxes.
Please note that the choices are the same whether we have a trust fund or not. In that economic sense, the trust fund assets are meaningless. And this point is not in dispute among serious observers. In 1999 (Pre-BushCo, for you libs out there), the US Treasury said this about the trust funds:
The Federal budget meaning of the term ``trust'' differs significantly from the private sector usage. The beneficiary of a private trust owns the trust's income and often its assets. A custodian manages the assets on behalf of the beneficiary according to the stipulations of the trust, which he cannot change unilaterally. In contrast, the Federal Government owns the assets and earnings of most Federal trust funds, and it can unilaterally raise or lower future trust fund collections and payments, or change the purpose for which the collections are used, by changing existing law.
...These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. Unlike the assets of private pension plans, they do not consist of real economic assets that can be drawn down in the future to fund benefits.
Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, make it easier for the
Government to pay benefits.
Paul Krugman tackles these issues in a recent column and a longer article, and does not attempt to pretend that the assets have economic significance. Instead, he focuses on the legal and political heft of the trust fund. However, he is toe-dancing down the line between advocacy and deception, and critics will say that he steps out of bounds into falsehood. Let's look at his column:
Privatizers say the trust fund doesn't count because it's invested in U.S. government bonds, which are "meaningless i.o.u.'s." Readers who want a long-form debunking of this sophistry can read my recent article in the online journal The Economists' Voice (www.bepress.com/ev).
The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.
There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees.
That is, we can't have a Social Security crisis without a general fiscal crisis - unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count.
Politically, that seems far-fetched.
Emphasis added. Now, I agree with his sense of the politics. However his defenders will need to insist that he is speaking metaphorically when he writes of "legislation specifically repudiating the general fund's debts to retirees", a point that is buttressed by his subsequent reference to "promises to older Americans".
In fact, the government does not need to specifically repudiate the bonds held by the trust fund; all it needs to do is reduce, by new law, the benefits to which retirees are entitled (i.e., the "promises"). If the new benefits are reduced below the level covered by the payroll tax, the Trust Fund will be back in surplus and have no statutory right to demand redemption of its bonds. Despite the presence of ample trust fund "assets", and even though a general default on treasury debt will not have occurred, retirees will not be paid full benefits. Hmm, tell me again how meaningful those assets are.
Is this legal ability of the government to re-write the rules controversial or in dispute? No. The 1999 Treasury excerpt above is quite clear when it says that "the Federal Government owns the assets and earnings of most Federal trust funds, and it can unilaterally raise or lower future trust fund collections and payments, or change the purpose for which the collections are used, by changing existing law".
Legally and metaphorically, we owe a "debt" from the general fund to Social Security beneficiaries, which is backed by Trust Fund "assets". However, a future change in laws can reduce or eliminate the legal debt, without triggering a default on publicly held Treasury debt. My suspicion is that Paul Krugman understands this point, but hopes that his readers will not.
Now, does this mean that the Trust Fund has no legal significance at all? No - the reduction in benefits after 2018 would have to occur as a result of an affirmative action, namely new legislation reducing benefits. Absent new law, the Soc Sec Administration is authorized to redeem its Treasury binds in order to pay benefits, the Treasury is obliged to honor its debt, and the Soc Sec debt is included in the current debt ceiling.
After (if) the trust fund is exhausted, the ground rules change - the Soc Sec Administration is still legally obliged to make a certain level of benefit payments, but it lacks the authority to spend more than its payroll tax receipts. At this point, the government really would be defaulting on a promise - without Congressional action, people who made years of high payroll taxes will get an overnight reduction in their benefits.
As to the economic significance of the trust fund, the only case to be made is that its presence has large political and small legal impact, and hence affects people's expectations about future policy. In this view, cutting benefits in 2018 will be politically difficult, because of the accounting mechanism of the Trust Fund.
So, to summarize - the consensus view, as expressed by the Clinton Treasury and Social Security critics, is that the Trust Fund assets have almost no economic or legal significance outside of their impact on the political process. Roger Lowenstein did not do a good job of presenting this.
MORE: Our search for the confused begins with the NY Times editors, who told us this on Jan 10:
In suggesting that 2018 is doomsyear, the president is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.'s - as detractors of Social Security so often claim. The facts are different: since 1983, payroll taxes have exceeded benefits, with the excess tax revenue invested in interest-bearing Treasury securities. (An alternative would be to, say, put the money in a mattress.) That accumulating interest and the securities themselves make up the Social Security trust fund. If the trust fund's Treasury securities are worthless, someone better tell investors throughout the world, who currently hold $4.3 trillion in Treasury debt that carries the exact same government obligation to pay as the trust fund securities. The president is irresponsible to even imply that the United States might not honor its debt obligations.
Well, legislating new, lower benefits will achieve the effect of making those bonds "worthless" without upsetting foreign investors.
Here is a quote in the Jan 2 WaPo from someone who surely knows better:
These 'IOUs' are Treasury bonds, one of the world's safest investments," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities. "The Treasury, the White House and Congress cannot choose not to pay interest on the bonds or not to redeem them -- unless they're willing to have the U.S. government default for the first time in history."
As I said, I am sure he understands the issues; presumably, he believes that framing it as a default on Treasuries may be helpful in advancing his agenda.