Mr. President, This is How the 21st Century Economy Works

For Immediate Release: Wednesday, April 6, 2005

Contact: Patrick McElwee, 202-293-5380 x110

Washington, DC – The following is the text of a statement from economist Dean Baker, co-director of the Center for Economic and Policy Research (CEPR).  “On Tuesday, April 5, 2005, President George W. Bush visited the Bureau of Public Debt, which stores the $1.8 trillion in government bonds currently held by the Social Security trust fund. The apparent purpose of this visit was to raise doubts about the reality of the Social Security trust fund. In a speech delivered in West Virginia just after his visit, President Bush flatly stated, ‘There is no trust fund, just IOUs that I saw firsthand.’

“That is an amazing, and probably unprecedented, statement. It is unlikely that any prior U.S. president ever called the integrity of government bonds into question. The United States has never defaulted on its obligations, which are backed by the ‘full faith and credit’ of the government. Investors and economists routinely cite U.S. bonds as one of the safest possible investments.

“President Bush could not honestly have expected to find vast stores of gold or silver hoarded in the trust fund. As the President surely knows, our economy is no longer based on physical stores of wealth. Almost every modern claim to wealth, such as stock investments or bank accounts, is represented by bookkeeping entries on sheets of paper or digital files.

“What may be more alarming, however, is if the President is hinting that Congress should consider defaulting on the bonds held by Social Security. Under the law, the general fund is obligated to repay Social Security; Congress would have to vote to default on the bonds to change that.

“The bottom line: A default on the Social Security bonds in 2018 would transfer over $1 trillion from the bottom 80 percent of households to the richest 5 percent. The payroll tax funding Social Security falls largely on low- and middle-income workers, since it exempts investment income and all wages above $90,000 a year. This regressive tax is justified by Social Security’s progressive benefits, which are weighted toward lower-income retirees. On the other hand, the general fund that is legally required to repay Social Security’s bonds is funded through income taxes that fall largely on wealthy Americans. In the event of a default, either workers would have their benefits cut or the regressive payroll tax would need to replace revenue that would otherwise have been provided by the trust fund bonds.

“If the President is serious about proposing default as a policy option, then he should be explicit that this is his intention. Otherwise, he should stop scaring people by questioning the integrity of the trust fund.”

For more information on the implications of a default, see CEPR’s paper, “Defaulting on the Social Security Trust Fund: What It Would Mean, and How It Would Be Done .”