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Sorry, Gramps, We Owe You Nothing

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It seems fair to say that there is a commonly-held belief that the U.S. Government has an obligation to make Social Security payment to those who paid into the program for decades. The benefits are part of contract between workers and the Feds that help ensure nobody has to retire to live on dog food.

Further, there’s a commonly-held idea that there is a Trust Fund, where all those worker payments are being held so there will be money to pay retirees. The promise of a trust fund is probably less trusted by the public, but they still think that they’re owed something from whatever Congress hasn’t already lifted from the trust fund cookie jar.

Well, there is a trust fund, but the cookie jar is full of empty promises instead of genuine savings:

That so-called "trust fund" is a fraud.  It does not exist.

Here's what actually happens (and Krugman knows this, which makes him a damned liar besides):

  • Your tax dollars go to Treasury.
  • Treasury keeps them and issues "special" Treasury bonds to the Social Security "trust fund."
  • Treasury counts these tax receipts against the federal deficit, making it look (much, until the last year) smaller than it really is.

Note the slight-of-hand here.  Social Security gets an alleged "bond" but they can't sell it to anyone but the Treasury.  That is, legally it is an IOU, not a bond.  A bond can be marketed in the open market to anyone who is willing to buy, for whatever they're willing to pay.  These are unmarketable (intentionally) and thus can only be redeemed in one place - at Treasury.

The problem is that Treasury spent the money and thus doesn't have anything with which to redeem the IOUs!

So in order to redeem these alleged "bonds" Treasury will have to sell more bonds - this time to the general public (foreign governments, people, etc) who have actual capital surplus, because Treasury doesn't - it blew that surplus on social spending programs right here and now.

In order to pay retirees, the goverment first has to borrow some real wealth (not promises, you can’t even buy dog food on a mere promise). But who holds the wealth?

Retirees! In the form of accumulated property (including real estate) and private pensions. So, to fund Social Security, the government has to borrow from those it will pay.

But what about foreign governments or the rich? Can’t they lend the Feds the money wealth? Yes, they could. They have been. The trillion-dollar question is when will the cycle of borrowing to pay debt collapse? At some point, the smart money will say, “No, thanks. I can get a better and safer return somewhere else.”

This has been a problem and a threat for quite a while. The underlying fundamental is the amount of debt the Federal Government can support. The current $13–15 trillion debt may be less, as a percentage of total economic output, than some seemingly healthty Euro countries.

I am convinced that debt is a house of cards that tends to collapse quickly. We got a taste of that in 2008 when the housing bubble burst. The trouble is predicting which card will go first, and when.

But say I am wrong, and somehow we can keep rolling the debt over without collapsing the whole financial system. That brings us back to the first widely-held belief, that retirees are owed something.

They’re not:

This is often expressed in the idea that Social Security benefits are "an earned right." This is true enough in a moral and political sense. But like all federal entitlement programs, Congress can change the rules regarding eligibility--and it has done so many times over the years. The rules can be made more generous, or they can be made more restrictive.

Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.

The Supreme Court has already decided that Social Security is a welfare program, not in any way a guaranteed contract.

There is language in the Fourteenth Amendment

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

that seems like Social Security debts are guaranteed, that there is ultimately a contractual obligation. If so, that obligation applies only to the bonds IOUs that Social Security gave to the Treausury. Flemming v. Nestor determined that the government owes nothing to any particular individual.

If the Feds ever have trouble rolling their debt over to a new generation of bondholders suckers, one of the things they can do to make their paper promises look more attractive is to reduce Federal outlays. That is, cut Social Security welfare payments.

In essence, the choice ahead for Congress will be to put Gramps on the dog food diet or let the entire government (and all their power) collapse.

And who do you think your Congresscritter really cares about?