Are They Advocating Default?

Focus on 2018 as Social Security Turning Point Implies Default on U.S. Government Bonds

For Immediate Release: March 9, 2005 

Contact: Ira Arlook, 202-721-0111

According to the Social Security trustees, the program will pay all promised benefits until 2042, 37 years from now. Yet in the debate over the future of Social Security, many politicians and commentators have focused on the year 2018 as the date when the program first faces serious problems. In a new paper, titled "Defaulting on the Social Security Trust Fund: What It Would Mean, and How It would Be Done," economists at the Center for Economic and Policy Research (CEPR) point out that 2018 would only pose a problem if the U.S. government were to default on the bonds held by the Social Security trust fund. This possibility has been raised by President Bush: "As a matter of fact, in 2018, the system goes into the red. And by the way, there's not a Social Security trust." The paper then briefly examines some of the economic and political consequences of such an unprecedented default.

Though the trustees project annual benefit payments will exceed annual tax revenues in 2018, they also project that the Social Security trust fund will hold more than $3.6 trillion (in 2005 dollars) in government bonds in 2018. Since Social Security is projected to hold enough bonds to cover its shortfall for more than two decades after that year, the program would only be confronted with a financial problem in 2018, if the government defaulted on the bonds held by the trust fund.

These bonds in the Social Security trust fund are backed by the "full faith and credit of the United States government," just like any other U.S. government bond. Thus, under current law, as long as there are sufficient assets held by the trust fund, it must pay out full Social Security benefits.

In addition to a possible loss in confidence in the U.S. government, a default on these trust fund bonds would result in a large upward redistribution of wealth, from the low- and middle-income earners who pay the bulk of Social Security taxes, to high-income earners who pay the bulk of the individual and corporate income taxes. A default in 2018 would redistribute $1.1 trillion (in 2005 dollars) from the bottom 80 percent of households to the richest 5 percent, with $840 billion going to the richest 1 percent. The average loss to a household in the bottom 80 percent would be more than $10,000, while the average gain to a household in the top 1 percent would be more than $800,000.

As a political matter, it is not clear what argument could be made as to why workers alone, through cuts to their Social Security benefits, should be forced to suffer from the government's failure to pursue responsible fiscal policies. In contrast to private investors, who freely choose to buy government bonds in full recognition of the risk involved, workers were legally required to pay into the Social Security system. It is not clear how politicians would argue that Social Security beneficiaries should be hit by a government default, while other investors are protected.

Those who raise 2018 as a turning point also claim that less government borrowing from Social Security will require spending cuts or tax increases. While the fact that the federal government will be able to borrow less from Social Security than it did in the past or does at present will pose a problem for the overall federal budget, the date 2018 has no importance in this story. It may be necessary to re-evaluate tax and spending policies, but this is a problem for the federal budget, not one for Social Security.

If default on the bonds held by the Social Security trust fund is to be considered as a serious option, then there must be a full discussion of the consequences of such a default.