Tuesday, January 25, 2005

# Posted 5:52 PM by Ariel David Adesnik  

QUESTIONS TO ASK ABOUT SOCIAL SECURITY: Yesterday's post on Social Security generated more of a respone than any single post I've written in a good six months, so I thought I'd summarize three of the critical points that all y'all raised:

1) Shouldn't we deal with the problem now, before Social Security reform becomes more divisive and more expensive?

Ideally, yes. In practice, the question is one of priorities. In other words, should reforming Social Security, which may or may not be in crisis, take precedence over efforts to deal with skyrocketing Medicare costs and federal budget deficits?

2) What is the precise nature of the Social Security trust fund? When held by a government agency such as SSA, do government bonds represent a true asset or simply an accounting fiction?

These are the issues that begin to get over my head. Many of you have been kind enough to provide concise answers to such questions. Please feel free to recommend any articles or posts designed to explain these issues to a non-expert. For the moment, I'll cite one passage from an article by Donald Luskin:
The trust funds will redeem the last of their bonds in 2041 — demanding from the government $1.003 trillion that year. From 2018 through 2041, the trust funds will redeem bonds worth, cumulatively, $11.9 trillion. Once again, just to be perfectly clear, let me emphasize that the federal government will have to come up with this $11.9 trillion somehow — either by tapping the capital markets, raising taxes, or trimming spending.

This should illuminate the debate on whether the trust funds are “real” or not. They are perfectly “real” in the sense that the Treasury bonds they hold are valid legal claims on the government. But they are not “real” in the sense that they, as a June, 2004, Congressional Budget Office report put it, “contain no financial resources” in and of themselves. For their value to be realized, the Treasury bills they hold must be redeemed for cash by the government — and that cash has to come from somewhere. [Hat tip: SP]
Naturally, many people disagree with Donald Luskin, so I welcome other points of view. Albeit unintentionally, I think his comments point to the fact that as long as the government avoids defaulting on its bonds, then Social Security will remain solvent until 2042.

3) No, the government won't default. But where will all of the money necessary to pay off those bonds come from? Higher taxes? Additional borrowing? Cutbacks on other programs?

The question touches on an accounting issue which seems to be way over my head. How does an insitution like the federal government plan for complex transfers of funds that will take place decades from now? How will the amount of money "owed" to SSA compare the amount of money owed to other bondholders? In other words, will the additional liability represented by the trust fund stretch our ability to cover outstanding debts, or is it something the government can take care of in the normal course of business?

Well, that's it for now. It looks like this debate is far from over.
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