Sunday, April 24, 2011

Social Security: Letter to the editor

Last Sunday I sent a letter on Social Security finances to the editor of the Democrat-Herald (Albany, Oregon). If it was to be published it would have been today. It wasn't. I hate to spend time on something and not have anyone read it, so here it is.


To the editor:

Thanks to Dale Coberly for explaining the economics of Social Security so lucidly (letters, April 17).

Of course Coberly’s analysis assumes that the Trust Fund is not a “fraud,” as Gordon Shadle’s letter in the same issue argues.

Shadle’s letter draws an analogy to someone who borrows money from himself, spends it all, and replaces it with I.O.Me’s, “backed by the full faith and credit of himself.” According to Shadle, “He’s too stupid to understand that once money is spent it doesn’t come back.”

There are two problems with Shadle’s analysis. “Full faith and credit” is a concept applicable only to governments, not to individuals or even private organizations. And “once money is spent it doesn’t come back” isn’t always true.

If I deposit money in a bank, it does not put that money in a “lockbox” to secure it until I want it back. It loans the money to someone and that person spends it. But if that person has an income (and if he doesn’t, the bank won’t loan him money) he will pay back the loan. So “spent money” can indeed “come back.”

Government has a constant flow of tax revenues. So if it sells bonds to me, to a bank, or to China, and spends the resulting money, it can pay interest and redeem bonds with those tax receipts. It guarantees to do so, promising the “full faith and credit” of the government to do so.

Because of money borrowed from the Social Security Trust Fund, our government has borrowed about 2.6 trillion dollars less from me, the Bank of American, and China. Its obligation to repay this money is no less than its duty to repay other bondholders. And paying this money back to Social Security will not increase the total national debt even if we do it with money borrowed from other lenders. Every billion paid back would increase money owed to other lenders by a billion, but it would also reduce the amount owed to Social Security by the same amount.(After you pay back money you owed, you don't owe it any more.) As Stephen Goss, Chief Actuary for the Social Security Administration points out, the net effect on the total national debt would be a “wash.”

Paul deLespinasse


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