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Home Publications Blogs Beat the Press Will a Partial Default on the National Debt be Necessary to Get the Deficit Under Control?

Will a Partial Default on the National Debt be Necessary to Get the Deficit Under Control?

Wednesday, 09 June 2010 04:41

That is what the Washington Post argued in an article on President Obama's deficit commission today. The article told readers that: "Adjusting Social Security benefits is a likely point of consensus, commission members say." [The word "adjusting" is presumably a typo. The only way to reduce the deficit is by cutting benefits.]

The Social Security trust fund holds more than $2.6 trillion in government bonds. According to the Congressional Budget Office, this money will be sufficient, along with current tax revenue, to pay all scheduled benefits through the year 2044. The decision to cut benefits would effectively mean defaulting on these bonds -- denying workers the benefits that they have already paid for through the designated Social Security tax.

The article misrepresents the finances of the program by telling readers that: "Social Security has been self-supporting since 1935, with taxes paid by current workers financing benefits for current retirees." This has not been true since the Greenspan Commission's recommendations were implemented in 1983. The commission's plan raised taxes and the normal retirement age, thereby reducing benefits. This led to a substantial degree of pre-funding, allowing the trust fund to accumulate more than $2.6 trillion in government bonds over the last quarter century.

As a result of this prefunding, the article's comment later in the paragraph: "Sometime in the next few years, taxes will no longer cover benefits," has no relevance to anything. Under the law, Social Security benefits are paid out of the trust fund, it makes not an iota of difference whether annual Social Security tax revenue is greater or less than annual benefit payments. This is an invention of the Washington Post and critics of Social Security.

The next paragraph tells readers:

"The program's defenders argue that there is no crisis: If Treasury would repay billions of dollars in surplus Social Security taxes borrowed over the years, the program could pay full benefits through 2037. But many budget experts question whether supporting the existing benefit structure should be a cash-strapped nation's first priority."

It is worth noting that the decision not to "repay billions of dollars in surplus Social Security taxes," is effectively a decision to default on the portion of the government debt held by the Social Security trust fund. It is worth highlighting this point so that readers understand the position being advocated by "many budget experts."


Comments (12)Add Comment
Class War
written by bobbyp, June 09, 2010 10:26
By all means, it is more important for the federal government to keep the Trust Fund on its books as a liability forever rather than use it for its intended purpose.

Cutting benefits reveals the 1980's 'reform' for what it was....a tax scam.
"When" , not "If"
written by AndrewDover, June 09, 2010 10:40
You are right that the post should not have said "if" in "If Treasury would repay billions of dollars in surplus Social Security taxes borrowed over the years,". The correct word is "When".

But if Congress adjusts the details of Social Security, either by raising more taxes, limiting benefit growth, or changing how disability claims are handled, that does not imply a default on those bonds.

You claim ".. decision to cut benefits would effectively mean defaulting on these bonds " is false. The bonds can be paid off and also benefits cut. It would be equally absurd to claim that if we raise SS taxes that the Trust fund bonds are effectively defaulting.
written by Bloix, June 09, 2010 10:52
You left out "to default" on the second last sentence.
written by skeptonomist, June 09, 2010 11:11
SS bashers play a deceptive game with talk of "adjusting" payout rates. Projections 30 years into the future, to the time when the Trust Fund runs out (as was always intended), show that rates may have to be adjusted somewhat for a smooth transition. If the economy is currently doing poorly, as at present, the projections are that payouts will have to be reduced; if the economy is booming, the payouts might need to be increased, but we don't hear about it when this is the case.

So yes, everyone agrees that there will have to be "adjustments", but there is no crisis about this and it can be handled by SS authorities. SS bashers want something else; they want SS benefits to be cut drastically to make up for the deficits which were run up in the rest of the Federal budget (the "on-budget" part). These deficits were largely the result of income-tax cuts for higher brackets, on income which was not subject to SS tax. The $11B+ debt which the US currently has is not due either to SS or health care expenses, and SS will not contribute to this in the future.

Dean's last paragraph may be garbled, so it is worth restating the main point; any drastic decrease in payout of the Trust Fund means that the government would be defaulting on its debt to those people, mostly baby boomers (born 1945-1973), who have been paying their SS payroll taxes since 1983. If this is clearly understood by the public it is very unlikely that SS payouts would be cut. The WaPo and other SS opponents do their best to confuse the issue. They have several real self-interested motives, including preventing any increases in upper-bracket income taxes and capital-gains and dividend taxes (which do not go into the SS system).
I applaud Dean Baker for this.
written by Quiddity, June 09, 2010 11:30
I frequently use the word "default" when discussing plans to pare back Social Security benefits. I'm glad to see that Baker is getting the message out.
written by romanticatheart, June 09, 2010 12:18
SS is old age insurance paid by the govt...originally sold as kind of an annuity to get past the folks who did not like its socialist underpinnings. But the taxes and "trust fund" are irrelevant, courts have already ruled this, though the tax is a sweet pro growth 13% flat rate that should be expanded to more income, and the rate raised, while reducing higher marginal rates. The choice of "lowering the return" on the annuity, or "defaulting on the bonds" is entirely up to congress, is not a "taking" or anything of the sort. It is entirely similar to deciding how much welfare payments or housing subsidies should be.

Yes, in 1985 they lowered my "rate of return" on my SS annuity, by raising the tax and extending the retirement age. And they can do it again. Get over it.
written by Eric, June 09, 2010 1:38
Default is not an accurate description of what potentially is afoot. The asset value of the redeemable debt is still going to exist, only it won't be available for the purpose that it was ostensibly bought for. Fraud is a better word here. But even fraud is not a useful description as we are a democracy and such a eventuality would be the result of specific enactment of new legislation re-directing these assets, at least partially, in other directions. It is a strong point that the nation accumulated these funds for the purpose of Social Security, but that does not compel any future Congress to respect the current arrangement. If other obligations are perceived to be more important, it will not matter what the purpose originally was. It is good to argue that applying the redeemed debt to SS is the only fair way to proceed, but supporters should also begin making the case that it is also the best use of these resources, because that is going to be a very big factor in what eventually happens.
written by diesel, June 09, 2010 9:28
Eric, your argument is well reasoned, but some of us may take issue with your use of the phrase "we are a democracy", upon which it hinges. In our view, the "specific enactment of new legislation re-directing these assets" would not be the result of a popular mandate but of well-funded, self-serving special interests, as others have stated.
Concord 1, Baker 0
written by JHM, June 10, 2010 6:42
It looks as if the "¡Smash Social Security!" folks win this round verbally.

Dr. Baker wants to make the gentry feel ashamed of themselves for causing their Uncle Sam to be "in default."

But what threat is that to Peterson People, who take for granted that the icky Fedguv can never do anythin' right anyway?

Healthy days.
written by skeptonomist, June 10, 2010 10:14
Congress could pass a law tomorrow obliterating all of the $11B+ of US debt, but this would still be, by definition, default. The legality and even "practicality" of how SS is handled are not the important points, it is who is going to pay more in taxes and get more in benefits in the future. The attempt to repudiate the Trust Fund is a matter of shifting the burden of paying for present and future debt from income taxes on high-income people to payroll taxes on wages and salaries only (up to a limit of about $100K), and denying the benefits of SS to people who have already paid for them with payroll taxes. There is really no reason for low-and middle-income wage-earning people, who are the very great majority in the country, to put up with this, and they would not if they understood the issue.

Privatization of SS would provide even more short-term benefits for Wall Street and owners of stock, so it is always lurking in the background.
written by Richard, June 10, 2010 11:59
This reminds me of the advice investment experts tell us that we should not invest all our retirement savings in the company we work for, to prevent what happened to Enron and Worldcom employees. Our trust fund has invested all its funds in US Government bonds, and it looks as though we are going to get the same deal.
Lori Montgomery enabled by the Post...
written by grooft, June 12, 2010 10:10
Dean, Could you please name the offending Post writer. Lori Montgomery deserves to be singled out as the most egregious budget bs-er at the Post. She is pathologically incapable of writing an honest story about the budget and her incapacity to get her mind around the actuality of Social Security makes her deserving of special derogatory mention. It probably wouldn't change the Post's reporting, but it might bring her to the Fiscal Times in the next Post buy-out. Which would shrink her audience (I hope) and cluster all the budget hawk/ucksters at this Pete Peterson site.

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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.