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Let’s start a chain email, shall we?

Let’s start a chain email, shall we?

by digby

Here’s Krugman with dumb-as-a-post Senator Ron Johnson, who I’m sure believes every stupid word he says:

“Unless we do something, these programs are going broke,” Johnson opined during a panel on ABC News. “When I hear people saying Social Security is solvent to the year 2035, it’s not.” “In a [sic] entitlement reform package, actually bringing in revenue for those entitlement reforms, I might look at that,” he added. “But the fact of the matter is that we’re already having a trillion dollars in tax increases hitting us in Obamacare. They’re hidden, but it’s middle class… As well as the $600 billion [in a January deal to increase taxes on wealthy Americans]. That’s $1.6 trillion in tax increases hitting us in the next 10 years.” 

“We’ve just run aground right there,” Krugman noted. “Your facts are false. The Social Security thing — Social Security, it has a dedicated revenue base, it has a trust fund based on that dedicated revenue base. You can’t change the rules midstream and say, ‘Oh well, suddenly the trust fund doesn’t count.'” 

Johnson interrupted with the claim that “the trust fund is a fiction, it has no value in the federal government.” “It important to realize that the facts that are being brought out here are, in fact, non-facts,” Krugman pointed out. 

“They’re absolute facts,” the Wisconsin Republican shot back.

No, they’re bullshit. Luckily hardly anyone in the country watches that show so it probably doesn’t matter, but this fiction is believed among the cognoscenti and therefore extremely destructive. Dean Baker suggested via twitter that you send this fact-filled post called Trusting The Fund: A Citizen’s Guide To Social Security’s Trust Fund to everyone you know so they can understand reality. (Not that it will do them much good because you’ll never get the gasbags and the politicians to understand it, but still … it’s our duty to try.)

It starts off by explaining the very important and significant distinction between deficits and debt — and why you should be very skeptical of people who mix them up. Then it breaks down all the misconceptions about Social Security. This is just one piece of the puzzle to give you an idea of just how confused people really are:

Social Security has always had its critics, but now they’ve been empowered in a particularly significant way. A lot depends on the citizenry understanding who is telling the truth. It wouldn’t hurt if the man on the street understood a bit about how the system works. To that end, a few basics. 

Social Security was originally constituted as a “pay-as-you-go” program, where current workers, through dedicated payroll taxes, pay for the benefits of current retirees. In some sense you’re paying for your parents’ retirement, and your kids will pay for yours. This works well enough if the ratio of workers to retirees is sufficiently large—that is, if there are many workers paying into the system for every retiree collecting benefits—but demographic changes have been long underway which, if not addressed, make this arrangement increasingly untenable. 

Fortunately, those changes have been addressed, as we will see. Like the income tax, Social Security’s dedicated funding stream, the payroll tax, is automatically withheld from most peoples’ paychecks. But is it large enough? Way back in the 1980s, it was apparent that it was not. Actuaries back then realized that, some decades in the future, the pay-as-you-go system as then constituted would collapse with the retirement of the baby boomers. Once the baby boom wave swept into the system, there would be too many retirees and not enough workers paying taxes to support them. What to do? 

President Reagan convened a commission, chaired by none other than Alan Greenspan, to study the problem and recommend a solution. This so-called Greenspan Commission proposed increasing the payroll tax, in order to build up a large nest-egg that could be drawn upon decades later to help pay for benefits for baby boom retirees. The proposal was adopted. From that point on, the Social Security system ran large surpluses year after year, above and beyond what was necessary to pay for current retirees, and those excess funds were set aside in what is known as the Social Security Trust Fund. 

The Trust Fund buildup was an example of eminent good sense and laudable foresight, but it soon enough became the subject of unwarranted controversy and gross misunderstanding. It’s a fascinating story. The controversy mostly derives from the fact that the Trust Fund invests its funds by loaning them to the government. This isn’t as odd as you might think. If fact, it’s quite a reasonable thing to do. After all, the Trust Fund has to do something with its money. And the government, running perennial budget deficits, needs to borrow from someone; why not borrow from the Trust Fund? Don’t worry for the moment that the Trust Fund is itself part of the government; you’ll see how this all ends up making sense. 

What happens is this. Payroll taxes, like all taxes, go directly into the government’s “checking account,” which is formally known as the general fund. The Treasury then issues to the Trust Fund special interest bearing government bonds in the amount of any payroll taxes in excess of what is required to pay current retiree benefits. In so doing the Trust Fund effectively purchases bonds from, and loans money to, the government. Is this so strange? It is not. After all, foreign governments, businesses, and private investors all loan money to the U.S. government through the purchase of its bonds. 

And why not? U.S. government debt is the gold standard for safety and liquidity. It is considered to be the safest investment on the planet. Furthermore, the system is completely transparent and above board. You may be surprised to learn that bonds held by the Trust Fund are officially reported as part of the national debt. That sixteen trillion dollar debt you keep hearing about? About two and a half trillion of it is held by the Social Security Trust Fund. 

Now it is certainly true that the government’s debt to the Trust Fund will have to be repaid. But then, all of the national debt will have to be repaid—mostly by further borrowing, issuing new debt as old debt is retired. That’s just a consequence of deficit spending; it has nothing to do with where you borrow. If the government didn’t borrow from the Trust Fund to finance its deficit spending, it would have borrowed that same amount from the financial markets. Either way, both the solvency of Social Security and the indebtedness of the country would be the same. 

Some persons, unfortunately including a fair number of politicians, say that we’ve been hoodwinked. The Trust Fund, they say, doesn’t contain real assets; it has been “looted;” all its money has been spent on other things; and the bonds it holds are just “worthless IOUs” from the government to itself. The first question one might ask is whether the government of China thinks that its U.S. government bonds are also worthless, or whether you think the government bonds in your own private investment portfolio are worthless. After all, the Trust Fund’s bonds have no lesser or greater standing than U.S. government bonds that are traded on the world’s financial markets. Fine. 

But perhaps you still can’t shake the feeling that something fishy is going on. Hold that thought: later on we’ll show how those “worthless” Trust Fund assets can nevertheless be used to pay actual Social Security benefits. Which, after all, is what they’re for. In the meantime, let’s explore a bit deeper why some misinformed persons might think that Social Security’s assets have been misappropriated[…]

He shares a little parable to illustrate how the trust fund works in practice:

Our story begins with the Treasury collecting payroll taxes and paying Social Security benefits, but now payroll taxes are insufficient to completely cover those payments. So the Treasury turns to the Trust Fund to withdraw additional money to make up the difference. What does that mean? 

Let’s picture an exchange between an imaginary bureaucrat at Treasury—let’s call him “Ted”—and an imaginary bureaucrat at the Trust Fund—we’ll call him “Fred.” Ted gets Fred on the horn. 

“Fred, I need to make a withdrawal.” Fred has been waiting these past few decades for just this moment. 

“Um, Ted, you know all I have is these lousy bonds you sold me. If you want me to satisfy your request, I’ll need to sell some of them back to you.” 

“Oh, yeah,” says Ted. “Ok, let me see what I can do.” Ted hangs up and has the Treasury issue some new bonds, selling them to the public in the financial markets. This raises the necessary funds to buy back some of the Trust Fund’s bonds. 

“Oops,” you might suddenly be thinking. But don’t worry; this all works out. Ted calls Fred again. “Fred, I have your money.” 

“Ok, Ted, here are your bonds.” The Trust Fund has just redeemed some of its “worthless IOUs” for cold hard cash. 

“Uh, Fred, can I make a withdrawal now?” asks Ted. “Sure,” says Fred, “here you go, buddy.” 

Fred sends the money back to Ted. Ted goes away and uses the money to cut Social Security checks. 

But, you object, Treasury ultimately had to borrow more money to pay benefits. So much for the Trust Fund having real assets. But not so fast. Remember: what matters is the debt, and it’s easy to see that the debt remains unchanged. How so? Well, those bonds that Fred sold back to Ted were part of the national debt, an obligation from the Treasury to the Trust Fund. Those bonds have now been retired, which reduces the national debt. But the bonds that Ted sold to the financial markets represent new debt, so they increase the national debt. And, wonder of wonders, the two offset exactly: the indebtedness of the country remains unchanged! Isn’t accounting great? One obligation is extinguished when a new one is created, and it’s a wash. Meanwhile, the checks go out, and the balance in the Trust Fund is reduced accordingly. Exactly what we wanted to happen.

This is what the 1983 deal was designed to do! There’s nothing unanticipated about the boomer retiring — surprisingly, they’ve known about it since we were born, back in the dark ages. That’s why they raised our contribution and delayed our retirement age in the first place. Now we see this bait and switch in which we’re told the trust fund has been looted and we just don’t have the money to pay Social Security anymore — at least not enough to pay full benefits.

And yet with all this lying and misinformation, we’re supposed to trust that the Democrats will ensure that the poor people won’t be too hurt in any deal. Why? Clearly, they aren’t going to stop attacking the program and inch by inch the Democrats are giving them what they want, all the while proclaiming that they just didn’t have a choice. This is a scam, ladies and gentlemen. They do have a choice.

Anyway, the author of this great piece points out that even some professionals don’t seem to understand how this whole thing works. He cites eventhelibrul Pete Peterson ally, Alice Rivlin:

Recently, former Clinton administration OMB director Alice Rivlin made a similar booboo (that’s a technical term). Writing in The New York Times, Rivlin advanced the startling (to her admirers, and to any reader who has gotten this far) claim that

Social Security currently adds to debt, because it pays out more benefits than it receives in taxes. While it accumulated credits when the higher ratio of workers to retirees was bringing in excess funds, Treasury has to borrow to redeem these credits.

And indeed it does. But as we have seen, such borrowing has no effect at all on the debt. Ms. Rivlin inexplicably seems to have a problem with the Trust Fund working as designed. It was, in truth, a rookie mistake, so elementary that one can’t help but wonder whether it was accidental or intentional. If accidental, could she have meant “deficit” instead of “debt?” Of course, even if she did, we’ve seen that the government’s reporting of the deficit isn’t a good gauge of what’s going on. And if intentional? Let’s not go there.

It stretches credulity to think that Alice Rivlin doesn’t understand this.

Until recently, I did not understand the extent to which economists and other financial “experts” tailor their allegedly unbiased opinions to fit an agenda. I’m going to guess that Rivlin really does believe that deficits are bad, that social security is unsustainable and/or that the political realities of the day require “liberals” of good faith to do the hard work of cutting to keep the big bad conservatives from doing it for us. This seems to be a typical belief among many of the Very Serious Centrists. But it’s complicated and so she has resorted to using misinformation to sell her solutions. The politicians who understand this (not all of them do) are also lying.

Please take the time to read this whole piece if you have even the tiniest bit of confusion about the debt, the deficit, the Social Security Trust Fund. And then send it to other progressives so they will be able to argue effectively when people say “the trust fund has been looted” or talk about how the country is “going bankrupt.” It’s vastly important that people understand this so that when we see the politicians using Social Security as a bargaining chip in hostage negotiations, they’ll understand who the looters really are.

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