“We don’t need to tell the rest of the world that anytime people in Congress start throwing a tantrum that we’re not going to pay our bills,” Warren Buffett said on TV last week. This is undoubtedly true. But Congress is already having a tantrum, and even the President is ready to make our parents pay. Keeping Social Security solvent is what they are calling it—which it certainly won’t be if Uncle Sam defaults on the national debt.
Here’s the kicker: Uncle Sam owes the seniors of this nation more than all the other nations put together—much more than the $4 trillion politicians want to cut from the federal budget. But the sad thing is the country’s debt to its senior citizens is spoken about in derisive terms. It’s called a “free lunch” or an entitlement (read: welfare) program. It’s discussed as if seniors were robbing their children instead of the other way around, as if seniors are to blame for the federal deficit.
Yet the government, whether run by Democrats or Republicans, has siphoned off Social Security’s hard cash and spent it. It wasn’t invested; it was spent. And that’s why the pundits can say things like the average Social Security recipient gets $3 for every $1 he or she contributed, apparently assuming old folks have kept their savings under their mattresses!
The government replaced cash with “special issue” bonds backed by the “full faith and credit of the U.S. government.” What exactly does this mean in a government that’s seriously considering defaulting on its debt? Good question. Here are some unpalatable facts:
The “special issue” bonds are not even included in calculations of national indebtedness. According to everyone (the OMB as well as the Simpson-Bowles and Domenici-Rivlin commissions), only publicly held debt counts. This means bonds held by China, Saudi Arabia, and you and me—but not Social Security–must be paid first. Why? Because the intragovernmental (special) bond is nothing more than a bookkeeping device that records how much one part of the U.S. government (Treasury) owes another part of the government (Social Security Administration [SSA]). We can’t default on Chinese-held debt; decades of AAA creditworthiness would be destroyed, the world would stop lending to us, the dollar would collapse, the economy would a spiral into a Great Depression that would make the 1930s look like a walk in the park, and we would become the next bankrupt nation. That’s why such a default is absolutely unacceptable.
On the other hand, what would happen to international financial markets if the Treasury stopped honoring the “special issue” bonds in the Social Security trust fund—besides bankrupting millions of seniors, including veterans? Nothing would happen. This “default” would simply mean that the SSA must radically reform itself. But if we default on the real debt owed to other nations, SSA would have to stop payments altogether.
However, if Mom and Pop let Uncle Sam refuse to pay them as promised, something might be salvaged. How? Possibly by delaying access to Social Security benefits by raising the eligibility age to 70 or even 72. Perhaps by means-testing (cutting benefits to those with higher incomes). Maybe by changing the inflation formula on the theory that you can live cheaper when you’re older. (Never mind that before Social Security was established, the vast majority of the poor were the elderly!) And possibly by raising—or better yet, eliminating—the cap on income subject to the payroll tax.
I am not happy about it, but we have to face reality: the Tea Partiers are intransigent and the trust fund is empty. As the OMB itself acknowledged, the special bonds “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Reducing benefits would mean Social Security recipients would have to save the country once again. The burden would fall disproportionately on the middle class. But what’s new about that?