President-elect Obama Suggests Defaulting on the National Debt
President-elect Obama apparently believes that the crisis brought on by the collapse of the housing bubble will require defaulting on the national debt. The New York Times reported today that Obama believes that "changes in Social Security and Medicare will be central to efforts to bring federal spending in line."
While Medicare is projected to face shortfalls because of the incredible inefficiency of the U.S. health care system, the Congressional Budget Office projects that Social Security will be fully funded until 2049 from its own stream of tax revenues and the U.S. bonds it holds.
If Mr. Obama plans to cut Social Security in the near future, then this effectively amounts to a default on the bonds held by the trust fund which were purchased with workers' Social Security taxes. If the budget situation is so dire that it is necessary to default on the government debt, then surely we should be considering defaulting on the bonds held by Robert Rubin, Peter Peterson, and other wealthy bankers, not just the bonds that were bought to pay Social Security benefits for the country's workers.
This is why I'd rather have a personal privatized savings account instead of giving my money to social security.
January 7, 2009 9:18 PM | Reply | Permalink
If your SS funds had been privatized, chances are you and the rest of us would all ready have lost 30-40%. As it is you can argue your case with your senators, congressman, and president.
January 7, 2009 9:45 PM | Reply | Permalink
You'd rather let Wall Street piss it away for you. Clever, that.
January 7, 2009 10:20 PM | Reply | Permalink
No, I would rather piss it away myself than let anyone else piss it away (that includes Wall Street and the Federal government).
Yes I agree I would be down 30-40% in 2008 but I am not retiring for many years and think that it's better to have the money in the capital markets (stocks, bonds, real estate, commodities, alternative investments, etc) than give it to Uncle Sam
January 8, 2009 6:17 AM | Reply | Permalink
"Yes I agree I would be down 30-40% in 2008 but I am not retiring for many years..."
A) Who cares about current retirees, right? All that matters for U.S. policy should be you, a single individual. Is that the logic?
B) Even by your own narrow logic (social security policy should be designed around you alone), here's hoping there isn't another crash right before you retire!
C) The reason it's called "social security" is it's supposed to provide security. That way, no matter what happens, we at least have a poverty-level income coming in when we retire. Otherwise, there's no point in even having the social security system.
January 8, 2009 12:43 PM | Reply | Permalink
A) No - the privatization would obviously look different for current retirees. It's a complex issue but we need to figure out a transition program
B) Right before I retire I would have the majority of my money in cash and very high quality bonds (Treasuries and corporates)
C) It's not providing me any security when it's a complete black box and I have no idea if I'll even get back when I retire what I'm putting in right now
January 8, 2009 1:26 PM | Reply | Permalink
MiddleClassBill:
There is nothing complicated about economics.
You spend more than you make, you go into debt. The next year, if you keep spending more than you make you go further into debt. From year to year your interest payments are making your income ever smaller and you go further into debt to maintain your inflated lifestyle.
On the other hand, if you spend less than you earn, the excess can be used to earn interest allowing you to spend more in the future without going into debt.
This applies to individuals, corporations, and governments.
January 8, 2009 4:10 PM | Reply | Permalink
MiddleClassBill only thinks about himself, and doesn't care to realize that current retires, and a good number that will retire for the next quarter century, can't even send an email let alone manage a privatized social security account, and that's not even taking into consideration the older retirees (now and in the future) who begin having a hard time managing their day to day lives. Things start slipping in old age, and should be a time to relax, let others take care of you, and not a time to try your hand in the stock market. Oh, and then there's the fact that most people are really bad at personal savings, anyway, which is why Social Security is around in the first place. If everyone put away money responsibly, SS would not be needed. But people don't. If they have the money, they spend the money. That's how our economy works, that's what people have been trained to do since childhood, and that's why the Gov't sends out "stimulus" checks when the economy tanks. Privatized social security is all sorts of stupid.
January 8, 2009 6:20 PM | Reply | Permalink
So can we give people a choice? The money that goes out of my paycheck goes to EITHER Social Security or to my own private savings account, but it's my choice. How about that? Then for all those people who are really bad about managing their savings can opt to have the government manage it. And the "private" option, you can't "spend" the money until you hit a certain age, so people electing the "private" option won't be able to just "spend" the money.
That sounds like a good plan to me.
January 8, 2009 7:05 PM | Reply | Permalink
Remember, Social Security is insurance not a retirement account. It's purpose is to provide a floor during your retirement to keep you from going into poverty. Unfortunately, for many people, social security has become their only source of retirement income. But at least they will have that.
It would be wonderful if you have some sort of retirement in addition to SS and I hope you will.
I certainly was hoping for that as well. I still have several years to go and I hope I will have at least something in addition to SS which would be nice. In my case outsourcing has killed my business. Others I know have lost all or most their retirements due to other economic conditions. You just never know what will come your way to change your life style as you get older.
At least SS can be a constant in our lives to provide some sort of security when we retire. Wall Street is anything but that.
January 8, 2009 1:23 PM | Reply | Permalink
Middle Class,
you would also need
1- a disablilty benefit with a medical benefit to go with it after two years,
2- A survivior's benefit insurance for your wife and kids.
3- a Guarantee that your private investment would not run out as long as you lived.
4- an investment that pays an immediate 100% match on your contribution.
By the way, privatization of Social Security does not guarantee continuation of the employer match.
January 8, 2009 1:13 PM | Reply | Permalink
You must have missed this one:
Italian Pensions Sapped by Private Funds Bush Backed
http://www.bloomberg.com/apps/news?pid=20601109&sid=aty4gEh9wups&refer=home
January 8, 2009 8:09 PM | Reply | Permalink
Yup, saw that. More of the same malarkey. Stocks and bonds will do better than some "government severance payment plan" that pays a fixed return slightly above inflation. If anyone needed the money in the short/medium term than they shouldn't have opted for a plan that invests the money in stocks or high risk bonds.
January 8, 2009 8:56 PM | Reply | Permalink
Thank's for making the analogy between SS funding and US bonds Mr. Baker. Why is it so easy to take from the many and give to the few? Distraction, just like any street conjurer. In this case distract the many with the fear of economic collapse if we don't do the altruistic thing and donate our savings for the good of the economy.
January 7, 2009 9:43 PM | Reply | Permalink
His remarks seem strangely timed to me. You're telling Americans who've just opened their 401K statements, who are watching their housing values tumble and who don't feel they have any job security that now the government wants to come after their social security?
Heck of a way to build confidence! The worst problem we've got now is that no one has any confidence in any institution public or private. Obama is trying way too hard to be a Republican just when Americans figured have finallhy figure out what the Republicans have done to them.
January 7, 2009 9:50 PM | Reply | Permalink
I'm really not following how you concluded that this leads to default. (I also mentioned this on HuffPo)
* Defaults happen when the lender (in this case the federal government) can't pay the required interest payments or doesn't pay when the bond owner redeems the bond. The federal government doesn't default on bonds/loans because they can be paid by printing more cash.
* The Social Security Trust Fund owns bonds (and is, therefore a bond holder) and uses interest payments and redemptions to pay its expenses (Social Security benefits)
* If Social Security benefits change (presumably to reduce SS expenses), the money is rolled over to buy new treasury bonds / treasury bills and remains part of the Trust Fund
So, whatever changes occur in social security or medicare policies, it is very unlikely to affect the security of the federal bondholders. No change in policy would lead to greater deficits (redemptions from the Trust Fund increase and reduce the funds available to the government) and greater money supply / higher inflation / weaker dollar but I'm not seeing how or when the federal government would go into default from this scenario.
January 7, 2009 10:39 PM | Reply | Permalink
Also, in a slow economy with unknown risks, investors are buying more secure federal bonds and treasury bills and, since the trade deficit continues, foreign government still buy federal bonds (according to the balance of trade--if there's a trade imbalance, the country in surplus often buys the debt of the country in deficit) so its unlikely that the US government will be unable to turn its debt issues into current cash to plug the budget imbalance.
There is constant redemption and a constant reissuance of new debt--a constant demand to buy US government debt, a constant supply owing to the continuing deficit, and continuing payments (due to the federal reserve printing/issuing the money that pays the debt). The NY Times article doesn't mention anything about the US missing debt payments just that, by reducing Social Security and Medicare payments, some debt redemptions by Social Security and Medicare may not occur as quickly in the future even though the deficit continues to increase.
January 7, 2009 11:05 PM | Reply | Permalink
This economic crisis is being caused by the collapse of the largest ponzi scheme ever perpetrated in the history of the world.
The US government creating additional debt to pay off previous debt is the perfect definition of a ponzi scheme.
Combine this with the deficit spending and it is the recipe for disaster.
Whenever an individual, corporation, or a government is in financial trouble, the answer is to either cut spending, increase income, and/or both.
The US government, under the Republicans, decided to do the opposite - increase spending and reduce income. This can only make the problem worse.
The solution provided above, that the government can always print more dollars creates its own problem, called inflation (see Zimbabwe's exchange rate). They resorted to the "printing money" solution.
For the last three Bush (Republican) Administrations, the USA has had massive deficit spending. The time has come to pay the piper.
This all goes back to the currently held false assumption that debt creates wealth. It doesn't. Printing dollars does not create wealth either.
When this massive ponzi bubble bursts, look out.
Interesting that talk is now about the USA defaulting on it's national debt. Goes back to President GW Bush in West Virginia looking at the T-Bills held by the Social Security Administration and calling them worthless pieces of paper. In a sense, he was right, the paper is practically worthless, the value is in the promise of the US governmnet to redeem them. If that promise is broken, there will be no credibility for US securities in the near future. That may be a good thing in the long run since it will eliminate US government borrowing. As stated above, the US government can always print the money it needs, but that always causes inflation with the effect of stealing the needed money for government services from everybody. Financing government this way has a much greater affect on the poor and middle class than it has on the rich.
January 8, 2009 7:59 AM | Reply | Permalink
I think Baker's worried about the camel's nose in the tent problem, za2008.
He's aware that these special bonds held by the Social Security Trust Fund are ancient history. The proceeds therefrom have already been spent buying tanks, warplanes and wars that the Baby Boom generation refused to pay for by way of taxing itself.
Now, the Baby Boom generation (Baker's cohort) wants younger generations to pay the taxes his generation wouldn't in order that the latter can enjoy a golden retirement.
Baker had, when it came time to rely on this special issue debt, hoped to be able to roll it over (T Bonds replacing SSTF bonds), but given that the profligate destruction of the USD he supports is likely to be U.S. policy for the foreseeable future, roll-overs seem unlikely to be available.
Thus, panic in retirement town.
January 7, 2009 11:08 PM | Reply | Permalink
One way to make sure that our debt continues to be bought is to keep almost as large of a trade deficit (since when the other country doesn't buy as much from our companies and people, they buy our government debt to make balance the exchange) and to demolish confidence in the private markets and lead to people to buy up federal debt (not that these are intended effects but they are the effective results).
Problem is, of course, an all-import economy eventually runs out of people to outsource and downsize leading to demand for all goods to crash, cash to stop circulating (and instead sit concentrated in the accounts of a few), and domestic investors to run out of investment capital since they're living off their savings.
Fortunately, we're not there yet.
I've read through the posting a few times and still not quite sure how he thinks a change in Social Security benefits (presumably to get their costs under control) would leads to defaults on US government debt.
"If Mr. Obama plans to cut Social Security in the near future, then this effectively amounts to a default on the bonds held by the trust fund which were purchased with workers' Social Security taxes."
From what I understand, the Social Security Trust Fund is pretty similar to a huge group IRA account that is all invested in government bonds and T-bills. I can't imagine any scenario where reducing expenses from this account would lead to defaults on the underlying government bonds.
Cutting benefits should lead to a relatively larger trust fund--which would lead to more not less US debt owned by a federal government entity that is extremely unlikely to redeem its debt so aggressively that the government can't afford to pay itself.
January 8, 2009 1:48 AM | Reply | Permalink
True; indeed the life of the SSTF would be extended beyond 2049 if benefits were cut. And that's precisely why Baker's worried.
Baker takes the position that these special bonds were purchased by the SSTF for the purpose of paying the scheduled benefits of the Baby Boomers. Any reduction in those scheduled benefits constitutes a violation of the initial undertaking to which Baker ascribes a full-faith-and-credit obligation on the part of the USG.
Look at it this way. We have say $4 trillion of these special bonds available to pay scheduled benefits through 2049, but that means future taxpayers will have to pay interest at possibly very high rates on the Treasury bonds which are sold to generate proceeds to pay these bonds off.
Now, reduce future benefits and the SSTF needs less money and thus, fewer special bonds need to be redeemed by Treasury. Reduce benefits enough and we never have to tap the SSTF's "bond fund" at all. The bonds could stay in the SSTF, unredeemed forever.
We could maintain the fiction of the bonds' "full faith and credit" characteristic without actually having to enforce it. Neat, eh?
And for sure, Baker doesn't enjoy that prospect.
January 8, 2009 2:27 AM | Reply | Permalink
Ellen:
What do you see as the difference between eliminating a portion of social security benefits and eliminating them entirely?
In either case, the Federal Governmnet is reneging on its obligations.
Why not just eliminate Social Security and reduce the national debt by $5 Trillion in one fell swoop instead of nickel and diming the retirees to death?
January 8, 2009 8:07 AM | Reply | Permalink
If you eliminate Social Security what happens to the ones that live off that ...most seniors that are on Social Security ..this is all they have to live off from ...if you do that your going to end up making more homeless ...which our government cant seem to help ...but has no problem helping out other countries poor. Not I say take a look at what those big corporation are getting in the line of tax breaks ...and the banks that are putting in orders for they're own jets... and giving themselves huge bonus's .. Which from what I hear the president is looking into ...lol I don't feel sorry for those idiots one bit.
February 1, 2009 9:38 PM | Reply | Permalink
za2008:
I don't understand.
"One way to make sure that our debt continues to be bought is to keep almost as large of a trade deficit"
Are you actually saying that the only way to make sure that the USA's debt is being serviced is to keep going further and further into debt?
January 8, 2009 4:20 PM | Reply | Permalink
Not quite. Two different things: (1) Trade deficit/balance of trade with other countries and (2) US Government budget deficit.
The US Budget Deficit is funded by issuing government debt in the form of government bonds and treasury bills (buyers contribute cash from their funds to the US Treasury, the US Treasury returns a bond or T-Bill)
A Trade Deficit occurs when the companies, people, investors, and governments (?) of a country buy more goods and services than they are selling. Imports are greater than Exports. Countries have to maintain a balance of trade with each other (I'm not sure of the mechanisms of enforcement but effectively every country that trades across an international boundaries needs to maintain balance with every other one).
When the US runs a trade deficit with another country (our Imports from that country are greater than our Exports to that country), the other country's government typically buys our government's bonds and T-bills to achieve balance of trade. This is why we've been hearing about China holding trillions in US debt.
Effectively, maintaining a trade deficit leads to greater demand for US government debt and provides the US government with the funds to maintain growing budget deficit.
January 8, 2009 5:30 PM | Reply | Permalink
Thanks, I get it now.
The T-Bills the USA sends to China to cover the trade deficit are different than the T-Bills that are being held by the Social Security Administration in West Virginia and which are counted as a part of the National Debt.
January 8, 2009 7:48 PM | Reply | Permalink
Ancient history or not, the federal goverment is still in business and committed to honoring every single debt obligation that it currently has or will ever have, including T-Bills. the SSTF is nothing more and nothing less than a massive investment of SS payroll tax receipts that are invested in T-Bills, that are literally no different from any other kind of T-Bill. It's totally fungible, and however the government has been spending and investing (or misspending and mis-investing) the money borrowed via these T-Bills, it owes them and the interest due on them in FULL, period, whether they were purchased by China, Joe the Plumber, or the SSTF.
The fact that the money loaned to the government in the form of T-Bills has been horribly misspent is irrelevant. The government still owes them back to whoever purchased them, plus interest, in full, and for it to renage on even a cent of these obligations, by whatever means, would be to default on them. Cutting back SS payouts so as to undermatch projected cost of living growth would be an indirect (and cynically clever) way of doing that, as would printing money above and beyond what economic growth warranted (although this would also screw over all other T-Bill purchasers too).
If Obama did this, he'd be a cynic and a fool. Cynic because it would be morally wrong, and foolish because it will blow up in his face politically. As well it should.
He's going to have to find other ways of keeping government spending in line than to do it on the backs of poor and middle class people. Or else he'll pay the price.
January 8, 2009 3:06 AM | Reply | Permalink
The government still owes them [government obligations; bonds and bills] back to whoever purchased them, plus interest, in full, and for it to renege on even a cent of these obligations, by whatever means, would be to default on them.
True enough, but even if the USG has committed to pay off those special purpose bonds, it will be paying them off to the trustees of the Social Security Trust Fund.
And as far as I know the trustees will do with those proceeds what Congress tells them to do -- including, as a hypothetical example, giving them to some future GMAC or AIG or Citibank if not back to Treasury.
Note: It may be argued that the trustees of the SSTF are not among the class of mandatory payees which you defined as "whoever purchased them" -- that is, they never purchased those bonds. A minor note but a distinction which may one day prove to be a significant difference.
January 8, 2009 4:58 AM | Reply | Permalink
I'm not sure what you mean by "special purpose bonds". The T-Bills that the SSTF purchases are the same exact T-Bills that the rest of the world purchases. There is no special designation for them as far as I know. And the SSA is not empowered to invest them otherwise, or spend a cent more or less than they're obligated to spend, as per law. Sure, congress could always change that, but that's hypothetical. As things stand, these T-Bills are due to be paid back on time and in full, including interest. Any shenanigans would have to come from the investing or spending side of SS, not the T-Bill side.
January 8, 2009 7:08 AM | Reply | Permalink
In respect to what types of securities the SSTF holds, the SSA website states:
There are two general types of such securities:
* Special issues—available only to the trust funds
* Public issues—marketable Treasury bonds available to the public.
The trust funds now hold only special issues, but they have held public issues in the past.
January 8, 2009 9:54 AM | Reply | Permalink
The default would be implicit and indirect. By cutting SS payouts, the government would effectively reduce its bond debt projected forward. It would still technically "owe" the SSTF this money, but it would never have to pay it out due to such fiscal tricks.
It's like a bank telling you that sure, they'll be happy to let you cash in your 6 month CD, but they can only pay it out in annual installements that, if you do the math, would result in a net lower yield for you over time. That's defaulting on an obligation in my book.
January 8, 2009 2:50 AM | Reply | Permalink
"The federal government doesn't default on bonds/loans because they can be paid by printing more cash."
Printing more cash is a form of default since it debases the currency and pays off with cash having less value that was promised.
January 8, 2009 4:15 PM | Reply | Permalink
Gold Standard!
Ron Paul 2008! 2012!
THE FEDERAL RESERVE IS JUST A BUNCH OF CROOKS!
Got it.
But banking and reserve and exchange system are what they are and the practice of printing money to fund current government expenses and pay off government debt is decades and, in some forms, centuries old. Using a gold standard has many disadvantages and trade-offs as well but I won't go there right now.
At least in today's economy, currency is valued relative to other currencies rather than to an absolute standard (gold in earlier ages). US currency devaluation trends are typically pretty short term since other currencies don't want their exports to be disadvantaged in the US marketplace, other currencies (formally or informally) tie their values to the dollar, a single US dollar is always worth one dollar, oil is valued and traded in US dollars, and US economic and government spending trends can affect other countries almost as much as they affects us.
January 8, 2009 5:20 PM | Reply | Permalink
For most citizens of a country "currency is valued" in relation to the goods and services a given amount of it can buy in the national marketplace -- not its FOREX relationships.
This rule holds true especially for U.S. citizens, because U.S. imports comprise such a small portion of GDP.
Printing dollars -- that is, increasing the amount of currency in excess of the increase in the value/amount of products -- is inflationary and constitutes a transfer of wealth from savers to consumers.
If you believe that consumption precedes economic growth, then, inflation is beneficial to the community and savers are a drag on its growth.
If you believe that savings leads to economic growth, then, -- not!
January 8, 2009 7:48 PM | Reply | Permalink
savings leads to economic growth
Can't we diminish private savings through, say, 10% year on year inflation and then tax to create a pool of publicly saved investable capital?
January 8, 2009 8:34 PM | Reply | Permalink
In a normal economy, high deficit spending and a higher money supply would lead to lower savings, higher consumption, and higher inflation.
In a recessionary economy, consumption and inflation are constrained by lower wages and dwindling savings and lower demand leading to lower prices.
Taking a not-necessarily-representative sampling of local prices, prices are stagnating and, in some cases--food and energy for instance--are currently falling as the money supply increases.
Also, global interdependence and the still wide regard for holding savings in US Dollar and US Securities and the centrality of the dollar in many global currency exchanges mitigates many of the inflationary pressures from the money supply. The regard for the relative stability of the dollar, however, is not necessarily permanent and could degrade in the foreseeable future.
January 8, 2009 9:27 PM | Reply | Permalink
The social security changes in the 1980s shifted the cost of the federal budget from the wealthy to the middle class. All this does is finalize the deal. Obama becomes Reagan II. The rich walk away without a scratch.
January 7, 2009 11:24 PM | Reply | Permalink
And still no mention of the military budget, which apparently he still plans to increase. This guy may turn out to be the most right-wing president we've ever had.
I thought he was at least extremely political savvy, but in two days he's lost the support of those over 50 by talking about cutting social security and those under 50 by talking about trillion dollar deficits for the foreseeable future. Who does he think is going to be left to vote for him?
January 7, 2009 11:32 PM | Reply | Permalink
If these fears are realized (and I'd caution that despite the many warning signs, until he's president, we can't know what he'll actually do), then he won't be right-wing so much as he'll be the ultimate tool of the economic establishment in its quest to transform the US into a feudal society. That's not "right-wing". That's evil.
But we'll just have to see what he actually does. Like you and others I've got my worries--more than I generally care to air publically--but I will reserve judgement until there's something concrete to judge. This could all be paying lip service to an establishment that he intends to slowly de-fang and do end runs around as he fools it into thinking that he's their guy. Or not.
January 8, 2009 3:16 AM | Reply | Permalink
Obama will implement the conservative ideology under the guise of pragmatism.
January 8, 2009 12:07 AM | Reply | Permalink
What an incredible irony eh? It's not too surprising though. Obama has played right into that nonsense about social security being in trouble for a long while now. Whatever happened to his support for eliminating the cap on Social Security taxes? I guess that has gone out the window since all his new buddies are agin it.
I hear far too much creeping Republicanism and far too little discussion about immediate relief for average Americans in these discussions of what the new administration will do and what direction it will take. It is disturbing to say the least, albeit not terribly surprising. The DLC has gotten everything it wanted in this new President of theirs... perhaps more.
January 8, 2009 1:05 AM | Reply | Permalink
Last summer Obama and McCain were secretly discussing aides that either would employ if they got elected. It's not a huge leap to consider the possibility that they also discussed policies that either would enact if elected. Yikes.
January 8, 2009 1:36 AM | Reply | Permalink
Disclaimer: I am the astute political observer who has been predicting (with tiresome regularity...) the cancellation via coup of virtually every Presidential election since 1972
That said, I want to remind the assembled trepidatious (and I count myself among them) that Prez has the head fakes.
Yearning to believe as I acknowledge myself to be, I think he is setting a trap for the pugs.
I just haven't quite worked out the details...
January 8, 2009 3:47 AM | Reply | Permalink
There's a happy thought...
January 8, 2009 4:00 AM | Reply | Permalink
a happy thought
Which (accompanied, I am given to understand, by fairy dust sprinkled by Tinkerbelle) will get you to Never Never Land.
January 8, 2009 4:48 AM | Reply | Permalink
Just let us know when you work out the details mate.
January 8, 2009 4:50 AM | Reply | Permalink
Changing SS payouts in no way constitutes debt default. Further, SS is not a "defined benefit" kind of pension-like concept. Congress can cut, or raise, benefits. Projections of SS income would of course change, but a projection is not a debt nor an entitlement.
SS was meant as a safety net. Maybe it's past time to return it to that function.
January 8, 2009 6:48 AM | Reply | Permalink
Obviously, it wouldn't technically be default. The government doesn't "default" on its debts (just as it "doesn't torture"). But it can and does plays various games with money to effectively default on them from time to time. Like printing extra money, which dilutes the value of what it pays out and which is effectively the same as partially defaulting on them. Or raising import tarrifs to creditor nations, as it's done in the past. Or decreasing what the SSA would have to pay out such that it would force the SSA to reinvest those maturing T-Bills that it would no longer need to meet its payment obligations, which would save the government from having to pay them all out. It's not "defaulting", technically, but it's basically the same thing, no different, really, from less severe forms of bankruptcy.
January 8, 2009 7:15 AM | Reply | Permalink
I don't get your point. Ecuador is said to be about to default on some of its debt. So governments can default.
But you seem to totally miss the point that cutting back SS payments is, or would be, in no way shape or form anything LIKE a "default" at all.
January 8, 2009 9:02 PM | Reply | Permalink
I get it.
Since cutting back on SS payments would only seem to be a partial default for those who are receiving those benefits, it is not really a default at all.
January 9, 2009 7:48 AM | Reply | Permalink
After reading the article, I have to wonder whether Dean is misattributing standard Village-based spin to Obama. The original statement Obama made was that we have to address the mismatch between entitlements and revenues; as far as I can tell, all the subsequent garbage about cutting benefits and the trust fund going belly up belongs to the reporters. Raising the cap on payroll taxes, or finding other sources of revenue, would do at least as good a job of addressing potential revenue shortfalls as any cut in benefits.
(Raising the cap would probably do a better job at addressing these issues, because the pessimistic assumptions about SS -- and to an extent medicare -- funding are ultimately pessimistic assumptions about wages subject to payroll tax collections. In the past decade that number has been pretty close to flat in real terms, while almost all the growth in real wages has happened above the payroll-tax cap.)
January 8, 2009 10:10 AM | Reply | Permalink
I think we're jumping the gun here as far as what Obama's going to do.
Caps were put in place when high-end wages were lower - updating then, literally, makes sense. Retirement age, 65, was put in place when the average life span was right about that age. Not raising that to coincide with today's average life span is ludicrous.
Then there's health-care costs. Of course we should go single-payer on that one and if enough people 'felt' the outrageous cost, there might be enough of us on the bandwagon to force congress to get real on the issue.
One way enough would, not to mention more money in government coffers, would be if health care benefits paid by employers were made part of employee's taxable income. Not only would the government collect $126 billion/year in income taxes, the employees suffering from increased taxes might be pissed enough to force Congress into enacting a universal health care system.
January 8, 2009 11:14 AM | Reply | Permalink
Umm, wasn't that part of McCain's health care plan? And didn't he LOSE the election at least partly as a result of that?
January 8, 2009 3:00 PM | Reply | Permalink
All Ponzi schemes that require more and more payments coming in to appear solvent eventually come to grief. Like Nixon to China popping the social security bubble will politically require a Dem.
January 8, 2009 10:33 AM | Reply | Permalink
This is an utterly irresponsible and demagogic post, fear-mongering at its very worst. There is not a shred of evidence for any of the insinuations Baker makes here.
First, even if there were a move to cut Social Security benefits, that would not involve defaulting on the bonds in the trust fund, since as Baker notes, the benefits are funded from the bonds and tax revenues.
The CBO report Baker cites was prepared in August, before the financial meltdown. Just a hunch, but I'm guessing current revenue projections for the next few decades aren't nearly as rosy as they were back in August.
Fulfilling the debt obligation constituted by the trust fund bonds might be quite onerous for future generations, and interfere with that generation's ability to spend money on other worthwhile projects. I'm sure our country will fulfill our debt obligations. But it is entirely responsible for government to continue to explore alternatives for refinancing that obligation. Even if there are no changes to benefits whatsoever; even if there are no privatization schemes (and privatization is something Obama has consistently opposed); and without in any way defaulting on those obligations, the financing of Social Security is an issue that needs to be re-addressed from time to time, and good for Obama for re-addressing it.
These sorts of columns are symptomatic of hysterical boomer fears that the younger generation is going to pull the Social Security rug out from under the feet of their elders. It's somewhat analogous to the right-wing paranoia about re-imposition of the Fairness Doctrine, another canard that is endlessly repeated without a shred of supporting evidence.
Some people are just foolish and misinformed. But Baker's business is understanding money, and he knows better. Baker apparently thinks we are all morons.
The bonds are not magic money. They are a debt we owe ourselves, and it is entirely responsible for our government to explore alternative plans for fulfilling the obligation.
January 8, 2009 10:49 AM | Reply | Permalink
"it is entirely responsible for our government to explore alternative plans for fulfilling the obligation."
Even if "fulfilling the obligation" means changing the terms of that obligation?
January 8, 2009 4:31 PM | Reply | Permalink
I'm not sure what you mean Johann. Change what terms?
January 8, 2009 5:31 PM | Reply | Permalink
The terms under which the SS System was sold to the American people - that it would be there for providing a basic income during the retirement years.
Or perhaps changing the definition of what a basic income actually is.
January 8, 2009 7:51 PM | Reply | Permalink
"President-elect Obama Suggests Defaulting on the National Debt"
Obama's suggesting no such thing. When they adjusted my age for full Social Security from 65 to 66, it was not a default on the national debt. If they do some tweaking in the future is not defaulting on the national debt. To phrase it that way is not helpful, in my opinion.
January 8, 2009 12:05 PM | Reply | Permalink
My trust in Obama slowly dissipates.
First it was his flip flop on FISA, then supporting Paulson's $700 billion carte blanch bill, then reneging on repealing tax cuts for the wealthy, sending more troops to Afghanistan, some of his appointments, his flip flop on Burris (who's appointment i care little about.
Obama may be the greatest con artist of all time.
We shall see.
January 8, 2009 1:26 PM | Reply | Permalink
You can tell who the young ones are on this blog, can't you, John?. I depend on SS so this is a subject that is near and dear to my hungry tummy.
One of the things that disturbs me about this proposal is the timing of it, which makes it sound like SS and medicare are somehow causing this mess and that *fixing* it, or *overhauling* it will make everything all better again.
January 8, 2009 3:55 PM | Reply | Permalink
FDR,
they rarely, if ever, talk about cutting Defense
or the now ever growing interest on the National Debt and Deficit. Total those two together and you get maybe 800 billion annually.
I'll suggest make a spending cut that will probably get me shot;
Cutting taxes is a form of spending, so why not reduce the tax cuts?
January 8, 2009 5:30 PM | Reply | Permalink
Hey, it just occurred to me.
If we cut Defense by $300 billion, cut the interest on the deficit and national debt by $100 billion, and repeal $300 billion of tax cuts..
WE JUST PICKED UP $700 BILLION!
January 8, 2009 6:34 PM | Reply | Permalink
SSSSHHHHHHHhhhhhhhhh!!!!!!!
Not so loud John! If anyone hears you, people might figure out that Ike's famous "military industrial complex" is sucking the very life out of our nation's economy and everything else. The biggest (and most useless) part of the annual federal budget is the money we waste on "defense" spending. Nearly all of our cowardly Congressional Democrats have been very disciplined in keeping their yaps shut about this and not bringing it up so don't upset their little tea party okay? We don't want to alert the public to the fact that they're being robbed and impoverished in order to keep the arms and munitions manufacturers and their fellow travelers fat and happy.
We spend in excess of $650 Billion every single year on "defense" which is more than all the other nation's on earth COMBINED!!!!!! And that doesn't even include the two current pointless and futile wars we are conducting or funds for nuclear weapons. Yet, Democrats dare not even bring up the subject of cutting the obscene defese budget. Mighty Obama still says he wants to spend even more on this obscene waste.
So,instead of focusing on this massive and totally unnecessary problem, let's focus on starving the old people who paid into Social Security all their lives and let's make sure we deny adequate health care and education to every American to make sure that we have enough weaponry and killing power to destroy every planet in the solar system in a heartbeat, not to mention every living creature on earth.
Jefferson said something along these lines... "I tremble for my country when I reflect that God is, indeed, just."
January 8, 2009 9:48 PM | Reply | Permalink
Rofl I think you should look at the Republican party if you want to talk about money spent on the defense budget ...Wasn't it a Republican president that was spending huge amounts of money on a war just like his father did. Ya I agree that the money spent on defense and wars should be cut but get your story straight Bush is the one that pushed for the war in Iraq not a Democrat.
February 1, 2009 9:50 PM | Reply | Permalink
Medicaire and Social Security should be near and dear to you, FDRdog. Just don't be taken in by demagoguery like Baker's.
One really stupid outgrowth of the Bush Social Security privatization flap is that some Democrats decided that to counter the privatization efforts we should place a superstitious, paranoid bubble of total silence around Social Security, and never, ever talk about it ever again. It is suggested that every political discussion of Social Security that suggests that the situation with the program is sub-optimal in any way at all amounts to a repetition of "Republican talking points", and a step down the slippery slope to privatization.
This is a fantastically childish and irresponsible attitude. It's like saying that because you were once given a bad diagnosis, and a quack doctor tried to sell you some bad medicine, you have decided never to get another physical, or take any medicine ever again.
January 8, 2009 5:41 PM | Reply | Permalink
I don't deny that something needs to be done to make SS solvent for the foreseeable future. But I don't think now is the time to do it. It's all the talk from Obama, not Baker, that has disturbed me. Obama spoke of protecting SS during the campaign and now he's talking about overhauling it? I'll try to be patient and wait to see what he proposes before I start my tantrum.
Move On is having a workshop in my town on how to approach Congress. Their timing couldn't be better for me.
January 8, 2009 6:26 PM | Reply | Permalink
If you sit on the sideline and are disappointed, you can blame yourself in part!
The interesting thing will be to see how the Obama Admin "listens" to us. I think it makes almost no practical sense, but then it could be that having a President who pays attention to the clamor of the people was well as to Congress could be better rather than worse.
January 8, 2009 9:17 PM | Reply | Permalink
Dean, this may be the most dishonest blog entry I've ever seen on TPMCafe.
If Social Security and Medicare had ever been fully funded systems (or had ever been intended to be), then maybe what you say might work - as an analogy at least - but for a pay as you go system, it's utter nonsense.
It's part of the budget, and it's been promised to future retirees the same way the Air Force is promised more aircraft. Reductions in benefits to government programs now making up 7.5% of GDP (based on 2007 CBO numbers) seems like a perfectly reasonable place to look for savings.
The bonds held by the Social Security Trust fund, which you reference, are the SAME bonds held by investors such as Mr. Rubin (not to mention central banks around the world). A default on those bonds is never going to happen, period, as long as the United States borrows in dollars.
And the United States only borrows in dollars.
Now, I agree that cutting benefits in the present would be silly and counterproductive; we're trying to increase demand, not chop it. However, equating future spending on social programs to a debt default is dishonest.
And Nonsense.
January 8, 2009 1:46 PM | Reply | Permalink
This conversation is also occurring on HuffPo:
http://www.huffingtonpost.com/dean-baker/president-elect-obama-sug_b_156113.html
on a cross-post of this post.
I'd agree with a number of people here and there--this is an inflammatory post that supports a flimsy conclusion drawn from very little information.
I guess we're seeing the start of the early knee-jerk reaction to any potential adjustments to social security and medicare.
Let's have the conversation about these programs future but let's have it honestly.
January 8, 2009 3:03 PM | Reply | Permalink
Does anyone here think we can go happily along until 2049 with the current system? That sounds absurd on its face.
January 8, 2009 3:47 PM | Reply | Permalink
Dorn76,
Peter Orszag who is Obama's pick as head of the Office of Management and Budget, was the head of CBO when its most recent SS projections came out. I think Peter is a very smart and honest guy. His projections look very reasonable to me. Do you know any projections that show that Social Security will be insolvent long before 2049? (I don't consider the Trustees 2042 projection to be "long before 2049").
I'm impressed that so many people here think I'm being dishonest for relying on a CBO report. I'm curious where everyone here gets their projections on SS.
January 8, 2009 8:15 PM | Reply | Permalink
No. Not discounting CBO data.
I'm discounting your conclusion that changes in Social Security benefits would amount to a default on National Debt
"If Mr. Obama plans to cut Social Security in the near future, then this effectively amounts to a default on the bonds held by the trust fund which were purchased with workers' Social Security taxes."
My skepticism is regardless of when the Trust Fund is expected to pay out more than it takes in--it's a relationship that I can't logically support. How is this conclusion reached? And how does the CBO report and/or the NY Times report lead to this conclusion?
January 8, 2009 9:09 PM | Reply | Permalink
I'm discounting [Baker's] conclusion that changes in Social Security benefits would amount to a default on National Debt.
I think we can go further and challenge Baker's claim that the special issues which fund the SSTF are the type of debt protected by the Fifth Amendment or that those holding public issues would be greatly upset if Congress chose not to pay them off.
A debtor cannot owe money to himself, and the USG cannot owe money to the USG. The SSTF trustees are the USG, and thus, "special issues" are not the equivalent of "public issues" under debtor-creditor law.
The special issues held by the SSTF may well be paid in full, but if so, they will be paid because Congress decides to do so and not because there is any constitutional obligation to do so.
The claim that "special issues" are the equivalent of "public issues" is a head fake intended to direct discussion away from issues of intergenerational fairness.
January 8, 2009 11:36 PM | Reply | Permalink
Go Dean Go
January 8, 2009 8:57 PM | Reply | Permalink
The original post isn't dishonest, exactly -- but it's misleading and inflammatory.
Defaulting on the debt = refusing to honor the notes the US has issued, which would leave institutions and governments around the world holding trillions of dollars in worthless paper. This would lead more or less to everyone on earth living in overturned schoolbuses, wearing home-made armor, and devouring each other.
Obama didn't advocate defaulting on our debt. He said that he would focus on entitlements as part of his overall strategy to reduce the deficit. Yes, Social Security is self-funding from bonds it holds, and those bonds were bought with taxpayer dollars. Good point. A reallocation of proceeds from the bonds to other spending initiatives would feel like a raw deal for people who’ve paid into the system for their whole lives. (If this were to occur, the taxpayers would have whatever recourse they're legally entitled to – challenging this in Congress, the courts, etc.)
But this would not be defaulting on the debt. In fact, by mitigating increases in our indebtedness, a move like this (wrong or right, legal or illegal) would actually have a salutary effect on our ability to meet our other debt obligations.
And besides, who’s to say the changes will have anything to do with channeling income from the bonds elsewhere or reducing benefits across the board? Couldn’t Obama mean that entitlements will figure in his plan to cut the deficit because he’s going to, say, tax Social Security payments as income for those in upper brackets?
Blogs from all over the world pick up items from other blogs. People reading your post could be non-native speakers of English and might not be able to understand much more than the headline. It’s irresponsible to blare out an unequivocal assertion that Obama advocates default.
January 8, 2009 11:14 PM | Reply | Permalink
If the government does not make good on the bonds held by the Social Security trust fund, which bear the full faith and credit of the U.S. government, that is a form of default.
It would be totally reasonable for the people who are the victims of this default (the tens of millions of workers who would not get the SS benefits they had paid for) to demand that other holders of U.S. government debt also share in the pain from default.
Given the large number of victims of a default on the SS bonds among the voting population (and the greater propensity of older people to vote), it is certainly plausible to believe that the impact of any proposed default could be spread among bondholders more generally. There is certainly no moral argument as to why this should not be the case.
January 9, 2009 4:52 AM | Reply | Permalink
. . . bonds held by the Social Security trust fund . . . bear the full faith and credit of the U.S. government . . . .
This naked assertion constitutes a legal conclusion and requires a legal argument to support it. Is there one?
I'm not even sure what Baker means by the phrase full faith and credit. This phrase which appears in Article IV Section 1 of the United States Constitution relates to the duties of the states; it imposes no duties on the federal government. It would not seem to be relevant to Baker's argument.*
If Baker means that the "special issues" are the equivalent to "public issues" when it comes to the holder's rights to enforce payment, he needs to do more than simply wave his hands.
* It may well be that Congress used the phrase "full faith and credit" in the 1983 amendment which established these special issue bonds but calling a cabbage a rose doesn't make it a rose.
January 9, 2009 11:01 AM | Reply | Permalink
Bush wanted to privatize Social Security. He was going to issue US GOVT Bonds to cover the transition costs, the same kind of Bonds in the Social Security Trust Fund that the Republicans claimed for years were worthless.
January 9, 2009 9:17 AM | Reply | Permalink