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Home Publications Blogs Beat the Press It's Friday and Charles Krauthammer Is Confused On Social Security Again

It's Friday and Charles Krauthammer Is Confused On Social Security Again

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Friday, 18 March 2011 05:47

Charles Krauthammer still does not understand the concept of government bonds. He badly wants the government to default on the bonds held by the Social Security trust fund. It seems that the main reason is that these bonds are effectively wealth to ordinary workers, not rich people or banks.

Krauthammer complains that the government bonds held by the trust fund are "special issue" bonds. He must know of a meaning for "special issue" that the rest of us don't. These are non-marketable bonds. That doesn't mean that the government can just default on them as Krauthammer wants to do. The implication -- actually the assertion -- of Krauthammer's piece is that because he doesn't like the people to whom these bonds are owed, the government can default and there would be no consequence.

That obviously is what Krauthammer wants, but that does not make it true. If the government were to default on its debt to Social Security then workers would justifiably be outraged. This could have both political and economic consequences. The disrespect this might cause for the government may lead to a surge in tax evasion and ignoring of other laws (perhaps even copyright). After all, why should workers respect the laws of a government that steals from them while protecting the wealthy?

Workers may also use their power as voters to decide that if the government can default on the debt it owes to them through Social Security that it can also default on the debt held by wealthy individuals like Peter Peterson as well as Wall Street banks. There certainly is no moral argument for honoring the bonds held by the latter group of investors if the government has defaulted on the bonds held by the trust fund. As an economic matter, it may also be better for most workers to see the government default on its debt in this situation, even recognizing the incredibly disruptions this would cause in world financial markets. (The money going to debt service could instead be used to pay Social Security and other benefits for working people.)

At a more concrete level, the assertion by Krauthammer that the bonds held by Social Security are not counted in the calculations of the government debt is just wrong. It is easy to find examples where it is included in calculations of the ratio of debt to GDP, as we find in the Economic Report of the President. There is also no shortage of deficit hawks who eagerly use the $14 trillion measure of the gross debt to make their argument, including for example, Charles Krauthammer, a Washington Post columnist [thanks to Joe].

It would also be nice if Krauthammer could take 2 minutes to understand something about means testing so that he would realize that this is not a practical way to solve Social Security's projected long-term shortfall.

Comments (15)Add Comment
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written by bmz, March 18, 2011 7:56
The Republicons are so adept at propaganda, that I'm sure they will convince the the majority of the "workers" that defaulting on Social Security debt is necessitated by the profligate Democrats. And then Obama will compromise on defaulting on just half the debt.
right when he's wrong
written by diesel, March 18, 2011 8:03
As Krauthammer said, "That money is gone with the wind. Those trust fund trinkets are nothing more than a record of past borrowings. They say nothing about the future."

And that wind smells of gunpowder, high-energy explosives, and burned jet and rocket fuel. Those aluminum trinkets mummify in Arizona's desert. And it's very likely that the future (of subsidizing defense appropriations with money borrowed from social obligations) will mirror the past.
Charlie's Friday Risk Report
written by izzatzo, March 18, 2011 8:25
Not to worry. It's Friday. When Monday rolls around Krauthammer will have read this blog and correct his mistake, reporting that SS is actually an extension of the Fed that prints money to buy and hold government debt and refund the interest earned to the Treasury.

Not only does this crowd out China from earning that interest while killing consumption of USA exports, it crowds out the rich in the USA from receiving that interest earned as well, reducing the very consumption demand that had already reversed the recession after the tax cuts.

If Krauthammer gets his wish and the government defaults on the bonds, SS will just print more money to replace them and convert to a cash and carry fiat counterfeit basis that causes hyperinflation to erode the future value of wealth of the wealthy disproportionately to the point they will have to depend on SS too.

But of course that's how risk works under capitalism isn't it Charlie. You pays your money and you takes your chances.
...
written by Peter Belenky, March 18, 2011 9:51
Krauthammer is right that there is a difference between bonds held by individuals and those held in trust for a large and indefinite class of beneficiaries. Default on debts to individuals is a serious matter with market and political consequences. We can reduce or defer payments to the class of SS beneficiaries with impunity, however, while pretending that we are protecting the long-run interests of that class. The public criterion is not whether individuals receive the value of their investment or whether there are enough bonds in the trust to support promised payments, but whether the balance between income and expenditures maintains the value of the fund. The defense against default to individuals can be pursued in court. The defense against reduced SS benefits must be a combination of political pressure and economic reasoning to expose fallacious.
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written by PeonInChief, March 18, 2011 9:57
Charles Krauthammer take two minutes to understand something? Surely you jest.
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written by joe, March 18, 2011 10:11
"There is also no shortage of deficit hawks who eagerly use the $14 trillion measure of the gross debt to make their argument."

Krauthammer is one of them. That's why I laugh when he tries to convince people that the bonds are worthless. If they are worthless, then the national debt is only the debt held by the public, about 9 trillion.
At least the CONs are CONsistent
written by Paul, March 18, 2011 10:50
Charles, and his Con compatriots, have tried to discredit SS since FDR created it 75 years ago. http://historymatters.gmu.edu/d/8128

Wrongheaded? Sure, but at least they never give up, unlike today's Dem's who have largely abandoned the New Deal and jobs creation. http://www.nytimes.com/2011/03...an.html?hp

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written by Eric, March 18, 2011 2:48
Krauthammer is the edge of the real action here. You need someone to talk default so that when the decision is made to reduce benefits so as to merely stretch the redemption process out by 40 years, every right-thinking person will be tickled pink that we have SAVED Social Security! Repeat in about 2051 as necessary.
Non-Marketable Bonds...
written by Brant Williams, March 18, 2011 4:37
OK...if they are real bonds...with real value, then where are the coupons? Does the the Treasury pay out coupons on these bonds? (I don't actually know...but I suspect there are no coupons paid...or they recycle back to the treasury....)

The real point is...these may be bonds...but they are not money. When it comes time to get the money to actually pay benefits....you will have to SELL THEM. All you people who think this whole arrangement is viable..?...mind telling us what impact selling all those bonds will be. Never mind that the main buyer of bonds is the federal reserve via QE....
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written by joe, March 19, 2011 12:29
"Does the the Treasury pay out coupons on these bonds?"

They pay interest on the bonds and the interest payments are used to pay benefits when there is not a surplus from FICA revenue. In 2010, there was a 41 billion shortfall from FICA revenue but interest payments were 118 billion. The interest payments were used to meet the surplus. The same will probably happen this year since there was a FICA tax cut in the 2010 stimulus passed in Dec.

The interest payments are normally added to the trust funds surplus.
"Does the the Treasury pay out coupons on these bonds?"
written by Brant Williams, March 19, 2011 2:42
Thanks Joe....

I think you meant to say "The interest payments were used to meet the SHORTFALL"

This makes the point exactly. Those coupons come out of the treasury. Going forward...the shortfalls are only going to get worse, due to demographic shifts. Within what...10 years...payouts will exceed FICA revenue and the treasure coupons COMBINED. What happens then?

The only value those bonds have, is the ability of the treasure to pay the coupons!

Lets say you have determined that to retire above the poverty line, you need to sock away 10% of your after tax income. So every you, you spend 100%, and write yourself an IOU for 10% of your income. That is exactly what SS is.

Just because at the time we wrote those IOUs...our friends treated them like money does not mean they will when it comes time to retire.

But people in this country have this miraculous ability to extrapolate 1 year trends for 10 years...and 10 year trends for 100.

At 42...I have no illusions. Every dime I pay to SS is a transfer payment. I will be lucky to get back .01 on the dollar.


The fact that when benefit payouts exceed FICA revenue...interest income (ie payments from the Treasure) have to be used makes it pretty clear that those bonds really have no value.
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written by NewsFromAnnArbor, March 19, 2011 4:06
Brant,

You'll get at least 70 cents to the dollar owed and also have disability coverage for yourself and your family in the meantime. There is also another way you benefit, the fact people can retire sooner than they otherwise could puts upward pressure on wages which benefits much younger workers like yourself. You've drunk too much cool-aid Brant!
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written by Joe Mazzilli, March 19, 2011 8:23
Brant missed the whole point of Baker's post. The SS trust fund's bonds are just as valid as any others. End of discussion. Furthermore, around 1983 we (meaning WE BOOMERS) began paying more into the fund as a way to compensate for the actuarial fact that the fund would pay our more than it takes in when we retire, but the extra money paid in would earn interest (currently $118 billion) to make up for it.
Another puppet
written by Grich, March 19, 2011 9:54
After reading Krauthammer's columns over the last several years, it is clear that even if he understands the issue he is not allowed to write what is really the truth because he is another in a long line of Right Wing puppets. These puppets are only allowed to push the Right Wing war machine agenda at the expense of all the little "serfs" at the bottom of the food chain.
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written by Brooks, March 19, 2011 10:09
It's Friday and Dean Baker Is Pretending to Be Confused On Social Security Again.

Actually, Krauthammer seems confused as well.

If we want, we can reduce reduce deficits by reducing spending on SS at any time without "defaulting" on those bonds.

It's very simple, once one breaks through the conceptual confusion created by all the bookkeeping technicalities.

We simply reduce FICA SS taxation, offset that tax reduction with an increase in other taxes (for example, raising the top marginal income tax rate), and reduce SS spending.

The result is no change in total revenue, a reduction in spending, and therefore a reduction in the deficit, without "defaulting" on those bonds.

Thing is, all the trust fund balances (a couple of trillion dollars) really represent is a commitment (of some sort) to spend at least that amount over time on SS. But there's no way we'd spend anywhere near that little on SS over coming decades. SS will be financed primarily by ongoing taxation, which can be raised or lowered as we wish. So the sizes of those balances are, practically-speaking meaningless, and projected degrees of "solvency" are irrelevant to whether or not (or to what extent) we should reduce SS spending to reduce the deficit.

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About Beat the Press

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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