Burnt Orange Report

Knocking down the straw man

By Nathan Nance

Guest post from Nate Nance

One of the central arguments for privatization of Social Security is that we will begin drawing more money out of the system than we put in in 2018. It's mostly to do with the baby boomer generation retiring and there are more of them than there are of us. To combat this problem, the bipartisan commission led by Alan Greenspan raised the payroll tax more than was needed to cover expenses so that we would run surpluses in the system and buy government bonds to stash away in the Trust Fund for the rainy days in 2018 and beyond.

But some people claim that because the government bought the government bonds, it means that the Trust Fund is just filled with IOUs from one part of the federal government to another, making it meaningless. So the system will be in deficit starting in 2018. There's no money. We need privatization now!

First of all, privatization doesn't really address the problem of not having enough money in the system. In fact, it means even more money will be out of the system, so how this is a "fix" I've never understood. It's the benefit cuts that they plan to make to the system are what will "solve" the iceberg yada yada. The private accounts and fancy rhetoric about an "ownership society" are really just fancy window dressing for the really big cuts in benefits.

But it doesn't really matter because they are wrong about the trust fund.

The reason that I know this is because of the Constitution. That's right. Section 4 of the 14th Amendment says "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." Roughly meaning that debts incurred by the federal government (i.e. to the payment of the bond) shall not be questioned because we are obliged to pay it (in other words we have to pay our debts). Those bonds are promisories from the federal government to be paid back with interest at a later time. The government has to pay it's debts, so the bonds will be paid, even if we have to pull money out of the general fund and put it in the trust fund. The word promisory should be familiar as well, since our currency is a promisory note, for the government to pay you back at a later time.

And the bonds must be good (probably because there is almost no risk of them not being paid, short of a revolution), so good, in fact, that President Bush is heavily invested in them right now.

Once we realize that the trust fund will indeed be paid and actually exists, the 2018 date becomes essentially meaningless in the Social Security discussion. Now, how we get the money into the general fund to pay off the bonds is a seperate issue, and one I'll be happy to discuss with anyone who emails me.

A friend of mine, who supports privatization, had a small argument just yesterday over the next point. She left before I got to give her the coup de grace, but her point was that private accounts were a higher return on investment than the government run pension plan. I pointed out the CBO's projections that traditional Social Security will pay more than private accounts coupled with price-indexing, even assuming a pretty low 1.9% average growth over the next 75 years.

Now, this person is a smart woman I've known for many years. She even has a business degree. But I was shocked as she actually asked "but what if we don't have that high growth?" That's when she left and by the time I was over my shock at being asked such a ridiculous question, I couldn't answer her. If we average less than 2% growth over the next 75 years, we have much bigger problems than Social Security. If there is not enough money going into Social Security, and SS comes from taxes on wages that means... no wages. Good job class. That kind of economic growth would be very bad, and if you remember the last time we had similar growth was the recession in 2001, and the stock market didn't exactly have a high return on investment then did it?

These are just a few of the things that we're going to have to understand as the debate over Social security heats up. I'm trying to do my part to help us all understand what this debate is actually over and what it may mean.

This is a guest post from Nathan Nance. Nate is a sports/news clerk at the Waco Tribune-Herald and writer/editor of Common Sense a Texas-based Democratic Web log. He can be reached at nate_nance@yahoo.com.

UPDATE: It took me three hours and several dozen phone calls about high school basketball to write this, so if anything is amiss or you don't understand what I meant, feel free to leave a comment or email me and I will try to clarify it. Thanks.