Okay, I read over that Belmont Club thread.
It's a lot more dicey than that one Belmont Club post suggests, here's the follow ups that explain why:
#40 Blert
You have a couple of important inaccuracies. I do agree with your larger point that a debt limit standoff should not stop Social Security checks, but it is certainly possible in my opinion. The inaccuracies:
1) The SS Trust Fund (SSTF) is running a surplus, but it is not a cash surplus. (See http://www.ssa.gov/cgi-bin/ops_period.cgi) Part of the SSTF surplus is interest payments from the US government which are immediately rolled over by law into new Treasury securities. (The linked table also understates the problem to some degree because the Federal Government does not pay the FICA taxes on its own employees in cash. Rather it pays directly in new securities which would be subject to the same problem.) If the Federal Government does not have authority to issue new securities, there isn’t enough cash coming in to pay full benefits.
2) The more serious problem is that the securities paid to the SSTF are non-marketable and cannot be sold. By law, they can only be redeemed by the Treasury. The SSTF does not buy them at auction. Rather the Treasury issues the securities using the results of the auction to set the yields for the non-marketable securities held by the SSTF. So there is no recourse to the market.
People need to be skeptical about security promised by the government. When the government says you have a right to housing, health care, or retirement security, that is a deeply misleading metaphor. You can’t enforce or sue for such positive “rights” the way you can enforce your actual Constitutional rights. At the end of the day, your positive “rights” are always limited to accepting the benefits — adequate or not — and paying the taxes for them — reasonable or not. And the government can always choose to change the deal.
July 14, 2011 - 10:52 am
blert,
I have to take issue with some factual inaccuracies you’ve made regarding Social Security. The Social Security “fund” does purchase bonds, but they are special issue intra-governmental U.S. Government bonds, not Treasury bonds. They aren’t trade-able, and they can’t be held by the public. In order for them to be converted back to spendable money, the Treasury has to issue Treasury bonds for them, ie it has to sell more debt. It can’t if the publicly held debt limit is reached. That is problem number one.
Social Security is also nothing more than a payroll tax attached to a welfare system on the back end. There is no contract between you and the government that you are guaranteed anything for having paid into the system, and there is nothing to distinguish or earmark those funds as separate from the general fund. Two Supreme Court cases have made this very clear.
In Fleming vs. Nestor, the Supreme court ruled that was no binding contract between the citizens/taxpayers and the government regarding Social Security, and that Social Security can be stopped or terminated at any time. The government can change the rules regarding SS and stop it, change it, withhold it, or whatever, at Congress’s will.
In Helvering vs. Davis, the court upheld that the SS payroll taxes were no different than normal excise taxes and were treated the same as any other taxes. They all go through the IRS into the general fund. They are earmarked as something different, but when Social Security runs a surplus (which has always been the case up until this year) then the excess was “invested” in the special issue bonds (basically a fancy IOU) and the money spent in the general fund.
SS is and always has been a pay-as-you-go system. There has never been a separate “trust fund” or other bucket of money. It has always been differentiated only in accounting books. All those IOUs from the special issue bonds are only able to be “money-good” if the Treasury is currently running a surplus, allowing money to be taken out of the general fund and paid out to SS beneficiaries in excess of the FICA and OASDI tax revenue coming in, or the government issuing Treasury bonds to fund the payments.
Anything else you may believe or have an understanding to (and most Americans share your understanding/beliefs to a large extent) is incorrect. The media, the politicians, and the government have been lying to you, us, our parents, grandparents, children, etc. They’ve mislead almost everybody as to what is actually going on.
Now, there is still plenty of money to pay for SS even after paying the interest on debt rollovers come August 3. But there isn’t enough money to pay for the interest, SS, Medicare, Medicaid, and Unemployment. That’s all we’ve got. There will have to be cuts somewhere. That doesn’t include the military/DOD, the FBI, the Dept. of Interior, the State Dept, the Dept. of Energy, the Dept. of Ed, etc, etc, etc, ad nauseum.
There will have to be cuts somewhere. If the debt ceiling isn’t raised (please, Dear God, let it not be raised), there will instantly need to be about a 42% cut in the budget of the Federal Government. It will decrease GDP of this country by a minimum of 10% overnight, and it will cause a severe depression.
To not do it only postpones what will happen, and will make everything worse. It would turn a depression into something unrecoverable with the current makeup of the U.S., and most likely an end to the Federal Government. The longer the can is kicked down the road, the heavier it becomes, until it an an unmovable object heavy enough to stop you cold.
That which cannot continue, won’t. At some point, some day, all these things will be forced upon us. If we voluntarily do it now, it’ll hurt a lot, but it will hurt a lot less than doing it later. If we had done it back in 2008, we’d have been done with it already and be well on our way back to recovery. Instead, we’ve bought ourselves three really crappy, painful years, no solution, and a bigger correction when it does get fixed.
July 14, 2011 - 5:24 pm
#123 blert & #131 Cetera
I have written a number of Social Security reform proposals while working for a Member of Congress and understand this particular program in great detail.
42 USC 401(e) states that the SSTF can sell any bonds it holds in the market “except public-debt obligations issued exclusively to the Trust Funds.” The Social Security Administration notes that the SSTF is invested exclusively in such obligations (http://www.ssa.gov/OACT/ProgData/specialissues.html).
blert: The President is legally obligated to redeem the bonds in the SSTF, as he is legally obligated to pay all the obligations of the United States. However, once we reach the debt ceiling, he will no longer be able to pay every obligation. Therefore, he will choose what to pay and what not to pay even though each one is an obligation of the United States.
You are kidding yourself if you believe that a default to the SSTF would be considered a default by the markets. The markets consider the entire thing to be an internal issue within the federal government with no relevance to its relations with its external creditors. If anything, the markets would like to see the repudiation of debts to the SSTF because it would reduce US government debt by $2.6 trillion and free up additional income to service external debts.
July 15, 2011 - 6:06 am
#131 Cetera
I agree entirely with your analysis. Still, I’ll preach to the choir a bit.
During the panic over the reforms in 1983 (when SS came within a few weeks of insolvency), Congress somehow managed to convince the SS actuaries that SSTF could somehow become an effective store of assets to backstop the SS system. The actuaries declared the system solvent after the proposed tax hikes and benefit cuts, paving the way for Congressional action. This was based on surpluses accruing in the SSTF to be drawn down later when needed for benefits.
To understand why the system doesn’t work, consider two scenarios:
A. No SSTF. When SS ceases to have a cash surplus (as has recently happened), the government can cut benefits to levels it can pay, raise taxes, or increase borrowing.
B. With SSTF. When SS ceases to have a cash surplus, the SSTF redeems bonds as necessary at the Treasury. The Treasury must then raise taxes or increase borrowing in order to pay the SSTF.
As you can see, the difference between the two scenarios is entirely semantic. Either way, the entire weight of benefit payments has to be paid now regardless of the supposed security provided by the SSTF. All of the surpluses racked up between 1983 and today have been squandered in exchange for nothing. The SSTF is a fraud and was from its first day.
If there is to be real savings as a component of the SS system, the excess funds would have to be invested outside of the government. Either the government would have to invest the funds directly — buying up huge portions of the private economy with inevitable accompanying political distortions — or it would rebate the surpluses to individuals in private accounts and allow them to make their own investments. At any rate, the opportunity to pursue either option without tax increases is gone because there is no longer any cash surplus into the SSTF.
Let me note that the liberal claim that extending the payroll tax will cover most of SS’s unfunded liabilities relies on the actuarial fiction that the SSTF works to store value. The additional payroll tax collections from the new tax would go into the SSTF and then be spent by the general fund in exchange for special issue bonds to be drawn upon later. Of course, when cash flow eventually turns negative, those bonds will make no difference in the government’s ability to pay benefits.
July 15, 2011 - 6:54 am
BFLR