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Wednesday, February 23, 2011

Social Security financing and the current state of play on whether the Obama Administration will defend or oppose Social Security

Bush lying in 2005

Joan McCarter at Daily Kos is paying close attention to the Social Security story, as she does in OMB Director Jacob Lew: Social Security isn't the problem 01/22/2011. One of the latest items on that front comes from Obama's director of the Office of Management and Budget (OMB), Jacob Lew, in the form of a USA Today op-ed, Social Security isn't the problem 01/22/2011. Given the White House's duplicity with labor and other parts of the Democratic base on the public option in health care reform in 2009-10, I find myself looking very closely at even the reassuring statements the Obama Administration issues on Social Security. Especially after all the leaks/trial balloons we've seen suggesting they were willing to endorse Social Security Phaseout.

One of the signs of how dishonest and pathetic the national narrative even on Social Security has become came from President Shrub Bush in 2005, when he was on his brief, failed drive to end Social Security. Here's an amazing statement from his appearance in Parkersburg, West Virginia on 04/05/2005:

I have just come from the Bureau of Public Debt. I want to thank Van Zeck, Keith Rake, and Susan Chapman. Susan was the tour guide there at the Bureau of Public Debt. I went there because I'm trying to make a point about the Social Security trust. You see, a lot of people in America think there's a trust, in this sense -- that we take your money through payroll taxes and then we hold it for you, and then when you retire, we give it back to you. But that's not the way it works.

There is no "trust fund," just IOUs that I saw firsthand, that future generations will pay -- will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.

The office here in Parkersburg stores those IOUs. They're stacked in a filing cabinet. Imagine -- the retirement security for future generations is sitting in a filing cabinet. It's time to strengthen and modernize Social Security for future generations with growing assets that you can control, that you call your own -- assets that the government cannot take away. (Applause.) [my emphasis]

Even by Cheney-Bush levels, this was astonishing dishonesty. And the President had to assume there was a bad dysfunctional national media to think he could get away with a claim like that. This AP story of that day at least managed to slip in an explanatory paragraph, explaining how the Office of Public Debt Accounting's Susan Chapman helped him do a disgraceful little dog-and-pony show: "Chapman opened the second drawer and pulled out a white notebook filled with pseudo Treasury securities — pieces of paper that offer physical evidence of $1.7 trillion in treasury bonds that make up the trust fund."

As Jocob Lew explains succinctly in USA Today:

When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due. We have just as much obligation to pay back those bonds with interest as we do to any other bondholders. The trust fund is the backbone of an important compact: that a lifetime of work will ensure dignity in retirement.

If investors around the world had believed, if the Chinese government that is loaning bizillions of dollars to the US had believed the President of the United States on that day in 2005 when he said that debt instruments backed by the full faith and credit of the US government were "just IOUs" that could not be considered real assets of a trust fund, just papers "stacked in a filing cabinet," the dollar would have plummeted immediately in international markets. The government borrowing costs would have soared through the roof.

Nothing liked that happened, because everyone in the world who understands what it means to have a security backed by the full faith and credit of the U.S. government knew that Bush was just blowing smoke out his ass. The stability of dollar, the financial health of the economy, depended at that moment on every serious investor around the world knowing that the President of the United States was being blatantly dishonest about the most secure investments offered by the US government.

It's a sad sign of how degraded the political conversation in the US has become that it seems like a breath of fresh air when the senior budget official states out loud what every investor in the world knows, that US Treasury bonds are "backed with the full faith and credit of the U.S. government." They are universally considered the safest, most "vanilla" financial security in the world.

For the same reason that Bush could lie in the faces of every American citizens about the Social Security trust fund being "just IOUs", the claim from the anti-Social Security crowd in - very sad to say - both parties that Social Security contributes to the deficit is not true. The Social Security trust fund is a separate legal entity from the federal General Fund. Social Security has been running a surplus for years, because of the 1983 Social Security bipartisan agreement to adjust the funding stream to cover the retirement projections the baby boomers. By investing those surpluses in the safest investment vehicles on the planet, US Treasuries, the trust fund was loaning money to the general fund and reducing the federal deficit. The general fund would have had to have borrowed the same amount of money from somewhere even if the Social Security Trust Fund had irresponsibly invested its surpluses in, say, gold coins from some place like the marginally-legitimate Goldline products that Glenn Beck hawks today.

As those bonds mature and the Social Security Trust Fund collects the interest and redeems the principal, they will use it to fund current commitments. None of that makes any difference to what the general fund had to borrow in the past or has to borrow now. Unless the financing mechanism were fundamentally changed from what it currently is, the general fund is in no way committed to cover Social Security obligations as such. It is committed to pay back US Treasury bonds, whether held by the Social Security Trust Fund, the Chinese government, or the Koch brothers' personal portfolios.

That means it was also a flat-out lie in that 2005 speech when Bush said, "Social Security was designed as a pay-as-you-go system, not as a trust system." (I know, Bush lied, the sun comes up in the east every morning.)

As Lew summarizes the point on Social Security and the federal deficit:

The problem is not Social Security; the problem is the mismatch between outlays and revenues in the rest of the budget. Closing that gap and paying down our debt will take tough choices, and the president's budget makes them. Strengthening Social Security is an important, but parallel, issue that needs to be addressed as quickly as possible. But let's not confuse it as either the cause of or a solution to our short-term fiscal problems.

Given my lack of confidence that the Obama Administration is willing to fight for Social Security, I can't help but wonder if even a statement like that may include weasel-words, i.e., "strengthening Social Security." After all, Bush also lied in that 2005 speech by saying he wanted to "fix the problem", "make Social Security permanently solvent for a younger generation", and so on. Both Democrats and Republicans opposed to Social Security frame their phaseout schemes as strengthening the program, fixing it, making it more secure, and yadda, yadda. Weasel-words won't defend Social Security against the phaseout advocates who want to take the US back to the 1920s when retirement was a luxury for the wealthy.

Still, Joan is right to look on the bright side on this particular statement from the Administration. The defenders of Social Security need to reinforce good behavior by Democrats, after all:

The problem there is the horse already left the barn on the revenue side of things [the federal deficit] with the tax-cut deal. Yes, there's a mismatch between outlays and revenues and the deal allows that mismatch to continue. Complicating this more for Social Security is the payroll tax holiday, and the revenues that will be lost for the program during a time when high unemployment is already creating a hit on it. So the difficulty for the administration in trying to create a parallel process for budget negotiation in which Social Security is strengthened is going to be next to impossible. Getting Social Security strengthened in this environment is going to be a massive challenge. At this point, just leaving it out of the negotiations entirely seems to be the saftest [sic] bet.

All that aside, good on the White House for getting out the facts on Social Security. More of that from all of our Dems, please. [my emphasis]

But looking on the bright doesn't mean we have to be unrealistic about what we're seeing on the bright side, either. We're celebrating that it's a refreshing moment when a senior member of a Democratic Administration makes a straightforward statement defending Social Security.

Tags: jacob lew, joan mccarter, social security

posted at 2:50:00 PM by Bruce Miller

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