WHAT CRISIS?:

Social Security Trust Fund is built on trillion-dollar IOUs (Larry Eichel, 1/18/05,
Philadelphia INQUIRER)

For those of you wondering whether there is such a thing as the Social Security Trust Fund, let us call your attention to the H.J. Hintgen Building, corner of Second and Avery, in Parkersburg, W.Va.

That's where the fund resides, in a drawer of a locked gray file cabinet, monitored by the Office of Public Debt Accounting, Bureau of Public Debt, U.S. Department of the Treasury.

The fund's holdings consist of 225 pieces of paper, each one representing Special Issue U.S. Treasury Bonds in multibillion-dollar denominations, $1.76 trillion in all.

Those pieces of paper aren't actual bonds; the real ones exist only in electronic form. The office maintains the ersatz documents because federal law requires that the fund - actually two funds, one for Old Age Survivors Insurance, the other for Disability Insurance - have a store of "paper instruments."

Understanding the trust fund is essential for assessing the urgency of the case for remaking the federal retirement system. Invariably, Social Security's timetable for distress is expressed in terms of when the fund has to be used and when it runs dry.

So do the bonds in it have any financial value?

For all the rhetorical obfuscation in the Social Security debate, there is little dispute among experts over some basic aspects of the trust fund.

They agree that the fund has real value, if only because the government says it does, and that it carries a real price.

In a report last year, the Congressional Budget Office called the trust fund mainly an "accounting mechanism" that contains "no economic resources." It described the bonds as legal commitments to pay, as opposed to the ability to do so. All of which has been said by other agencies in other years.

Yet those commitments are of great significance, even if they do represent promises (IOUs) made by one part of the government to another. Such commitments are the basis on which all government securities are issued. Not to honor the pledges would amount to default.

"Has the United States ever defaulted on its obligations? I don't think so," said Mark Weisbrot, codirector of the liberal, Washington-based Center for Economic and Policy Research. "Those bonds are as real as the ones held by Bill Gates and the government of China. Not to pay them would be robbery."

One way or another, the bonds will have to be honored. But there is no money set aside to pay for them.

When the bonds come due, the government will have to adjust its finances by reducing other spending, increasing other borrowing, or raising other taxes. There are no other options.

The real reason to reform SS is to make the system better and restore its moral component, but to pretend its financial situation is untroubled is sheer nonsense. The funniest current Democratic mantra is that even when the President says the system will be broke, "it will still be able to pay 80% of its obligations." Republicans should start running ads saying the Democrats are proposing a 20% cut in SS.

Posted by Orrin Judd at February 13, 2005 6:30 AM