Tuesday, March 23, 2010

Liberal Economists' Denial About Social Security

Paul Krugman pulls this from time to time, but today it's Dean Baker:
Serious newspapers don't pull down ghosts from the sky to present their views to readers. However, in an article discussing the implications of the health care plan, the NYT told readers:"many have come to believe that the system [Social Security] must change or go broke, the battle Mr. Bush fought and lost in 2005."

Of course people who are familiar with the finances of the system don't believe such things. The Congressional Budget Office projects that the program can pay all scheduled benefits through the year 2044 with no changes whatsoever. Even after this date it could still pay more than 75 percent of projected benefits long into the future (a level far higher than current benefits) even if no changes were ever made.

This is true only because social security is holding special treasury bonds. Bonds that the federal government must pay back from the normal revenues. Baker addresses this in another post today, he writes:
That is what can be concluded from its decision to call the Treasury bonds held by the Social Security trust fund "IOUs."

This is not the normal term applied to government bonds in the New York Times or anywhere else. This is a pejorative term that has the effect of undermining the credibility of the trust fund. That is the sort of comment that is usually reserved for its opinion pages.

The article also wrongly tells readers that: "By 2016, Social Security will begin paying more in benefits than it collects in payroll taxes, according to the annual report of government trustees." Actually, Social Security is currently paying out more in benefits than it collects in taxes. This fact has no special relevance for the program since it has already accumulated more than $2.5 trillion in government bonds to cover future projected shortfall. Opponents of Social Security have long sought to hype the date when benefits would exceed annual tax collections in order to promote the sense of crisis.

Okay, let me break this down one last time. Social Security Trust Fund has $2.5 trillion in bonds. It got these by taking in more money than it paid out. While it was taking in more money than it paid out it bought special government bonds. In other words, Social security loaned the extra money it took in to the government's general fund, which was promptly spent.

Now, if you look at social security in isolation, then there's no huge problem. They've got bonds that the federal government is legally obligated to pay back. The problem is when you look at the whole. The federal government has to pay $2.5 trillion to social security. That puts a big dent in the ability of the government to do other things.

So, yes. It's true that if you just look at social security, then everything looks fine on paper. The problem is that here in reality the government is going to have trouble coming up with $2.5 trillion.

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