Tuesday, January 04, 2005

Krugman sez: "Do You Take Visa?"

The first customer for FLUBA's Commemorative Social Security Bonds, reserves a place in line:

...the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China.

Which is flatly false. As Larry Summers' 1999 Treasury Dept.'s, Analytical Perspectives on the Budget put it:

They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government's ability to pay benefits.

The bonds owned by Japanese pension funds are assets to those funds, as are those owned by China, and they are marketable. While those bonds are a liability of the U.S. government.

Contrarily, the bonds held by Social Security are special bonds, that cannot be sold on the open market, and are exactly offset by a liability of the same federal government. They are I. O. Mes, not I.O.Us. Their net value to the government is thus $0.

Were the Treasury to default on the bonds Japanese pension funds hold, that would have very severe and real negative consequences for this country's ability to borrow in credit markets. Defaulting on bonds held by yourself might have positive consequences for the federal government's credit worthiness.

Interestingly, had the Social Security Trust Fund been investing in, say, German government bonds these last 20+ years, the 'trust fund' would have assets it could draw on to meet the promises made to the Baby Boomer retirees. Again, contrary to a notion peddled by Prof. Krugman in the NY Times (Nothing for Something, August 8, 2001).

Also, this reality--that the bonds in the 'trust fund' are pretend bonds--will begin to hit us possibly as early as 2009 (when the first Baby Boomers--born in 1946--are eligible for early retirement). At that point the SS 'surplus' will begin to shrink, and congress will have to find other ways to finance its spending.

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