There are number of problems of both fact and interpretation, both with Mr. Baker's original comments and with the subsequent follow-up comments equating Social Security adjustments with "defaulting" on government bonds.
First, neither Bernanke nor other would-be reformers is seriously advocating "defaulting" on government bonds. To the contrary, analysts on all sides of this debate, including the reformist side, stress that no one doubts that the government will honor the bonds. Further, if you actually read the specs of the various reform proposals that have been introduced, they all they all honor the bonds in the Trust Fund. In fact, some would even issue additional bonds, though this is besides the point.
All that is being pointed out is that the government can't effectively pre-fund future benefits by issuing bonds to itself, from one account to the other. This has nothing to do with the creditworthiness of the federal government. If someone proposes to spend money that the government doesn't yet have the resources to pay, saying that the government will issue a bond to cover the expenditure doesn't answer the question of where the money will come from. Bond or no bond, we still have to decide who is going to pay for that expenditure, and how.
Equating adjustments to Social Security's benefit schedule with a default on government bonds is a red herring. The government has adjusted Soc Sec's benefit schedule repeatedly (for instance, in 1977 and 1983) without this being interpreted as a government default.
Moreover, it's simply incorrect to assert that the Baby Boomers have already paid for their own benefits. The Social Security shortfall does not arise because of an imbalance between the scheduled benefits and promises of future participants; it's entirely a function of an excess of promised benefits over revenues for participants in the program to date. Diamond-Orszag and others have written about this as the "legacy debt." Here it shows that the excess of past taxes over benefits for participants in the program to date is $1.9 T. The excess of future benefits over taxes from those people is $15.1 T, producing a net shortfall (after rounding errors) of $13.3 T. (Diamond-Orszag estimated it at closer to $11 T, which reflects the fact that they wrote in 2003). It's simply not correct that participants to date have pre-paid their own benefits. Under current law, future generations are being asked to pay for their own benefits (in the aggregate) plus make good on the enormous mbalance of payments of program participants to date.
Finally, it's a widely-accepted myth, but a myth nevertheless, that the Greenspan Commission "deliberately" tried to pre-fund benefits by building up a big Social Security Trust Fund. This myth is so widely accepted now that anyone could be excused for repeating it, but a review of the historical evidence shows clearly that it isn't true. Whether you read the CRS report on the 1983 amendments, the interview with the Commission's Executive Director Robert Myers, the documents consulted by the Greenspan Commission itself, or transcripts of various speeches by the late Senator Moynihan, another Commission member, it's clear that they never thought they were pre-funding future benefits through the Trust Fund. They simply sought a result of 75-year actuarial balance on average, without careful attention to how they got there. This is one reason why a series of Advisory Councils since the Commission have all advocated using a different metric than 75-year balance, so as not to repeat the same mistake. According to Myers and others, had they realized that they had produced "balance" by following big surpluses in the 1980s, 1990s and 2000s with big deficits in the 2020s and beyond, they might have gone about it another way. So, not only has the Trust Fund not been an effective source of advance funding, the Greenspan Commission never actually argued that it would be.
The bottom line is that if Bernanke's critics were more confidently in the right, they'd respond to the arguments he had made, rather than attacking one (arguing for default) that he didn't.
Monday, January 22, 2007
What Did the Greenspan Commission Do?
An anonymous commenter on the last post made some very good points. The last of which generates the title of this post.