Does Congress Want to Default on the National Debt?

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Dean Baker
Truthout, January 11, 2010

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The deficit hawks in Congress are pushing again to establish a special commission to deal with the problem of the deficit. They are trying to include a provision establishing such a commission as part of a bill to increase the country’s debt ceiling.

The deal is that this commission would produce a set of recommendations to reduce the deficit. Its recommendations would then be fast-tracked so that they would not be subjected to the normal congressional procedures. This means that they could not be amended or filibustered. They would be subject to a straight up or down vote by the lame duck Congress after the November election. This means that many of the people who were just voted out of office would get to decide the future of our Social Security and Medicare benefits: so much for democracy.

While the commission idea is bad enough by itself, it especially troubling that the proposal would place major cuts in Social Security on the table. This is troubling for two reasons. First, current and near retirees will badly need their Social Security, after the Wall Street boys’ machinations destroyed their home equity and retirement accounts. The vast majority of middle-income families will have very little other than Social Security to support them in retirement.

However, plans to cut Social Security are even more troubling because they amount to an effective default on a portion of the national debt. In 1983 Congress voted to raise the Social Security tax above the level needed to pay for current Social Security benefits. The intention was to deliberately accumulate a surplus, which would be invested in government bonds and held by the Social Security trust fund. The rationale was that the huge baby boomer cohort would begin retiring and collecting benefits in 2008. The trust fund could be used to partially cover the cost of their retirement.

This means that the baby boomers have effectively already paid for the cost of their own retirement. According to the Congressional Budget Office, the bonds in the trust fund, together with ongoing tax revenue, will be sufficient to pay for all Social Security benefits through the year 2044.

It is also worth noting that boomers are not getting any great bonanza from Social Security. Gene Steuerle, an expert on Social Security and former Vice-President of the Peter G. Peterson Foundation, calculated that a 50-year old man earning $42,000 a year would get a return of just 0.97 percent on his Social Security taxes. (Higher income workers did worse.) Steuerle calculated that this amounted to a net transfer to the government of $54,000. This assumes that the scheduled benefit is paid in full. This worker will do even worse if his benefit is cut, as the Wall Street crew wants.

In this context, cutting benefits for the current or near retirees amounts to an effective default on the bonds held by the Social Security trust fund. These bonds were supposed to pay for the benefits of the baby boomers. If Congress doesn’t pay these benefits, then it is effectively defaulting on the bonds held by the trust fund.

The deficit hawks, led by Wall Street investment banker Peter Peterson, have no qualms about defaulting on the government bonds held by the Social Security trust fund. In fact, they argue that there is no alternative. Peterson and his followers assume that it is acceptable to default on the government bonds that are supposed to pay for workers’ Social Security because there will be no consequences to the economy if Congress votes to default.

But, this is a political assessment, not economic analysis. There will only be no economic consequences from defaulting on the bonds held by the trust fund if the public decides to let Congress default without consequence. However, there is no reason whatsoever why the public should allow Congress to default on the bonds dedicated to paying their Social Security at the same time that it honors in full the bonds held by Peter Peterson, Goldman Sachs, and the rest of the Wall Street crowd.

In other words, if the Peterson crew wants defaulting on the bonds held by the Social Security trust fund to be on the agenda, then defaulting on the bonds held by the Wall Street gang should also be on the agenda. Defaulting on the government debt will have serious consequences and certainly should not be done lightly. But if the Peterson Wall Street crew is putting default on the bonds held by the Social Security trust fund on the agenda, then the rest of us should insist that a partial default on other government bonds also be on the agenda.

After all, it was the greed of the Wall Street crew and the inept policy prescriptions of many of these deficit hawks that brought down the economy. They should not be allowed to take what little the rest of us have left while walking away unscathed themselves. If defaulting on the debt held by Social Security is on the agenda, then the commission better have a partial default on all government debt on its agenda. That is simple enough for even a Wall Street investment banker to understand.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.