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.

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.


pensiondoom said...

But I'm also saying that I don't see why future generations of workers--who were not party to any of the decisions being made as part of that racket--should have to pay the consequences to the degree suggested by Dean Baker in his post.

That again is a dishonest argument. This whole concept of "generations" is bogus, and anyone who pushes it is, umm.., lets say, dubious at best.

Q.Who benefited from excess SS taxes today?
A. Today's rich, via reduced income taxes

Q. Who foots the bill for repaying that SS bonds tomorrow?
A. Tomorrow's rich, via increased income taxes.

So the whole thing is between todays rich and tomorrow's rich. Both minorities (who earn income way beyond the payroll limits)

To conflate that rich minorities of today and tomorrow, with the vast majority of working stiffs, into "todays generation" and "tomorrows generation", is another one of the rightwing con jobs.

Given the fact, that social mobility is very less in the US (and becoming more so) tomorrows rich is mostly going to be the children of today's rich.

This rich minority is trying by crook and hook to eliminate the estate tax, to ensure that their children are indeed tomorrows rich.

The vast SS reform exercise, by today's rich, to transfer their wealth to tomorrows rich (their children), makes the crime worse. It is obscene, and they know what they are doing.

I am not going to call you names.
But certainly, to abet this scheme, is not befitting your position.

Lord said...

The problem is more the framing of the debate. Entitlements, if anything, are only a small problem. Healthcare is the problem. Solve that and entitlements could be fixed with rounding errors.

PGL said...

I've heard the claim in the last paragraph before - and I have a real problem with it. It goes like this. The folks on the Greenspan Commission were smart fellows so they knew that when they bumbed up the payroll contribution, more revenues would flow in. And I would suppose that these smart folks would have known that the Trust Fund would run surpluses. Whether you call this prefunding or whatever - they had to know about it. So to pretend otherwise.

PGL said...

As I was preparing an Angrybear comment on your reader's 6th paragraph (the one that just leaves me shaking my head), I also noticed his 4th paragraph, which certainly undermines that dumb comment from Roland Patrick. But to suggest that this is what Dean Baker, Brad DeLong, and folks like me are saying is truly a gross misrepresentation of our position. I don't wish to be mean to one of your readers, but his attempt to rebut Dean Baker is the kind of stuff you'd expect from Bill O'Reilly. This is a serious issue - and spinning what those who wish to contribute is not something I tend to praise.

Franklin said...

Take a look at the speeches that President Reagan, Tip O'Neil and Howard Baker gave upon the signing of the Social Security Amendments act of 1993. You can see them at:


I don't think they intended to play a trick on the Baby Boom generation. During his first election campaign President Reagan promised to balance the budget by 1983. - If he had balanced the non SS budget and if congress had kept it balanced, the retirement of the Baby Boom generation could have be "pre funded" by buying up existing government bonds from the Chinese and Japanese. If this had happened, then by the time the Baby Boom generation retired, the national debt would be paid off except for what was owed to the trust fund - and then that debt could easily be rolled over by selling it back to investors. -