Making Paper Assets Worth Something

In my last post, I commented on M.P. Dunleavey's page-B6 "Basic Instincts" column in yesterday's NYT Business section (entitled "Plan to Retire But Leave Out Social Security"). That post concerned the Chicken-Little silliness of her column's main point ("Omigosh! My Social Security Statement says the trust fund will run out in 2040! Better assume I'll get Zero!!")

In reading Dunleavey's column, I had a couple thoughts that I hadn't had before. A key part of the political attack on Social Security last year was the canard that the bonds it has accrued since the 1983 Greenspan Commission's Report (filled with raving leftists, as you can tell by its having been chaired by Alan Greenspan) recommended that the system "save" for the purposes of dealing with the future costs of the Baby Boomers' retirement. Congress enacted and President Reagan signed legislation that implemented key elements of this report. Most relevantly for this post, the payroll tax was increased so that the system could accrue assets meant to be sufficient to defray the costs of the Boomers' retirement at a time when there would be fewer workers per retiree, and so on. In other words, the Greenspan Commission contemplated exactly the challenges we faced. We find ourselves in our current situation because the total value of bonds that will have accrued from the tax increases recommended by the Commission turned out to be insufficient to meet the program's shortfall through 2056 (which was the long run horizon that the Commission was charged with addressing). As I understand things, this inadequacy is primarily due to an unexpected slowdown in wage growth (benefit levels for current retirees are insensitive to current tax revenues, which are themselves determined by total earnings up to a per-individual cap, which was $90,000 last year).

There is no question that the Social Security system faces a shortfall and that something should be done about it (I tend to favor some version of the Diamond-Orszag plan, about which I will perhaps write in the future). But the sky-is-falling crowd has made an especially large bale of hay out of the supposed vulnerability of the special bonds that the Social Security Trust Funds have been accruing since the Greenspan Commission-induced surpluses commenced. Simply put, here are the basic facts:

• At present, the Social Security system takes in more in revenues than it pays out in benefits. (This situation has gone on for 2 decades and will continue for the next 11 or so years, even if no changes are made.)
  
• By law, the resulting surpluses must be invested in special Treasury bonds. Thus, the Social Security Trust Funds are required to invest in low-yield assets (perhaps I'll discuss the bonds-versus-stocks issue, and its general irrelevance, another time).
  
• Those bonds are backed by the usual "full faith and credit of the United States government" promise.
  
• Nonetheless, some proponents of structural changes---i.e., partial or full privatization---of Social Security have tried hard to convince the public that "There is no 'trust fund,' just IOUs that I saw firsthand," as President Bush said during a visit to the Bureau of the Public Debt in April 2005.

The worthless-pieces-of-paper PR strategy has probably made headway with some people. And, as Olivia Mitchell of Wharton is rightly quoted as saying in Dunleavey's column, "the Treasury goes ahead and spends that money, so although there is a promise, nobody knows where the money will come from to pay them back."

Mitchell's point is commonly made, and it is certainly correct. Which brings me to the couple of thoughts I had reading Dunleavey's column yesterday:

1. Suppose we accept, as President Bush and some of his backers claim, that the Social Security Trust Funds' assets are particularly worthless since they are simply promises by one part of the government to pay another. Then, the system can pay promised benefits only if Congress and the President are willing, as the President also said in his visit to the Bureau of the Public Debt, to enact policies so that "future generations will pay [for these IOUs]...either in higher taxes, or reduced benefits, or cuts to other critical government programs." So we are accepting that the system's assets are not really assets at all---not in the sense that a government or corporate bond you or I might own is an asset. With such an asset, we simply sell or cash it in and receive its value. Barring bankruptcy of the issuing entity, we will certainly be paid. By contrast, on the accepted line of reasoning, when the Social Security Trust Fund tries to redeem its "assets" from the U.S. Treasury, the Treasury can simply say, "Ix-nay on the Asset Pay", since presumably the "higher taxes, or reduced benefits, or cuts to other criticial government programs" may simply be too politically unpopular. Thus these assets are more hope than plan.
   
   But if that is true, then there is not really any Social Security system at all! Social Security is then just another line item in the government's budget. There happens to be a tax "dedicated" to it, but benefits continue regardless of that tax's revenue, anyway. So why shouldn't we equally doubt, say, the Pentagon's ability to get its budget, or the department of transportation, and so on? Hey, why assume that the wealthiest Americans can continue to count on the reduced taxes Congress and the President have bestowed on them? No particular reason, none at all. Social Security's political defenders should start making the case that if there is no Trust Fund as such---if the Greenspan Commission was just a con---then there is no reason to treat Social Security as a special program. If those assets aren't really assets at all, then there really isn't a relevantly separate Social Security program, either. Of course this is really quite silly---of course there is a program, one in whose name quite a bit has been promised. That is why we need a way to enforce the legally binding nature of those bonds. So how to do that?
   
   
2. Quite simply.
   1. First, change the legal status of the Social Security Administration to a private, non-profit corporation that is legally charged with meeting benefits under current policy (including the provision about automatic cuts should full benefit payment make the system insolvent).
      
   2. Second, require the federal government to direct all relevant payroll tax revenues (i.e., the 12.4 percent part, for you wonks) into the coffers of this private corporation.
      
   3. Third, have Congress convert all those special bonds into bonds that are legally indistinguishable from ones purchased at public auctions.
   
   If we took this step, there would no longer be any way to default specifically on bonds held by the Social Security system without defaulting on all sorts of bonds. Those worthless pieces of paper would be indistinguishable from all the other full-faith-and-credit ones held by private individuals and corporations (and foreign governments). I'm not an expert on these details, but I'm betting this plan would pass constitutional muster (see "Reserve System, Federal" for a similar case). It would also have the substantial virtue of (a) making good on the Greenspan Commission's, Congress's, and President Reagan's promises, and (b) forcing politicians to focus on the real issue, which is about benefits and tax revenues, and eliminating the legalistic debate over the status of duly lent money.