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Home Publications Blogs Beat the Press If Peter Peterson Sold Government Bonds to Pay for His "Campaign to Fix the Debt" Did He Add to the Deficit?

If Peter Peterson Sold Government Bonds to Pay for His "Campaign to Fix the Debt" Did He Add to the Deficit?

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Thursday, 29 November 2012 10:57

According to USA Today, he did. USA Today's editors are hopping mad because people like Senator Dick Durbin keep reminding them of the law which says that Social Security cannot contribute to the deficit.

Under the law, the Social Security program is financed exclusively by its own payroll tax. (The exception is the last two years where general revenue was added to make up for the revenue lost as a result of the payroll tax holiday.) It can only spend money raised through this tax either in the current year or from the interest and principal from government bonds purchased in prior years.

This means that Social Security can never add to the deficit, except in the same way that Peter Peterson sells his government bonds. When Peterson sells his bonds, the government must either cut spending, raise taxes or borrow the money from someone else. Since the actors in financial markets are more realistic than the frantic Washington types who are working themselves into hysterics about the deficit, the government will have no problem borrowing from someone else either when Peter Peterson sells his bonds or Social Security cashes in some of its bonds.

Anyhow, give USA Today and the other deficit fear mongers a gigantic "F" for flunking reading comprehension. Unless Congress changes the law, Social Security cannot contribute to the deficit, got it boys and girls?

btw, USA Today also has another bizarre invention in this editorial. It tells readers:

"From 1983 through 2009, Social Security collected more in taxes than it paid in benefits. The surpluses were supposed to go into the trust fund, protected by what Al Gore called a "lockbox" when he ran for president in 2000. Alas, there is no lockbox and never has been; the money came into the Treasury and went out just as quickly, spent on the government's day-to-day expenses and replaced by IOUs in a file cabinet."

Huh? What on earth is the paper talking about? The surplus did go into the trust fund, buying U.S. government bonds, which the paper bizarrely calls IOUs. This is exactly what the law required. It's not clear where USA Today thinks government bonds should be kept, but apparently not in a filing cabinet.

Anyhow Al Gore did have a specific proposal for the treatment of the surplus. It's not clear that he would have implemented it if elected (it would have meant running large budget surpluses even as the U.S. economy sank into recession in 2001. That is unconscionably stupid economic policy), but it certainly is not what is required under the law, even if folks at USA Today really liked it.

I'm going off to see what the yield is on GE and Verizon IOUs.

 

Addendum:

Sorry folks, I didn't mean to be overly obscure on the Peterson selling his bonds reference. He could have bonds that actually come due that he will cash in and the Treasury would have to roll over this debt, as it does all the time, as some folks have pointed out. But I was actually thinking of the more typical case where he dumps $30 million of bonds in the market. In that case, Peterson was the person who was originally lending money to the U.S. government, but then another person (the buyer) will then be holding the loan. That is what I meant that we would need someone else to borrow from. Of course on the bonds he holds Peterson is obviously the person at risk (he needs to find someone), but as a practical matter, since we are issuing new bonds all the time, it has the same effect on the market if Peterson dumps his $30 million as if the government has to issue another $30 million in new bonds.

Comments (33)Add Comment
Sells?
written by foosion, November 29, 2012 11:46
When Peterson sells his bonds, the government must either cut spending, raise taxes or borrow the money from someone else.

If he sells his bonds to someone else, the govt does not have to do anything. If he (or his buyer) receives payment on his bonds, the govt must find the money to pay that interest or maturing principal.

What am I missing?
...
written by coberly, November 29, 2012 11:55
foosion

what you are missing is the point.

granted Peterson can sell his bonds to someone else without affecting the debt/deficit. but ultimately those bonds get "sold" back to the government... reducing the debt, not increasing it. the same is true of the bonds in SS. the only difference is that SS bonds are not "sellable" to the public. this keeps them save from market changes in the price of bonds, but does not affect the fact that, like regular bonds, their value depends on the "full faith and trust" of the United States to "buy" them back.
keep it up
written by Nick, November 29, 2012 12:17
GE and Verizon IOUs

had me laughing out loud in the office.

keep fighting the good fight, dean.
...
written by foosion, November 29, 2012 12:22
coberly, no one using standard terminology talks about selling bonds to the govt (or any borrower) when they mean getting paid at maturity. That's the problem with Dean's wording.

Payments on Peterson's bonds have the same effect on govt finances as payments on Social Security's bonds.
...
written by Jim Naureckas, November 29, 2012 12:25
I guess what USA Today is imagining should have happened would be for the government to have put all the money from the Social Security surplus in a bank account. This would be a sum larger than the assets of the biggest bank in the U.S., by the way.

Or perhaps the government should have kept it in cash in a huge vault, like Scrooge McDuck.
...
written by Eric377, November 29, 2012 12:26
Such a pedantic fool. Get this: the political issue is clearly shaping up between fully honoring SS obligations per current law by net redemption of the Trust Fund over the next couple of decades or changing those obligations so that the Trust Fund either never has to be redeemed or only gets redeemed further decades out. I agree that if a party has a legally enforceable obligation to pay another party $10, then paying them the $10 and retiring the debt doesn't change their balance sheet. I, however, the party can influence the counterparty to relieve them of that $10 obligation, then paying them the $10 anyway impact negatively what their balance sheet might have been. Good lord, start treating this as the serious threat that it really and truly is, please.
...
written by coberly, November 29, 2012 12:54
foosion

i have been blessed by not knowing "standard terminology." that forces me to think about the real world situation. as far as i can tell your last sentence agrees with Baker.

Erik

hard to tell from your post who is the pedantic fool. i have to say it was hard for me to tell from the rest of your post what you were saying. What is the "serious threat"?

The only one I can see is that the public will be stampeded into letting the congress "fix" SS, the way you fixed the cat.

By my calculations repaying the Trust Fund would EITHER require a 3% increase in the tax above 100k for about ten years OR just let a one tenth of one percent increase in the payroll tax allow the workers to pay for their own future retirement. this would keep the TR principle from ever needing to be touched, it would gradually be absorbed into the "normal" one year SS reserve... money that is arguably never spent.
my christmas fund...
written by pete, November 29, 2012 2:33
In January I began saving for Christmas. I had my take home pay of $1,000. I took $100 of this aside for Christmas. Well, actually, since I needed the cash now, I simply wrote myself an IOU for $100 and put it in a lock box. Then I spent $500 on rent, $400 on food, and $100 on transportation. I did this for each month through December. Now I have $1,200 in IOUs saved up for Christmas! Super! Off to Neiman Marcus!
...
written by medgeek, November 29, 2012 2:38
I too laughed at the GE and Verizon IOU comment; it's a great line. This is pretty serious though. The editors of a major American newspaper have totally misrepresented the most basic features of social security accounting. I can't distinguish two possibilities. Either the editors are breathtakingly stupid or they are totally disingenuous, or a combination. Given all that, is there a snowball's chance in Hades that the man on the street could possibly understand these issues?
...
written by az, November 29, 2012 3:07
Its not just USA Today. FactCheck.org also performed a switcheroo from the exception of the past two years to purported half a trillion deficit: http://www.factcheck.org/2011/...s-red-ink/

Dean, keep up the good work
...
written by Arne, November 29, 2012 3:34
The distinction between Peterson's bonds and the SS Trust Fund is that SS is off-budget. If the unified budget is the correct way to think about it then FactCheck is right. The problem is that most people don't understand the distinction and even those who do choose different perspectives in different situations.

Per Dean's perspective above, the chart he has been using recently for deficits is wrong.
To Arne - chart label
written by nassim sabba, November 29, 2012 4:32
The charts that I recall Dean Baker use are usually for pointing out the issue with medicare and its deficit because of sick-care costs that keep rising faster than general inflation. If you label your chart properly and explain your intention, then I don't read them improperly. I don't recall them ever being labeled as the federal deficit. They are understood to have components, federal expenditure, SS and medicare.
Comedy...
written by nassim sabba, November 29, 2012 4:36
Yes Dean, the following comment is indeed extremely funny if it was not put in there for misguiding readers who don't get to read your writings.

"Alas, there is no lockbox and never has been; the money came into the Treasury and went out just as quickly, spent on the government's day-to-day expenses and replaced by IOUs in a file cabinet."

Very funny. Very funny. Short file cabinets, along with "folders" for of IOUs.
...
written by coberly, November 29, 2012 5:14
Arne

there is no if. the unified budget is "keeping two sets of books." the money was borrowed from the SS Trust Fund, a legally separate entity from "The United States of America" and definitely represents a different set of people from those that benefited from the borrowing.

The money not only has to be paid back, it IS being paid back.
pete's christmas fund
written by coberly, November 29, 2012 5:19
Pete

has nobody told you yet that there is no "Uncle Sam." There are 300 million people in this country. Some of them borrow from some others of them all the time. The United States government may regulate the borrowing, but it is not "borrowing from itself."

You have been suckered by a cartoon designed to sucker the, well, suckers.
coberly....so wrong on the macro level
written by pete, November 29, 2012 5:37
Indeed when we as the government borrow from we the people, we do indeed borrow from ourselves. When the treasury borrows from SS, it is an accounting gimmick, but it is no different than my iou in a lock box. Treasury must ultimately come up with the funds to pay the SS checks.

Bigger point is that SS is just a transfer anyway. to pay us our SS we just tax ourselves. No drain on the economy. Just a simple transfer...nothing to see here...keep moving...stop worrying about SS. It is the funding of foolish wars and building high speed trains in the middle of the california central valley that are a problem. That and as Dean points out our overpaid doctors and nurses.

I'm willing to concede the point to USA Today
written by f.fursty, November 29, 2012 6:12
But if we do, then lots of current thinking has to be changed too. Romney's 47% comment, for instance, no longer applies. Since payroll taxes are apparently the same as income taxes, in the sense that both fund current govt expenditures, one cannot say that only 47% of Americans pay taxes.

But that's only the beginning. If payroll taxes are just income taxes, then we have a massively regressive tax system. A huge amount of income that pays for govt is capped for no apparent reason at around $110K. Why cap that if payroll tax is just income tax? The working poor and middle-class are shouldering an excessive burden.

But even more, if you say that there is no such thing as the ss trust fund than there is no such thing as social security going bankrupt, any more than the defense department can go bankrupt. It is just part of the federal govt.

Tha means that social security expenditutes must now compete with every other kind of expenditure. So every aircraft carrier we buy is now in a real way less money into the pockets of retirees. I think we can probably win that fight.
...
written by Arne, November 29, 2012 6:39
nassim,

One of the posts with the chart I am thinking of is http://7.2.1www.cepr.net/index...d-medicare

Thanks Dean
written by millionsknives, November 29, 2012 7:42
I also read the post from factcheck.org and thought that it entirely misrepresented how financing of social security works.
the legal construct is a legal construct
written by Brian Dell, November 30, 2012 3:28
I think Dean is referring to "the law" too frequently. Of interest to an economist, I would think, is a thing's economic reality, not its legal reality.

On that count, there is not much to this "trust fund" because the existence of a large balance does not, in fact, imply that the government's ability to pay benefits is that much greater. If Greece had a "trust fund" like this would creditors agree that it ought to be classed as an asset?
The IOU line was W's
written by Paul Vigna, November 30, 2012 7:02
I remember George W. Bush referring to Tsy bonds, or maybe it was the SS bonds, as IOUs in a file cabinet. That was the first time I'd ever heard somebody describe it like that. Made my blood run cold. Surprised to see the imagery reappear here.
...
written by Emersberger, November 30, 2012 7:32
Brian Dell wrote

“I think Dean is referring to "the law" too frequently. Of interest to an economist, I would think, is a thing's economic reality, not its legal reality.
On that count, there is not much to this "trust fund" because the existence of a large balance does not, in fact, imply that the government's ability to pay benefits is that much greater. If Greece had a "trust fund" like this would creditors agree that it ought to be classed as an asset?”

First of all, everyone’s property, including any financial asset, is ultimately protected by the government. You can never disentangle that “legal reality” from economics. That becomes dramatically revealed in a default, or near default situations: Greece (which you mentioned) also Argentine.

It is certainly true that if the US government is bankrupt then the value “trust fund” is in dire trouble – BUT THEN SO IS EVERYONE ELSE WHO OWNS GOVERNMENT BONDS. The government cannot be selectively bankrupt – bankrupt for the retirees expecting $1200 a month but not for elite investors like Peterson who fully expect to be paid back when their government bonds mature. The "trust fund" represents about 18% of the USA's public debt.

No one remotely competent or honest would be saying that the USA government is anywhere near bankruptcy or default. Hence nobody should be claiming the “trust fund” is a bunch of worthless IOU’s unless they are going to say the same about ALL other financial assets without any regard for the actual situation of the companies or governments who issue them
...
written by skeptonomist, November 30, 2012 9:04
Actually SS does affect the deficit, if the deficit (or surplus) you're talking about is that based on the "unified" budget. Thus far payroll tax income has been used in this way to reduce the apparent size of annual deficits (though politicians will probably switch when money begins to flow out of the Trust Fund). Although Dean insists correctly that SS and general funds are legally separate, he (along with essentially all the media) still refers to "unified" deficits, for example when referring to surpluses during the Clinton administration. The subject is apparently confusing enough to the media and the public without this duality.

Paying out the surplus in the SS Trust Fund, which is what is supposed to happen, will probably increase general-fund deficits in the future if income and other taxes are not raised. Preventing such raises is one reason that Peterson and others are campaigning to have the Trust Fund obligation dishonored or postponed.
poor economist Brian Dell
written by coberly, November 30, 2012 3:33
You are a p--- p--- economist.

the economic reality of the Social Security Trust Fund, is that a nation with a GDP of around 15 Trillion Dollars owes about Three Trillion to the people who paid for their Social Security in advance, and "trusted" the United States of America to use the money for good purposes and then pay it back, with interest, at the time needed.

Since as a good economist you are convinced that if you owe me money, paying me back would subtract from your limited resources, so of course you think that I am the cause of your "deficit."

and no doubt as a good economist you have calculated that to pay back the money The United States of America borrowed from Social Security, a tax increase of about 3% on incomes over 100k would do the job in about ten years... just about the time over which SS will need the money.

as a p--- p--- economist you will not have noticed that raising the payroll tax one tenth of one percent per year over that time would avoid the government ever having to pay back ANY of the principle... as that principle would gradually be absorbed into the "normal" one year reserve that SS maintains and would never have to be spent.

but it's okay, i believe you are an economist. god knows, we hear from your like all the time.


just a little more help for Brian Dell
written by coberly, November 30, 2012 3:37
If I had an income of 150 thousand dollars and bought a car for 30 thousand, with ten years to pay, you would no doubt tell everyone that I did not have the resources to pay off the debt.

You probably won't get too many banks or car dealers taking your professional advice.
more help for Brian Dell
written by coberly, November 30, 2012 3:44
The Trust Fund is NOT an asset to the United States government. It is a DEBT of the United States government. It is an asset to Social Security... that is to say, the debt owed to the Social Security Trust Fund... is an asset of the Fund.

funny how an economist would not understand that.
coberly...exactly
written by pete, November 30, 2012 5:28
We the people own social security and the treasury. There fore we have an asset (ss bonds in the fund) and a libility (ss bonds in the fund) hence we net out with zero. The trust fund does nothing for us. It is an accounting gimmick designed to fool people into thinking it is a guarantee. Everyone who receives the annual update from SS knows that the payouts may be changed at the whim of congress. There certainly is no contract. This happened big time in the 80s when they made me work longer to get my ss. So if congress decides to take away Bill Gates and Warren Buffetts SS payments, they can certainly do that. Same with medicare. No need for the fat cats to receive these things.
the trust fund was not held in escrow
written by Brian Dell, November 30, 2012 6:59
If people had truly "paid for their Social Security [benefits] in advance" the system would be analogous to the Canada Pension Plan; i.e. mandatory payroll deductions that go to a fund overseen by an arm's length investment board. But that hasn't been the system. The payroll collections in excess of payouts between 1983 and 2009 instead went to same year spending.

So the money's gone. One could argue that there's a moral obligation to not cut benefits for those who paid payroll taxes between '83 and '09 but that's in fact rather strained because one would be saying that members of demographic bulges (here, baby boomers) are entitled to take advantage of that status. It's that demographic bulge that created the contribution surplus (boomers were in their 20s or early 30s in 1983, those born in 1946 turned 63 in 2009) and the "trust fund" is arguably just a construct meant to put pressure on the generation(s) following the boomers to agree to higher payroll taxes or income taxes.
the whim of congress
written by coberly, November 30, 2012 7:05
pete

time was when the whim of congress was limited by the "will of the people."

Social Security is worth fighting for. You appear ready to give up yours by default.

NO private retirement plan can GUARANTEE a benefit that will see you through your old age. The government guarantee is only as good as the government, which is only as good as us.

That "accounting gimmick" is the law. The law is all that protects ANY of your investments.

And one more time, there is more than one person in the united states. It is simply a miserable failure to think clearly to say "we" net out to zero.

No "fat cat" will take any more out of Social Security than he paid in (plus "interest"). In fact it is the amount the fat cats pay in that makes it possible for the poor to take out quite a bit more than they pay in. It's like insurance. Those who don't have the fire, pay in enough to pay those who do have the fire.
miserable failure
written by coberly, November 30, 2012 7:10
The people who get money from Social Security engaged in a specific, legally distinct, act. They paid the Federal Insurance Contribution... called the "payroll tax." This entitles them to collect a pension based on what they paid.

The idea that somehow the money they paid in is "the government's money" and the government paying it back to them is really the government paying itself is the kind of clever nonsense by which fast talkers fleece the marks. Don't be a mark.
...
written by liberal, November 30, 2012 9:18
pete wrote,
There fore we have an asset (ss bonds in the fund) and a libility (ss bonds in the fund) hence we net out with zero.


Nonsense, because not everyone is a social security beneficiary and a general fund taxpayer to the same extent.
...
written by liberal, November 30, 2012 9:23
pete wrote,
There certainly is no contract.


Of course it's a contract. The issue is, rather, that this contract has force of law, which can be changed.

But the "contract" to pay out to private holders of Treasury bonds can be changed, too, either by inflating away or, in an extreme event, changing the Constitution to allow default. Sure, not very likely, but it's not like the property interest of private bondholders is a law of physics.
Wrong
written by joe, December 01, 2012 4:36
"When Peterson sells his bonds, the government must either cut spending, raise taxes or borrow the money from someone else" - The fed can always purchase them. What do you think QE was?

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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