Nothing They Do Surprises Me Any More.

From the Washington Post:

"Republican budget writers say they may have found a way to cut the federal deficit even if they borrow hundreds of billions more to overhaul the Social Security system: Don't count all that new borrowing.

As they lay the groundwork for what will probably be a controversial fight over Social Security, Republican lawmakers and the Bush administration are examining a number of accounting strategies that would allow the expensive transition to a partially privatized Social Security system without -- at least on paper -- expanding the country's record annual budget deficits. The strategies include, for example, moving the costs of Social Security reform "off-budget" so they are not counted against the government's yearly shortfall."

Right. Deficits cause three sorts of problems. First, they have all sorts of harmful effects on the economy that have nothing to do with anyone's perceptions. Second, if potential purchasers of our bonds conclude that we are irresponsibly running up unsustainable levels of debt, they might stop buying, which would cause further problems. But these purchasers, especially the largest ones (e.g., other countries' central banks and large investors) are unlikely to be deceived by this charade: as Kent Conrad said (in the Post): "This gets to the markets, and people who are in the markets can add and subtract." Finally, there is a political problem: if voters think Republicans are running up too much debt, they might lose popularity. This is by far the least serious set of problems, but it is the only one that this proposal would deal with at all. That tells you something about the administration's priorities.

We have already debated the question whether Social Security is really in financial trouble, so I won't go over that question here. I do want to comment on one argument advanced in the Post article: ""The diversion of a portion of payroll taxes to personal accounts is akin to prepaying a mortgage," R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers, wrote in the current issue of Business Week. "If the transition costs are borrowed, the resulting higher explicit federal debt in the near term is offset by lower implicit debt (Social Security obligations) in the longer run."" This line of reasoning seems to rely on the assumption that there is no significant difference between explicit debt (i.e., actual borrowing) and implicit debt (i.e., Social Security payments we are committed to making at some point in the future.) But this is wrong: most obviously, you have to pay interest on explicit debt, but not on implicit debt. And the interest payments that would be incurred by converting several trillion dollars of implicit debt to actual debt are huge.

Comments

[Sebastian Holsclaw]

"But this is wrong: most obviously, you have to pay interest on explicit debt, but not on implicit debt. And the interest payments that would be incurred by converting several trillion dollars of implicit debt to actual debt are huge."

Typically the knowledge of off-budget liabilites increases the interest rate of your current borrowing, so unless you aren't borrowing now, and we certainly are, it is factored in. Same thing if you try to borrow money personally and are already well-extended.

The overall economic impact is likely to be zero or nearly zero in real terms so long as we weren't getting rid of large portions of social security--such as by engaging in agressive means testing. Turning Social Security into a real safety net would be my preference, but if we are treating it as a 'right', it is a liability which would have real impact whether or not we choose to call it off budget or on budget.

I would prefer that we put it on budget, and that we not engage in accounting handwaving about it.

"Finally, there is a political problem: if voters think Republicans are running up too much debt, they might lose popularity."

Heh. Which is why the Democrats were engaged in lying about the accounting of one of their favorite programs all this time.

[hilzoy]

Sebastian: the knowledge of the implicit debt may be factored into the interest rate, but by converting implicit to explicit debt you increase the amount of debt that has to be serviced at this interest rate. So I don't think the economic impact will be zero.

Which lying are you talking about?

[Doh]

"Typically the knowledge of off-budget liabilites increases the interest rate of your current borrowing, so unless you aren't borrowing now, and we certainly are, it is factored in. Same thing if you try to borrow money personally and are already well-extended."

There's a significant difference here between you and I seeking a new loan when we have existing legal debts and the US government issuing debt backed by the full faith and credit of the US, when the government has existing entitlement programs that it has no legal obligation to pay 30 years down the line (although admittedly it could have some sort of ethical or political obligation).

The constraints on either end are not of the same caliber for the government as for individuals. IANAEconomist, but I think the relationship between projected future federal operating deficits and current interest rates is fairly complex, and to suggest that one element of future deficits-- future social security obligations-- is being fully reflected in current interest rates is (I'd guess) not supportable.

"Heh. Which is why the Democrats were engaged in lying about the accounting of one of their favorite programs all this time."

I'm not even sure what you mean here, but it sounds to me like a violation of the posting rules.

[Sebastian Holsclaw]

"Which lying are you talking about?"

I'm talking about the whole game of putting the social security debt off-budget in the first place. It should never have been off budget. We wouldn't be having this discussion at all if we had been accounting for it ethically all along. Also I refer to the lying about Social Security being in a pension plan format when it has never been such--not for even a moment in the entire history of the plan.

"There's a significant difference here between you and I seeking a new loan when we have existing legal debts and the US government issuing debt backed by the full faith and credit of the US, when the government has existing entitlement programs that it has no legal obligation to pay 30 years down the line (although admittedly it could have some sort of ethical or political obligation)."

Saying "the full faith and credit of the US" works for for future debt as for for current debt. If that part of your argument is helpful, it is true for both time frames. If anything you should argue that it is more true now (before the off-book liabilities which you think are not adequetly factored in) than it will be in the future (as they become factored in). It really doesn't add anything to the argument in either time frame as far as I am concerned. But if you are going to throw it in there, you should realize it applies in both cases. Practically that means that if investors are seeing the US as a safe investment, our rates are lower than they would be if a country with a similar debt profile tried to get credit. But SS liabilities are part of that debt profile, and they always have been to any non-idiot investor.

As for the idea that Social Security is not reflected in current forecasts the debt profile, I don't buy that at all. It is the single-most obvious and the single largest future expenditure not on the books. I don't see how you could miss it. It would be like a credit agency missing the fact that I have $100,000 in school debt in deferment.

[Jadegold]

I'm talking about the whole game of putting the social security debt off-budget in the first place. It should never have been off budget.

I'm not sure you understand 'off-budget.'

By your definition, most of DoD is off-budget. After all, when the Air Force buys an aircraft, the service life maintenance and repair of that aircraft is similarly 'off-budget.'

You can't have it both ways. If you want to hold SS to a certain accounting methodology, in the name of consistency, you should be prepared to hold every Govt. program to the same standard.

Of course, barring any unknown national disaster, we can reasonably forecast the size and needs of future US populations. Yet, national security needs are more uncertain.

[Sebastian Holsclaw]

Maintenance is on budget. It is part of the Defense Department operations budget which is on budget.

[Jadegold]

O&M isn't fixed to specific weapons systems, Sebastian. It's a line item in the PresBud and it's approved annually.

[fdl]

off-budget? then why did congress raise the debt ceiling to 8 trillion this week? oh yeah, the T bills held by SSA COUNT AS DEBT.

once more with feeling . . .

1. One believes that SSA is NOT part of the federal govt. SSA holds a massive surplus invested only in T bills. (nice safe investment for the trustees to pick.) SSA's revenue stream MAY go negative in 15 years, at which time SSA has any number of choices to keep revenue in balance with disbursements, including redeeming its T bills. If SSA takes that course, then the govt can (a) increase borrowing from someone else, (b) raise taxes, (c) cut spending. One possible course of spending cuts is in benefits to old people.

2. One believes that SSA IS part of the federal govt. In which case the whole trustee thing is a sham, as is the debt held by SSA. Total federal debt drops a few trillion! dollars. Payroll taxes are admitted to be just a regressive income tax. SSA is simply just another big program, albeit one which keeps a lot of old people out of the cold.

take your pick. each position has its merits and demerits; both are perfectly supportable.

BTW, Sebastian, last time there was a SS thread I asked for your evidence regarding the number of people who "need" (we can argue that definition, if you'd like) their SS payments. My understanding is that a vast chunk of the middle class has very little savings, so the moment they retire they "need" SS to maintain their standard of living. But i have no cite. If you have evidence that a lot of money is being disbursed by the SSA to people who don't need it, I'd love to read it.

Francis

[Doh]

Sebastian, with all due respect, I really don't think you have any idea what you are talking about, although maybe I'm just saying that because I can't make heads or tails of what you are saying.

For example, what on earth do you mean by this--

"I'm talking about the whole game of putting the social security debt off-budget in the first place. It should never have been off budget. We wouldn't be having this discussion at all if we had been accounting for it ethically all along."

The Social Security trust funds have been placed "off-budget" but (IIRC) that is because they were running a surplus, not a deficit. Even then, of course, the surplus or deficit of off-budget items is added to the surplus or deficit of on-budget items to yield the federal government's consolidated budgetary surplus or deficit.

[Bernard Yomtov]

Let me leap halfway to Sebastian's defense. It is true that it would have been desirable, not to say honest, all these years, to account for Social Security separately from the rest of government. I am not talking about future obligations, but of the annual flow of taxes in and benefits out. The fact that taxes exceed benefits has helped to conceal the size of the federal deficit.

But now I turn on Sebastian. The idea that the Democrats are solely responsible for this is utter nonsense. The parties share the blame. Where is the upswell of Republican sentiment that this practice should be altered? The plan described hardly suggests that Republicans consider honest accounting an important part of any reform. And perhaps we should investigate the source of the other lie about Social Security - that it is in hopeless financial condition and must be rescued by drastic measures. Which party is more responsible for that one, do you think?

As far as Hubbard's statement goes, it is not clear if he was speaking in present value terms. I hope he was. When you prepay a mortgage you don't make all the future payments at once, you pay off the principal due, which is the PV of the payments.

The point about Hubbard's argument that I do not understand is this:

We now have, in PV terms, a liability consisting of benefits to be paid. The plan is to borrow the money to meet this liability, thereby substituting one liability for the other. Under the current system, the liability will be met by the trust fund and future payroll taxes. These two items are the system's assets. It's all very well to say that substituting one liability for another of equal value makes no difference, but aren't we also talking about reducing payroll taxes by diverting a portion into private accounts? Doesn't that reduce the system's assets while leaving liabilities unchanged?

[Sebastian Holsclaw]

FDL Your choice number 2 is closer to the truth but the ramifications are not what you think. The problem is that you are confusing liabilities and debt which are not precisely the same thing. The SSA-held US treasury bonds are an accounting fiction because they are not investments when borrowed by the US government. The 'surplus' money was spent on other government expenditures. It was not invested. The liabilities of the Social Security Administration are not fictional. (And we aren't even talking about the disasterous Medicare boondoggle). The liabilites are well known. The fact that the investments are a sham is well known. None of that is a mystery to potential investors.

The reason the long term transition costs are likely to be zero or near zero is that the SSA 'investments' could be retired, and the interest servicing them will not be necessary.

[votermom]

This link seems on-topic.
(From suburbanguerilla.blogspot.com)

[Doh]

So Sebastian, your position is that the Treasury notes issued to the SSA are a fiction, but the "liabilities" of SSA are not fictional?

I find that approach bizarre.

Bernard, I think the statement you made-- that keeping Social Security on budget (even if only in the consolidated budget) masks the annual deficit -- is a fair point, and it's the reason the trust funds were moved off budget (to try and highlight that effect, but of course then people just looked at the consolidated budget figures, not the on-budget figures).

But, as best we can tell from his last two posts, that's not Sebastian's point at all. His point is that there is an actual "social security debt" which will come due and payable in the future, and Democrats are responsible for an unethical accounting method which resulted in moving that "debt" "off-budget."

Personally, I don't think that argument bears a sufficient resemblance to reality to merit discussion, but then I could just be lying.

[Bernard Yomtov]

Doh,

I'm finding the use of the terms "on-budget," "off-budget," etc. a little unclear here. I thought that the fact that people looked at the consolidated budget, i.e., the deficit as reduced by the SS surplus, to mean that SS is "on-budget," and that the plan discussed would move it "off-budget," again for the purpose of making things look better than they are.

[Doh]

Bernard,

As I understand it, we have "on-budget", "off-budget", and the two combined, "consolidated."

In theory, you are right that moving things off-budget should remove them from the annual calculation of the budget deficit, but in reality we still calculate an "on budget" deficit and a "consolidated" deficit, and you will sometimes see references to both in a good news story.

Social security is already "off budget" (but is part of the consolidated budget, and I am not aware of any proposals to stop calculating a consolidated budget as well).

[fdl]

"the liabilities of the SSA are not fictional"

Neither is DoD spending in 2017, and yet i don't see anyone worrying about that.

"surplus not invested"

I'd love to see a thoughtful analysis of the RoI of tax dollars. Roads? Environmental protection? A defense system that ensures a steady flow of cheap oil? and prevents (mostly) attacks on our homeland? health care for the uninsured?

put it another way. As a society, we want to take care of the elderly, now and in 30 years. How do we do it?

This is the easy question -- we and they just pay for it. The class of elderly unemployed will (a) sell their assets and (b) receive tax dollars.

but as of now, very few people in any age cohort have enough assets to take care of themselves. [i remain willing to be proven wrong on this point.]

so, on a going-forward basis, the real question to me is what is the best system for creating an economy in 10, 20, 30 etc years from now in which the elderly can live a decent life.

Is the best mechanism forced savings in the private market? I don't agree that the answer is obviously yes. Perhaps the better structure is not to impose the deadweight cost of creating 300 million private accounts. Perhaps the better structure is not to create an immense demand for low-risk private debt and equities. Perhaps the distorting effects on the market of creating private accounts will be so large that there will be a smaller economy in 10, 20 etc years out, and therefore fewer dollars available to tax. Perhaps the law of unintended consequences will have some adverse impact.

Maybe, instead, the SSA should come back into the USG. Cancel the debt. Eliminate payroll taxes and create an integrated progressive income tax. Forget means testing -- are you really going to force millions of seniors to report their wealth to the IRS? what about illiquid assets? Can you imagine the compliance issues? Just count SSA payments as income. Balance the budget, or at least keep federal debt from growing disproportionately to the size of the economy.

Given that the conservatives who post here are generally more in the libertarian wing of the Repub party (vs, say, the social conservatives), I am utterly astonished at their support for forced savings.

"Please send us X tax dollars. And you owe us Y dollars more for your savings account." Uh, but I need that money for . . . "Sorry. Uncle Sam has decided you must save a certain amount every month."

Sounds like the 1970s democratic party.

Francis

[Bernard Yomtov]

The SSA-held US treasury bonds are an accounting fiction because they are not investments when borrowed by the US government.

I really have to object to this. The bonds are held by the Social Security Trust Fund. They are backed by the full faith and credit of the government. The funds they represent cannot, by law, be used for anything other than paying Social Security benefits.

Can Congress change the law? Of course. The government can also choose to default on the bonds. But defaulting on obligations is not good for a government's fiscal health.

As I have commented before, the situation is really no different than if the funds were invested in corporate bonds instead of treasuries. If the government decides to take Social Security's money away, by not paying off the bonds, then it could similarly decide to take Social Security's money away by appropriating the corporate bonds.

[Sebastian Holsclaw]

"Given that the conservatives who post here are generally more in the libertarian wing of the Repub party (vs, say, the social conservatives), I am utterly astonished at their support for forced savings."

It is a matter of realism. Ideally I would completely do away with SS and replace it with a pure safety net program. But that isn't politically realistic and I know that.