Can we trust the latest arguments regarding the Social Security trust funds?
People on all sides of the debate are making statements that simply are false or misleading.
Often, one can only assume people are playing fast and loose with the truth because they want to win over the public. Sometimes, it is possible they just don’t understand some issue, and that leads to stretching the truth.
The issues are complicated, in large part because things that are true for a family or a firm are not true for a nation. Politicians who don’t understand this make statements that amplify misunderstandings rather than clear them up.
A story in Wednesday’s paper on President Bush’s trip to West Virginia to examine the bonds held by the Social Security trust fund illustrates the problem.
The trip was a publicity move supporting the president’s proposals for “personal accounts.” He went to show that “there is no trust fund, just IOUs that I saw firsthand, that future generations will pay.”
The article correctly points out that the Treasury bonds held by the trust fund don’t have any real value, but are only promises that the government will tax enough to pay interest and principal at some time in the future.
Many private trust funds, administered by banks for people or estates, also contain Treasury bonds. Those bonds have no intrinsic value, either. Nor do the billions of dollars in T-bonds held by life insurance companies, private and state pension plans or mutual funds. Like the bonds in the Social Security trust funds, T-bonds held by the public have value only because the U.S. government pledges to pay interest and principal when due.
The fact that our nation has never reneged on such promises means U.S. Treasury bonds are the safest investment in the world. That there are no physical assets for bondholders to claim is irrelevant. No one worries that the nation would default on promised bond payments.
Personal-account supporters will argue that a promise to pay myriad private individuals and firms is inherently different from one branch of the federal government promising to pay another branch. They are entirely correct. The political incentives in the two cases are different.
The relevant question is about the likelihood that future Congresses would default on sums owed to the Social Security Administration versus money owed to the private bondholders. When Bush speaks of the trust-fund bonds as mere pieces of paper, he essentially argues that future Congresses will be dishonest. If so, global investors might well ask, “If they are going to default on those bonds, why won’t they on ours?”
Our current system was designed by a commission convened by a conservative Republican president, Ronald Reagan. Nine of 15 members were Republicans, including Bob Dole, Bill Archer, Barber Conable, John Heinz and Alan Greenspan. All were smart people, well versed in policy matters.
The commission clearly understood what they were doing in recommending that these trust funds hold only T-bonds. They knew that the T-bonds, like those sold to the public, were only IOUs. They knew the trust fund had no value beyond the willingness by future Congresses to raise tax money.
To argue that the existing system is somehow worthless or fraudulent is to argue that the leading lights of the Republican Party in the 1980s were stupid or dishonest.
The assertion by some politicians and reporters that the 1983 system was somehow administered contrary to plan compounds public misunderstanding. For example, Wednesday’s article asserts: “Instead of socking the surplus away, the government spent it on other programs. …”
The implication is that government deviated from what was planned in 1983 and that unanticipated mismanagement occurred. This is not true. What happened in the last 22 years is exactly what the commission intended. Moreover, the plan was approved with strong congressional majorities in both parties.
Designers of the 1983 changes clearly knew the money would not be “socked away.” They understood, as most reporters apparently do not, that, outside of putting the money into corporate stocks and bonds, there is no way the government could “save” anything. By a large majority, they avoided the private market-investment option.
Were the intelligent people who last “reformed” Social Security somehow seized by collective imbecility? Of course not. They understood the course on which we embarked. They also understood that a promise to make future payments from future federal taxes was not an onerous or impossible commitment as long as the government kept its general fiscal house in order.
They did not anticipate that the government would run large deficits for another 16 years or that we would return to large deficits after only a few years of surplus. The Republican reformers in 1983 did not establish an inherently bad plan. They were just unduly optimistic about the prudence and integrity of their colleagues and successors in Congress.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.