Tuesday, January 04, 2005
He's baaaaaack: New York Times columnist Paul Krugman has returned from his all-too-brief vacation to read a book with what promises to be a series of articles arguing that Social Security is not in trouble, and everything will be OK for 100+ years to come.
Krugman's got some beauts in the column and a longer piece in The Economist's Voice [PDF format] -- a relatively new publication that boasts Krugman acolyte J. Bradford Delong as "co-editor."
To deconstruct the Krugman's entire house of cards will take more time than I have before I hit the sack this morning, but I'll hit some highlights.
First, in the longer piece, Krugman makes an argument that investing a portion of your Social Security retirement funds in private mangaged accounts is akin to a "free lunch" that won't produce returns above what Social Security would. Krugman, your personal financial advisor, apparently thinks that 401(k)s are a bad idea and you'd be better off sticking your retirement money in the mattress. Stocks are just too risky.
Second, Krugman believes that IOUs written to yourself are just as good as cash.
The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.
There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees.
That is, we can't have a Social Security crisis without a general fiscal crisis - unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count.
Krugman is playing what my father correctly described as "word games" when I tried similar schemantic arguments as a high school student.
When the government starts having to pay those government bonds that the Social Security "Trust Fund" is holding (and it's holding a lot of them), where does that money come from? It comes from the general budget. When that happens, Social Security, which has helped cover the government's excessive spending, starts becoming another drain on the budget. You can call it a "Social Security crisis," or you can call it a "general fiscal crisis" -- the labels are meaningless, the effect is not. Beginning sometime in the next decade, the government will have a new, mandatory (as Krugman rightly points out, the federal government will not default on the bonds) spending program that will continue to grow.
At that point, the government has three options -- it can raise taxes (on Social Security or marginal tax rates or luxury taxes, or any other way they want to do it), it can cut programs and/or benefits, or it can go deeper into debt.
There's one thing Krugman and I agree on: The federal budget is out of whack and spending restraint needs to come back into vogue -- so the last option isn't really an option.
Krugman rightly takes to task President Bush and Congress (but mainly Bush) for fiscally irresponsible budget practices. In the Voice piece Krugman poses an interesting "what-if".
It’s interesting to ask what would have happened if the General Fund actually had been run responsibly — which is to say, if Social Security surpluses had been kept in a “lockbox”, and the General Fund had been balanced on average.
In that case, the accumulating trust fund would have been a very real contribution to the government as a whole’s ability to pay future benefits.
If the general fund had been run responsibly, there would certainly be less of a problem in the next decade, but a "very real contribution"?
Let's take Krugman's what-if and play with it. Starting in 2005, at The New York Times editorial board's urging, the president and Congress got their act together and over a 13 year period not only balanced the federal budget, but wiped out the deficit. The government spends not one dime more than it takes in.
The year is 2018. Social Security reaches the tipping point where it doesn't take in enough money to pay the promised benefits. The Social Security trustees open up the Al Gore memorial lockbox and grab a handful of government bonds. They walk across the street to the Treasury Department and cash them in.
And the federal budget immediately goes into a deficit.
In all likelihood that's not a situation we're going to be in 13 years from now, so it's really meaningless to concern ourselves with it.
The problem that faces us is a simple one. In a few years Social Security ceases to be a free ride. The demographic that once ensured solvency with 14 workers for every retiree will have a just over two for every individual receiving benefits. That sort of a system can't remain solvent in the long run. It's a Ponzi scheme. If Enron were running this racket, Krugman would be having a fit.
*UPDATE* Random Jottings takes a whack at Krugman too -- informative graphic included!