Sunday, March 20, 2011

Social Security: Letter to the editor

This letter was published by the Corvallis (Oregon) Gazette-Times on March 20, 2011. The article it refers to can be read here.


Charles Krauthammer often writes perceptive analyses of current affairs. But his piece on Social Security is almost totally nonsense, and I suspect that he has little understanding of economics, accounting, and banking.

Krauthammer tells us that the Social Security surplus generated during the last quarter century, “scooped up by the Treasury, reduced the federal debt by tens of billions.” This is simply untrue. The national debt consists of two parts. The first is money owed to people and organizations (including the Chinese government) who buy U.S. bonds (e-bonds, I-bonds, etc). The second part of the national debt is money owed to the Social Security and Medicaid and similar trust funds because they have loaned their surpluses to our government.

Krauthammer’s comment is based on the fact that the first part of the national debt is not as big as it would have been if nothing had been borrowed from the trust funds. But the second part of the debt, that owed to the trust funds, is bigger by precisely the same amount, which means that the total national debt was NOT reduced by the money “scooped up” by the Treasury.

The same facts apply now that the Social Security tax is bringing in less money each year than has to be paid out to Social Security recipients. To cover benefit payouts, the Treasury will now have to pay back some of the money (currently totaling about 2.6 trillion dollars) it previously borrowed from Social Security. It can pay for this in three possible ways: reduce other government expenditures, raise taxes, or borrow the money from the people who buy U.S. bonds.

Even if it borrows all the money, this will not increase the national debt by one dollar. It will increase the first part of the debt, but it will also decrease the second part of the debt, that owed to Social Security, by exactly the same amount.

The real problem here is that Congress can no longer go on funding government expenditures in considerable part with surpluses borrowed from Social Security, since there are no more annual surpluses. It will have to rely on a progressive income tax on all income rather than a regressive flat rate tax that exempts many kinds of income and income about a certain amount. This is politically painful, but it is not a problem with Social Security itself.

The Trust Fund is NOT a “fiction” and Krauthammer has only managed to confuse the issue.

Paul F. deLespinasse

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