January 20, 2007
Bernanke and the Social Security Trust Fund
I would like to join Felix Salmon ,  in suggesting that Dean Baker has mischaracterized both Fed Chair Ben Bernanke's remarks to the Congress as well as the substantive policy questions on the table.
Yes, an AP story tells us that President Bush wants to address the "looming insolvency of Social Security." Since the non-partisan Congressional Budget Office projects that Social Security can pay all future benefits for the next 39 years, with no changes whatsoever, this definitely gives new meaning to the word "looming" or perhaps "insolvency."
The real headline for this article should have been that Fed Chairman Ben Bernanke is apparently suggesting that the federal government default on some of the government bonds held by the Social Security trust fund. That would seem to be the implication of his suggestion that we restructure Social Security and presumably not pay the full benefits mandated under current law.
Perhaps Mr. Bernanke is following in the footsteps of President Kirchner in Argentina. Argentina has seen four and a half years of very impressive growth following the partial default on its debt. In fact, Rafael Correa, Ecuador's new president, was sufficiently impressed that he is now considering a similar step.
Of course, if Mr. Bernanke wants to go in the direction of defaulting on U.S. government debt, the default should not just be on the government bonds held by the country's workers through the Social Security trust fund. Any default should also hit the bonds held by wealthy people, large corporations, and central banks. Personally, I don't think that default is a good strategy for the United States at this time, but the fact that Mr. Bernanke appears to advocate it is certainly newsworthy.
I would suggest first that the word "default" is completely inappropriate for this discussion. The term "default" has a very clear and very narrow legal meaning, used to refer to a situation in which one has promised to make a specific identified dollar payment to a specific individual at a specific date, and the payment is not made. The logical options on the table for Social Security are raising the age for social security eligibility (e.g., , ), or using means-testing to reduce payments to the richest Americans. Mr. Baker is entitled to believe that such adjustments would be undesirable or unnecessary. But to describe such proposals as a "government default" is to use inaccurate language in order to inflame passions rather than inform the discussion.
Second, I find nothing in Bernanke's remarks that could be construed as his endorsement of these or any other proposals. Exactly the opposite-- Bernanke has gone to great lengths to avoid recommending any particular policy remedy. Instead he understands his role to be to call attention to the issue without taking sides in the political debate as to how the goal might be achieved. For that matter, my reading was that the primary issue Bernanke was talking about here was Medicare rather than Social Security, though I'm willing to agree with Mark Thoma that one might have wished for Bernanke to be a little more clear about this.
Evidently what sent Baker off is the fact that, for purposes of summarizing the magnitude of the problem, Bernanke used the gross federal debt less that owed to the Social Security Trust Fund rather than gross federal debt alone; PGL also raises this concern. Whether one focuses on the unified budget or on the budget excluding social security receipts and expenditures depends on the question one is asking. If the government runs a $100 billion deficit from federal fund receipts and outlays and a $100 billion surplus from trust fund receipts and outlays, then the total amount of borrowing it needs to undertake from private or foreign lenders as a result of those operations is zero. The total interest payments for which it must find a source of revenue in the current year as a result of these fiscal operations is also zero. Thus, if one's focus is on the impact of federal borrowing on capital markets, the feasibility of raising those funds on capital markets, or the difficulty the Treasury may face in finding a source of revenue with which to make interest payments-- and such issues are precisely the focus of Bernanke's remarks-- the correct measures to use for the discussion are the net federal debt and the unified federal deficit.
The current political impasse in Washington has resulted because too many people are willing to play "gotcha" politics, attacking anybody who offers constructive ideas on these issues of heartlessness towards our senior citizens or wishing to tax us into poverty. Bernanke has performed a public service by putting this issue on the table. For this, he has my gratitude.
Posted by James Hamilton at January 20, 2007 06:09 AMdigg this | reddit
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Tracked on January 20, 2007 01:52 PM
In (partial) defense of Dean, there are some politicians who do wish to subsidize the rest of the government by using the Soc. Sec. Trust Fund reserves. A fair read of the Bernanke's remarks, however, would note that all he told Congress was that policymakers have to make some choice - including possibily raised income tax rates.
Posted by: pgl at January 20, 2007 07:00 AM
Professor, look at the way Bernanke presents the data:
"Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960. The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006."
Everything Bernanke said is correct, but it is very misleading. Yes, the unified budget deficit is "close" to the the "average since 1960". But what about the on-budget deficit? Bernanke doesn't mention that it is significantly above the average for his chosen period.
Since closing the on-budget deficit is critical to solving the long term fiscal problems, why doesn't Bernanke mention this?
In other words, you are too kind.
Posted by: CalculatedRisk at January 20, 2007 10:22 AM
"Since closing the on-budget deficit is critical to solving the long term fiscal problems, why doesn't Bernanke mention this?"
Posted by: RN at January 20, 2007 10:47 AM
He did mention that. Several times during the Q&A.
Posted by: Steve at January 20, 2007 11:59 AM
"government default" is to use inaccurate language in order to inflame passions rather than inform the discussion."
We're waiting to hear your thoughts on those who use terms such as "Ponzi" and "basket of IOU's" to dispassionately address the issue of the Trust Funds solvency.
Posted by: mayo at January 20, 2007 12:32 PM
Brad DeLong has contributed to this debate by taking about two different kinds of Soc. Sec. proposals - those that Brad, Dean, Andrew Samwick, and I agree upon. Those are not defaults. But what the White House is alluding to is a default on Soc. Sec. obligations. As I note over at Angrybear - we should all be as clear as Brad just was.
Posted by: pgl at January 20, 2007 12:50 PM
Steve, do you have a link to the Q&A?
BTW, I was a supported of Bernanke for Fed Chairman (and I still think he was an excellent choice).
Best to all.
Posted by: CalculatedRisk at January 20, 2007 01:54 PM
CR: A video of Bernanke's testimony is available from C-SPAN. The Q & A begins 29 minutes in, so you need to fast-forward a bit.
Among other things, Bernanke said that "the short-term unified budget deficit really has nothing to say about the long-term implications of our projected entitlement spending."
Posted by: Emmanuel at January 20, 2007 02:59 PM
I was looking for a transcript myself, but couldn't find it. The video is probably worth watching. I do remember one question where he was asked to clarify something about the two deficit measures and he basically said that the unified deficit understates the fiscal problems.
I think that was more along the lines of what he was implying with the quote you cited. He was trying to say, "Yes, the unified deficit isn't that bad, but there's more to the story than that."
Posted by: Steve at January 20, 2007 04:49 PM
Thanks JDH. I've been trying to get this all across to Baker for quite some time, but I think I've erred by playing into the deceptive terminology too much. You put it clearly and in the way I've intended when you say the net Federal position is what matters.
American taxpayers will soon find out how little it matters whether this or that government program is "solvent" or in "default" when the net government position is shortfall/deficit.
Posted by: Aaron Krowne at January 20, 2007 08:18 PM
So, Peter borrows the money from Paul, spends it all and wants Paul to help pay it back? Or, is it that Paul should pay all?
Posted by: ken melvin at January 22, 2007 08:24 AM
So Baker is "off", ("Evidently what sent Baker off is...") with his "mischaracterization" (further explicated as "I would suggest first that the word "default" is completely inappropriate.") but Chairman Bernanke is "on", respectfully, mostly ("my reading was that the primary issue Bernanke was talking about here was Medicare rather than Social Security, though I'm willing to agree with Mark Thoma that one might have wished for Bernanke to be a little more clear about this.") and the fact that SS is not distinguished from Medicare is not merely an oversight, but...a great help in avoiding the clutter that arises when too many distinctions are made?
"Wishing for more clarity", is so reverential, I feel compelled to follow suit now that it is so fashionable...unlike being "off" and making remarks that need no further clarity about being the "completely inappropriate" remarks they are.
[Reverence for colleagues has its limits...and God knows, so much tighter for recreational economists.]
I'm not much good at reverence, but I notice that AP drew their interpretation and I haven't see Beranke's correction yet. Maybe I missed it, that Bernanke defence of the SSTF that, unlike Medicare, is not an entitlement that needs our immediate attention.
Ok people that's all the reverence I can muster.
Baker, you go boy.
Posted by: calmo at January 22, 2007 10:35 AM
So Peter borrows from Paul, spends it on living expenses, then wants Paul to pay back all or part of what Peter owes Paul?
Posted by: ken melvin at January 22, 2007 10:37 AM
Well, one can fuss with Dean about his use of terminology, but the deeper point is that Bernanke is simply not recognizing that social security is in a very different condition than the medical entitlement programs. I have seen some claiming that he seems to put a bit more focus on medicare than social security, but it would seem not by much. I also recognize that he mostly focused on the unified budget as seen by the CBO, although he did reference the SS Trustees on the demography of social security, if not the economics.
I have been harsh about Bernanke elsewhere, accusing him of "drinking social security kool aid" over on maxspeak. However, I think he is playing a more complicated game, a political game in which he is hoping to encourage some kind of budget deficit reduction by almost any means. I think his thinking might go like this, which is not openly stated.
Republicans will oppose almost any tax increase. Military spending cannot be cut in the near term since Bush is getting more boots on the ground in Iraq (against public, the ISG, and Congressional opinion), meaning as Pelosi has pointed out, that Congress will not feel able to cut funds to them. Obviously interest payments on the national debt cannot be cut, except by lowering interest rates or cutting the deficit (and as noted on this blog, more of those are going abroad, uh oh). And while the medical entitlements are clearly the rapidly growing problem, the real problem with them is the more general problem of rising medical care costs, which is very hard to deal with.
Which leaves social security, where there has been this long running campaign to convince the public that there is a "crisis" in social security, a successful campaign, even though there is no crisis and no problem. Most crucially, young people have been convinced, most thinking they won't get any SS benefits at all, and they wiil be the victims of future benefit cuts, whether by retirement age increases or monkeying with the indexing schemes. So, they are bamboozled suckers who can be easily fleeced.
So, we have this stealth bipartisan panel being put together by the Senate Budget Committee to "reform social security." They can come up with a deal: cut future benefits, supposedly painful for the Dems but probably not noticed by its ignorant victims, and raise FICA taxes now, supposedly painful for the GOP, which can also be made more palatable for Dems if it is done semi-progressively by raising the income cap. So, the immediate net out of this bipartisan deal would be a FICA tax increase. Bernanke can live with that, even if it is based on a fraud, as Dean Baker has been pointing out.
Posted by: Barkley Rosser at January 22, 2007 02:13 PM
What's wrong with Bernanke? Speak clearly, man! Social Security is in surplus and will be fine for 40 years according to current projections. Medicare is a looming fiscal catastrophe. Is that so hard?
Posted by: Detroit Dan at January 22, 2007 06:11 PM
Can someone (JDH?) enlighten me about the relationship between Bernanke and Hamilton? Are they best friends? The unwavering (and uncritical) support would seem to indicate such. For evidence, visit JDH's earlier Bernanke the "inflation-hawk" posts.
Posted by: stirthepot at January 22, 2007 07:57 PM
Stirthepot, I know Ben quite well from the many years back when he was an academic like me, and developed a tremendous respect for him over that time on the basis of the strength of his intellect. I have taught out of the books and articles he has written to a great number of students. I have not had an opportunity to talk with him personally since he became Fed Chair, but I believe he is likely to analyze issues the same way I would, partly because he has the same sort of background as I do. I am thinking in that regard that I likely have something to contribute as a Fed-watcher. I tend to see the world very much the same way that he does (and differently from a good many other commentators), so I find my natural role often turns out to be explaining and defending what he has said.
I had not mentioned this personal connection before, because it seemed a bit like name-dropping. I now see from your comments that perhaps some people might find it relevant information for evaluating my remarks. But I would also hope that, if you're a regular reader of Econbrowser, you would have figured out that I always write what I believe to be true, and do my best to communicate what that is and the reasons for it. If I thought Bernanke was wrong, I would say so. But I just happen to think he's almost always been right. And that's of course related to my view that he's a very smart guy. I admit to having a lot more reason for holding that view than just basing it on his public remarks since he became Chair of the Federal Reserve.
Posted by: JDH at January 22, 2007 08:38 PM
As a regular reader I appreciate the candor. I also believe that you would honestly report if you thought he was wrong. However, I think being able to "sign the bias" is important in this context. Thanks for the reply.
Posted by: stirthepot at January 23, 2007 06:26 AM