Friday, November 13, 2009

What is Paul Krugman Talking About?

I just reread Paul Krugman's old post on why there is no problem with the Social Security Trust Fund assets.

His argument:

The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen. So legally, mechanically, 2018 has no meaning.

. . .

What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?

To be honest, I don't really understand Krugman's point.

The assets in the Social Security Trust Funds represent a claim against the United States Treasury. In other words, Treasury has borrowed from the Social Security Trust Funds to finance its current spending, and it will eventually have to repay that debt.

When the Social Security program begins to cash in those assets (probably some time in 2016), Congress has three (potentially interchangeable) options to finance the repayment of its debt: raise taxes, cut spending, or add to the already unsustainable deficit.

None of these options is particuarly appealing. The combined Trust Funds contain approximately $2.6 trillion in assets, which means that the federal government will have to find $2.6 trillion in revenue over the next few decades.

Krugman wants to reframe the problem as a crisis in the General Fund rather than the Social Security Trust Fund itself. And, technically, he's probably right. But how does this really change anything? The federal government still has to make a series of difficult choices ahead. Choosing the wrong path could still place the Social Security system and the entire federal budget in jeopardy.

Viewing the problem this way may be politically appealing to Krugman, but it's not exactly helpful.

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