Tuesday, April 10, 2012

The Krugman Konfusion on Social Security

Paul Krugman writes on Social Security:
The serious (as opposed to Serious) thing to say here is that on current projections, Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets.
First, Krugman starts out with this howler where makes some kind of Serious distinction between shortfall and bankruptcy. A shortfall means the money isn't there to make payments as the SS program is designed. This means that someone is going to get screwed (which is what happens in a bankruptcy). It will be either a cut in payouts to recipients (a most obvious bankruptcy), higher taxes (bankruptcy paid for by taxpayers) or money simply printed to pay for the shortfall ( a bankruptcy paid for by savers and those who will not get pay increases that are enough to compensate for the inflation).

But, aside from this howler, is the fact that SS is no longer cash flow positive. Krugman completely misses this and this is a very big deal. Just a few years ago, SS was a buyer of up to 25% of all Treasury securities issued. As of about a year, they are a net liquidator. Got that?

SS has gone from a major buyer of Treasury securities, to raising funds from the liquidation of Treasury securities. They are for all practical purposes now competitors with the Treasury in the Treasury market. This is the only way SS will be able to meet their obligations in the here and now. What happens in a quarter of a century, which is the time frame that Krugman wants to pass the problem off to, is that SS will have sold off all of its Treasury securities and things will get worse. But the problem begins now with the start of the sale of the Treasruy securities. Very dangerous and another important reason why interest rates will skyrocket at some point.


  1. "SS has gone from a major buyer of Treasury securities, to raising funds from the liquidation of Treasury securities."

    Mr. Wenzel, could you elaborate on this a bit? Do you have any other sources that speak to this? (I have always heard about how SS is bankrupt but am loathe to find any real credible sources or analysis on such claims).

    1. This was widely reported a couple of years ago. If payouts exceed payroll taxes (and there has been a holiday even on the payroll taxes), the only place they can get the revenue is to cash out the IOUs (i.e. Treasury securities) to fund the difference.

    2. I have a hard time believing you have tried to find the information you seek. We're talking about information published on the ssa.gov website that comes up on the 1st page of google results. Their entire FAQ is made up of questions about this and they even allow you to run reports. It's not even controversial or contested information.

      Simplified summary... You pay SS taxes. That money is then loaned to the US Government via purchase of US Government securities. The government spends that money to kill brown people, bailout banks, prop up dictators, etc.. When the government needs to pay money to SS recipients, they borrow money from someone else to pay back the money originally borrowed from the SS fund.

      The only real disagreement among the political class is whether or not this qualifies SS as "bankrupt" (in other words, superficial nonsense).

  2. The funny thing about Krugnuts comments is that he actually is basing his entire conclusion on a straight line projection that assumes an upward sloping economy (no recessions). Even a first year econ student knows that all the variables in the economy never move continuously in the same direction and in a linear fashion. Of course he is right in sensing that there are more pressing issues such as the 800lb gorilla in the room and social securities companion program called medicare. However, in today's world, what good is a SS check if medicare is bankrupt?

  3. Ben;
    as soon as your (and millions of other taxpayers social security) tax money hits the SS trust fund account, its sent on to the treasury in exchange for a note promising to pay it back in the future.
    When there was ten or so worker for every retiree it was fine however now the ratio is about one to one and there isn't enough tax money coming in so they have to cash in those notes to keep gramps happy, so the go to the Treasury give them some cash then treasury has to run of to the fed who creates a few billion new dollars and adds it to govt debt.
    More dollars chasing the same quantity of goods equals (I'll let you guess). If this goes on for long enough, not just for SS, but Medicare and the Military as well. then people who might loan the govt money might want more to cover the risk of default as well as the decline in value of their money over time .
    (this is how I understand it in a brief précis, any corrections or additions are welcome.)

  4. I was under the impression that the treasuries that fill the "trust fund" were a type of "special obligation" treasury, that can only be redeemed by the government. As such, they could not be sold on the open market.

    This is doubly bad. It is basically adds a flow through cash obligation for the treasury (read: taxpayer), but will not show up as a budgetary item (or be added to the deficit) because it is essentially a balance sheet transaction.

    Can someone correct me if I'm mistaken.

  5. @Ben: The Social Security Trustees Report Summary for 2011 (https://www.socialsecurity.gov/oact/TRSUM/index.html) may be helpful to you. Note the first paragraph in the Social Security section.

  6. Paul Krugman is not an economist.

  7. Calling Krugman an economist is like calling Rachel Ray a chef.

  8. Really, folks. We've made adjustments in social security before. We can do it again. The easiest fix is to ask those who are really well-heeled to cough up the same percentage ALL of us pay--poor and middle class as well as wealthy--and pay it on more of their presently exempt income. Someone who makes $10 million a year pays the same dollar amount of social security tax as a person who makes an income of $160,000. I forget where the cut-off is--somewhere between $100,000 and $150,000? On income above that arbitrary amount, no tax is collected. When the last major adjustment was made to Social Security, the planners were expecting to tax about 80% of all income, but an unexpected shift in incomes took place: More of our nation's total earnings began going to people in the top 1% --and even more dramatically to those in the top 1/10 of 1% of earners. So less of our nation's total income is being taxed. The mathematics are easy. Only politics stands in the way--the insistence among some of the wealthy that they wish NOT to pay social security at the same rate as those of us who have far smaller incomes.

  9. Gary Dupe (intentional)-

    If the people that made over 150k/year paid ALL of their extra income in taxes, it STILL wouldn't make up for the shortfall in SS. Get a clue, man.