Tuesday, March 15, 2011

Krauthammer vs Lew on Social Security

In the Washington Post, columnist Charles Krauthammer took issue with OMB director Jacob Lew's claims that Social Security was safe for a generation due to assets held in the trust funds:

The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction. If you don't believe me, listen to the OMB's own explanation (in the Clinton administration budget for fiscal 2000 under then-Director Jack Lew, the very same). The OMB explained that these trust fund "balances" are nothing more than a "bookkeeping" device. "They do not consist of real economic assets that can be drawn down in the future to fund benefits." In other words, the Social Security trust fund contains - nothing.

On the OMB's blog, Lew responded:

Krauthammer is correct when he writes that there is no "lockbox" that keeps the money sent in by workers for until they retire. By design, when more taxes are collected than are needed to pay benefits, funds are invested in Treasury bonds and are held in reserve for when revenue collected is not enough to pay the benefits due. Yet these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are, making them anything but "worthless IOUs" as Krauthammer suggests. The government has just as much obligation to pay back the bonds in the Social Security trust fund as we do to any other bondholders.

This back-and-forth plays off a predictable misunderstanding regarding the trust fund: it is, as Lew says, an asset to Social Security. It also is, as Krauthmammer says, a liability to the rest of the government and, by extension, the taxpayer. So while we can't say that the trust fund is worthless, in the sense that benefits will be cut today because the system is running cash deficits, we also can't say that it makes taxpayers' job of funding Social Security benefits any easier.


shoffy22 said...

Very interesting post! I wonder what your thoughts are on this thought - I wish more people would note that the fact that since we have our current trust fund balance of about 2.8 trillion (I think), this means that we've borrowed 2.8 trillion less from private investors than we would have without the trust fund. We'll probably need to borrow from private investors that much money to now pay back the trust fund assets over the next few decades, but that still has served a huge function in spreading out these costs over a very long time period and allowing for the same payroll tax rate to finance benefits over this whole span (by having a tax rate that would be too high from roughly 1985-2010 and too low from roughly 2011-2037 than the rate would be under a total pay-go system).

To me, it seems like this system would work great, and adding 2.8 trillion in new borrowing from investors over the next few decades would be no big deal at all, if the rest of the federal government was able to get its fiscal house in order. For social security reform in particular, the trust fund can be quite helpful as it will allow for more gradual changes to benefits and taxes in order to ensure long term solvency.

My impression from your post is I think you would agree with my points here? I was curious what additional thoughts you had on this subject? Thanks for your post!

Andrew G. Biggs said...

Shoffy, You raise a good point. Teh TF is definitely 'real' as an asset to Social Security and a liability to the rest of the budget. Whether it's 'real' in a broad economic or budgetary sense depends on the counterfactual, of what the government would have borrowed had the TF not been available. The obvious 'all other things being equal' case is that if the government hadn't borrowed $2.6T from the TF it would have borrowed it elsewhere, so OASDI surpluses reduced the amount we borrow from the public. However, it's possible that the presence of these surpluses -- and the ability to borrow them without increasing the stated budget deficit or the publicly-held debt -- encouraged policymakers to spend more or tax less than they otherwise would have. In this case, the TF would NOT be real in an economic/budgetary sense; that is, in a broad sense we wouldn't have pre-funded benefits except on paper. In this old post (http://andrewgbiggs.blogspot.com/2008/03/what-does-it-mean-to-save-surplus.html) I discussed some of the research on that issue.