Re: Bush busts Social Security with massive deficits

From: Dave Thompson (davethompson_at_cmeforit.us)
Date: 09/27/04 

Date: Sun, 26 Sep 2004 19:32:32 -0700

In news:I6J5d.5080$Wu1.1043@trnddc02,
sinister <sinister@nospam.invalid> pecked:
> "Dave Thompson" <davethompson@cmeforit.us> wrote in message
> news:EeE5d.368244$sh.174529@fed1read06...
>> In news:PuD5d.14760$Gk4.4066@fe1.texas.rr.com,
>> Igor <jjweatherby@houston.rr.com> pecked:
>>>
>>> Here is how it works. First look at your paycheck. You will see
>>> three taxes.
>>>
>>> 1. FICA This is the tax that is used for the general budget. This
>>> is the budget that is in deficit.
>>>
>>> 2. Social Security This is a completely seperate budget. All social
>>> security taxes go to the social security budget. This is the budget
>>> that is in surplus.
>>>
>>> 3. Medicare is combined with Social Security.
>>>
>>> Now the confusion. Deficit number are calculated as the sum of all
>>> budgets. This is incorrect. Currently the Republicans want this
>>> because it makes the deficit look smaller. Democrats go along with
>>> because they can spook people about Social Security. Here is how the
>>> budgets are handled. When the general fund deficit is FICA -
>>> expenditures. When expenditures are greater than taxes a deficit
>>> results. This is much larger than reported. Why? Simply because
>>> Social Security is a seperate budget. The Social Security surplus is
>>> locked away and never used to finance a deficit.
>>
>> (SNIP)
>>
>> All very nice and all very wrong.
>>
>> Social Security does not have money in its trust fund. It has
>> special government bonds that must be redeemed by the Treasury in
>> the future. By law all monies collected by Social Security are
>> IMMEDIATELY deposited in the Treasury for current government
>> operations and Social Security receives non-negotiable bonds.
>>
>> A better analogy:
>>
>> Your employer takes your 401k funds and gives you an IOU to be paid
>> in the future. In the present your employer uses those funds for
>> current operations. The IOU's are a liability against the employer's
>> balance ***. If your employer goes bankrupt there will be no money
>> to fund the IOU's.
>>
>> So goes Social Security. There are NO, repeat NO tangible assets in
>> the Trust Fund. There are only IOU's in the form of non-negotiable
>> government bonds.
>
> Does that mean agents who hold "marketable" US treasury debt hold
> "only IOUs"?
>
> In both cases, the IOU is backed by the force of statute.
>
> In terms of what the government can do to actually pay the IOU back,
> all it really has is the power to tax (or, I suppose, float more
> debt).
> Perhaps one could argue that it's easier for the government to
> "default" on the Social Security debt---it could change the statute.
> Whereas defaulting on public debt would be arguably harder. Though
> defaulting on the SS debt would come with enormous political
> repercussions, as it would represent a massive (multi-trillion) shift
> of wealth up the income ladder.
> In terms of your analogy, don't employers sometimes offer employees
> stock that is essentially nonmarketable, as it has restrictions on
> its sale? (I.e., minimum holding periods of years.)
>
>> --
>> Dave Thompson

Commercial US debt is a whole lot more liquid than the bonds that Social
Security must buy. You are correct in that it would be MUCH harder to
repudiate the public debt. Of course, the US could declare all debts null
and void like a South American Banana Republic, but that would be the end of
the USA as we currently know it. Realistically the government will never
repudiate the debt to Social Security. The point is when those debts start
coming due in rapid fashion (Baby Boomer retirement) it will cause a massive
drain on the Treasury to fund the payments.

Yes some employers offer restricted stock for 401k plans. It's a bad system
for employees and should not be used unless the employer matching is REALLY
good. Ask the poor folks at Enron. 

--
Dave Thompson
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