The Catfood Commission and its sister, AmericaSpeaks, never talk about the Social Security Trust Fund, which currently holds about $2.54 trillion in Treasury bonds. That’s because they don’t want to pay those bonds. They can’t publicly admit they want the Treasury to default, so they resort to word trickery. Here’s Alan Simpson, co-chair of the Catfood Commission (aka the “deficit commission,” and, officially, the National Commission on Fiscal Responsibility and Reform), explaining away the bonds in the Trust Fund:
LAWSON: But what about the $180 billion in surplus that it brings in every year?
SIMPSON: There is no surplus in there. It’s a bunch of IOUs.
LAWSON: That’s what I wanted to actually get at.
SIMPSON: Listen. Listen. It’s 2.5 trillion bucks in IOUs which have been used to build the interstate highway system and all of the things people have enjoyed since it has been set up.
Simpson thinks those bonds are just worthless pieces of paper. Let’s ask Miss Manners about this point of view:
[Miss Manners] also asks that you not bore her with explaining the comparative quality of marital and nonmarital relationships, especially when using the term “honesty” or asking the nonsensical question of what difference a piece of paper makes. Miss Manners has a safe-deposit box full of papers that make a difference. – “Miss Manners’ Guide to Excruciatingly Correct Behavior” by Judith Martin.
Thank you, Miss Manners. Simpson’s position is indeed nonsense. Here’s his explanation of how the bonds in the Trust Fund get repaid:
SIMPSON: Let me say things in a way so your fans will understand this, so you can go and be a hero. There is not enough in the system by the month to pay in, to pay out what comes in. In other words, there is more going out, than coming in. That happened 3 or 4 weeks ago.
So, what do they do? They go to that trust fund and say, ‘We need the IOUs out of it.’ And they say, ‘You can have them, but you have to pay for them.’ So you’re taking a double hit on your own government. Makes no sense. The government goes and says, ‘Hey, here’s that 2.5 trillion IOUs, now we need some money out of that system because we haven’t got enough to pay this month.’ And they say, ‘Great.’ So the government gets a double hit.
Nonsense.* I’m guessing that hidden in that fusillade of words, Simpson is saying that the Treasury can’t pay those bonds until it finds a new source of money. If we can’t find a new source of money, we have to default on the bonds in the Trust Fund.
My evidence? [cont’d.]Take a look at this McClatchy article. The only reason given for concerns about the national debt is that the ratio of publicly held debt to the GDP might reach 90 percent in 2020. No one is worried about the ratio of the total national debt to GDP. Total national debt is the sum of publicly held and intragovernmental debt. The Trust Fund bonds are the latter. Total debt is currently about 90 percent of GDP, so if Trust Fund debt mattered, we would already be in a disastrous situation. The only way it doesn’t matter is if no one thinks we have to repay the Trust Fund Bonds, either because we are going to default, or because annual revenues will always exceed expenses. And by no one, I mean the bond market and its fabulously wealthy players.
Simpson’s explanation for repayment of Trust Fund bonds is nonsense. The bonds could be repaid by issuing new Treasury bonds, and canceling Trust Fund bonds. That won’t affect deficits, because borrowed money isn’t part of the deficit calculation.
It won’t affect the total national debt either. If we issue new public debt, all we do is change the composition of the total debt, decreasing intragovernmental holdings and increasing publicly held debt by the same amount.
Or, as Jamie Galbraith and several excellent commenters here suggest, the Treasury could just pay Social Security benefits and reduce the Trust Fund bonds by a like amount, without issuing new debt. That would reduce the total national debt.
In any case, the bonds are obligations of the Treasury, and refusing to pay them is a sovereign default, which means a default on its debt by a sovereign nation. That would be a financial disaster.
Simpson can’t just say he wants to default. Instead, he cloaks default by increasing taxes and cutting benefits so that between the two, the Trust Fund will continue to run surpluses every year. The Trust Fund won’t ever call the bonds because FICA taxes will be enough every year to pay benefits. That way the Cat Foodies can pretend that there isn’t a default. The surplus can be used to fund wars or bank bailouts, with no possibility that it will ever be paid off.
And where does Simpson propose to find this new money? He won’t tax the rich. Instead, he increases taxes on the very same people who have been paying excess money into the system so it would be available today. We get to pay twice: once to fill up the Trust Fund, and once more so we don’t have to draw down the Trust Fund. That isn’t nonsense. It’s fraud. And it’s a sovereign default by the US against its own citizens.
*Social Security is funded by taxes created by the Federal Insurance Contributions Act (FICA). Those taxes are deposited into the Social Security Trust Fund. All payments of Social Security benefits come from the Trust Fund. The excess of FICA taxes over benefits is invested in special Treasury bonds. That works in the same way that you buy Treasury notes for your IRA. Those bonds pay interest, and the interest is deposited into the Trust Fund. Since 1983, working Americans have paid extra FICA taxes and built up the Trust Fund so that we could fund Social Security benefits as the Baby Boomers retire. That worked. There is plenty of money to fund Social Security for years.