Bush on Social Security: an idiot, a liar, or a politician?

The Coffee Shop
1

Or all three?

On one hand, he says “I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government” to allay fears of private accounts losing money in the open market.

On the other hand, he dismisses the current Social Security Trust fund as “And all that’s left behind is file cabinets full of IOUs.”, referring to the Treasury bonds that the Trust fund surplus has purchased. I’m pretty sure these are “backed by the full faith and credit of the United States government”, too.

WTF?

2

Please stop with the logic, it makes my rose-tinted goggles fog.

3

Geez, next you will tell me you expect our politicians to be honest.

4

I thought that idiot, liar, politian, used car saleman, eBay scammer, were synonymous…
Jay

5

Sorry, but you are going to have to step up as the idiot if you can’t see the difference between the government “lending” money to itself in the form of a block of bonds and individuals owning bonds in their own account at market rates.

6

Sorry, but you are going to have to step up as the idiot if you can’t see the difference between the government “lending” money to itself in the form of a block of bonds and individuals owning bonds in their own account at market rates.
Are you saying that the bonds held by the Social Security Administration are not backed by the full faith and credit of the US government?

8

I am saying the government is on both sides of the transaction. It is not arms length. It is not at market rates. So the simplistic answer would be no, those bonds are not backed by full faith and credit of the US government. A stroke of the pen could make them vanish at any time. The government will not sue itself.

Also note that if “bonds” in the “trust fund” solved any problems, a stroke of the pen could put an extra $11 tillion in “bonds” into the “trust fund” to “fund” future obligations. Of course, that would just be a bookkeeping entry with no real meaning.

The real solution is get a real trust fund in some form with claims on real assets in the private economy. The best way to think of that would be as a real, rather than illusory, form of Al Gore’s famous lockbox. This could be done with private accounts or even some sort of Calpers like investment vehicle.

9

You are simply factually incorrect. You have never seen a SS trust fund bond. They are private bonds, at non market interest rates and they are not bought or sold on the open or any other market. If you look at the government’s balance sheet, you will see them called out on a seperate line item. They are simply not the same.

Arguing the your right pocket owes your left pocket money is simply not a meaningful concept. Continue with the fiction that the “bonds” “fund” future SS obligations as you choose, but it simply has no meaning. Any future obligations can only be funded by cash flows to the government at that time.

Congress could put $11 trillion in the form of “bonds” into the “trust fund” tomorrow. Nothing would change.

10

I have rescinded my previous comment.

However, I think we are both wrong here.

I was incorrect in saying they are the same Treasury bonds available to the market. In fact, they are special issue bonds, not available to the public. However, the interest rate is near market, derived from a formula driven by market rates. In addition, the funds do hold some public market securities, although fewer than in the past. I suspect this is because they did not want to unduly crowd out private investment by pushing rates higher.

That said, by law, the funds are invested in Treasury securities. This is not an accounting creation - they are actual obligations of the US government, and it is simply inconceivable that the government would default on them, which would result in significant unrest in the global capital markets, without question. Any large government reneging on any credit would have similar results. It would be far simpler, and more likely, for the government to simply print more money or issue new bonds in the public markets, although both would have significant market effects.

So I don’t think your left pocket, right pocket analogy has any traction. If it did, the “trust fund” would only be an accounting creation, instead of an actual practice backed by law and actual legal notes of credit.

Heres’s the SSA’s take on it:

Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs? What is SSA’s reaction to this criticism?

As stated in the answer to “What happens to the taxes that go into the trust funds?”, most of the money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.

Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 35 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds’ securities will need to be redeemed on a large scale prior to maturity.

11

I’m screwed.

http://www.businessweek.com/bwdaily/dnflash/apr2005/nf20050429_8282_db045.htm?campaign_id=rss_daily

Boiled down to its essence, it would mean workers who earn a lifetime average of $25,000 a year or less in today’s dollars would continue to get the benefits they’ve been promised by Social Security. A 25-year-old making the average U.S. wage of $36,000 would have scheduled benefits cut by about 16%. Those making more than $100,000 would see their basic Social Security benefit cut in half. By 2075, basic benefits for high-wage workers would effectively disappear. This plan would fix about two-thirds of the system’s funding shortfall.

12

This plan would fix about two-thirds of the system’s funding shortfall.

Sounds good to me. Art probably won’t like it, though.

13

The government probably won’t renege on the bonds. They would do it in the form of reneging on the obligations that look to the bonds for funding instead. In one form or another, we are going to have SS cuts. The bottom line is that these bonds are never going to be redeemed. In the case of bonds held by third parties, that option is not politically available for the reasons you described

You can make all the full faith and credit arguments you want. First answer the question: what would change in the real economy were the Congress to increase the “trust fund” tomorrow by placing an additional $10 trillion dollars into it, or by taking $3 trillion out of it for that matter? Government external cash flows wouldn’t vary by a single dollar. It is hard to argue that the “trust fund” has meaning if the amount in the “fund” does not.

14

Couldn’t the bond rating conceivably get lowered? I’m not sure if that has really ever happened for US Federal bonds, but I know local and state government bonds have to monitor these values very very carefully.

15

The feds have the advantage of owning the printing press, so their bond rating wouldn’t be affected. The markets might actually like the move since it would just be recognizing obligations in the form of bonds which already exist in the form of entitlement laws.

For the most part, the whole thing would be a non event. Kind of like loaning yourself $1,000,000.

16

“For the most part, the whole thing would be a non event. Kind of like loaning yourself $1,000,000”

Not being any sort of economist, this sentence doesn’t make sense to me. There seems to be a fundamental difference between me loaning myself $1,000,000 and the govt doing anything similar. That difference being that I have no power to create money, but the govt does. In essence, if the govt says there is a million more dollars in existence today than there were yesterday, then that money now exists.

Am I wrong about that?

17

If we can get past the issue of whether there’s a real trust fund or not, what did you think of the actual proposal?

18

In essence, if the govt says there is a million more dollars in existence today than there were yesterday, then that money now exists.

Am I wrong about that?

Strictly speaking, probably not. But I’m sure you’re aware that you (meaning the govt) can’t just print up a million bucks and say you’ve created new money. All you’ve done really is devalue the currency.

19

Well sort of. What it does are through the FOMC. Through open-market purchases, it can buy US Treasuries from holders, which thereby increases the money supply. Where the currency comes from to do so I believe can essentially come from printing more money. While this in fact doesn’t mean that more money is printed, from an accounting standpoint you now have more money in circulation, because money held by the Treasury is not technically in circulation. But yes, you generally speaking would have devalued the currency, and increased inflation, to the extent the economy is running at full capacity.

20

I really don’t see a difference here. If there is a difference, someone is going to have to expain it to me.

If you were to draw up a consolidated balance sheet of the federal government and the various trust funds, these loans would cancel out and would not show up.

Over the next ten years or so, the SS fund will show a surplus of some $2 trillion dollars. There will be $2 trillion more in bonds in the fund. The government will take all $2 trillion and spend it on other programs. Someone explain to me how this process will make SS better “funded.”

21

http://www.salon.com/comics/tomo/2005/02/14/tomo/story.jpg
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