A Social Security Poison Pill

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Brad DeLong has an interesting gloss on the Bush administration's current argument for social security private accounts:
If Blahous understood the argument he's making--and seriously wanted to communicate it--he would say something like this: "Think of it this way: Bush and Delay and Hastert and Frist are out of their minds, and are on a giant financial bender. They think they can drink up every bottle in the liquor cabinet, but if they do we'll have nothing left for the party we're giving tomorrow. Private accounts is a way of moving some of the good liquor to another cabinet and putting a lock on it so Bush and Delay and Hastert and Frist can't spill and waste it tonight. That's what we are really doing."

And, Blahous says, Bush really wants the bottles moved to the other cabinet--one with a lock on it--so he can't get at them. After all, Blahous says, "The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts. These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away." You see, Bush really wants the government to run a budget surplus equal to the Social Security surplus, and we have to enact private accounts to force him to do what he really wants.

Yes. It's a clown show.

(Note that this is basically the same rationale behind "starve the beast").

Anyway, if the issue is being able to commit the US to not spending the Social Security surplus, it seems to me that there are simpler mechanisms. As I understand the situation, the argument being made here is that because the Social Security debt is in treasury notes, all the US government has to do is say that it's not going to honor treasury notes held by the SSA. I.e., they're just IOUs to yourself. The theory here is that this doesn't compromise the government's ability to borrow money, since it's not going to repudiate the generic debt, just the SSA debt.

Now, I'm pretty skeptical that that's not going to totally destroy America's credit, but it seems to me that there's a pretty easy way to credibly commit to not doing so: stop holding the SSA debt in treasuries. I'm not saying that the SSA has to buy HP stock or something. Just sell off the treasuries it currently holds and buy bonds from stable governments.

The point here is to destroy the distinction between the debt owed to the SSA, so the government has to repudiate the entire debt. Of course, the government can still just sieze the entire trust fund, but of course the government could just increase the private account clawback too... It's just such fine distinctions that turn out to make a big difference to how things look on TV.

And yes, before you ask, I realize quite well that this isn't the Bush administration's real reason for wanting to have private accounts, but that doesn't mean it's not a good idea to protect ourselves in the future.

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3 Comments

There's another reason why the arguments are flawed: with suitable taxation, the government can still gain access to most of the money stored in personal accounts.

Usually the argument that the SSA debt "doesn't really exist" is that taxes will have to go up or spending down just as much if they are treated as real assets as if they were treated as non-assets. If SSA were understood as being fixed from general funds, then when the payroll tax can't pay for Social Security, that causes a drain on general funds. Alternatively, if you think the Treasury bonds are an investment, when the SSA redeems those treasuries, it causes the exact same drain on general funds.

I'm struck by the power of the question: If Bush thinks the Trust Fund doesn't exist, why is he still making us pay into it?

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