Lew acknowledges that the Social Security surpluses of the last decades were siphoned off to the Treasury Department and spent. He also agrees that Treasury then deposited corresponding IOUs — called “special issue” bonds – in the Social Security trust fund. These have real value, claims Lew. After all, “these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are.”
Really? If these trust fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included? We measure national solvency by debt/GDP ratio. As calculated by everyone from the OMB to the CIA, from the Simpson-Bowles to the Domenici-Rivlin commissions, the debt/GDP ratio counts only publicly held debt. This means bonds held by China, Saudi Arabia, you and me. The debt ratio completely ignores the kind of intragovernmental bonds that Lew insists are the equivalent of publicly held bonds.
So loans between government entities are not included in the reported public debt. Only the debt to outside entities are reported.
So if my son owes me $50 – it’s different from owing VISA $50.
That’s why publicly held bonds are so radically different from intragovernmental bonds. If we default on Chinese-held debt, decades of AAA creditworthiness is destroyed, the world stops lending to us, the dollar collapses, the economy goes into a spiral and we become Argentina. That’s why such a default is inconceivable.
On the other hand, what would happen to financial markets if the Treasury stopped honoring the “special issue” bonds in the Social Security trust fund? A lot of angry grumbling at home for sure. But externally? Nothing.
This “default” would simply be the Treasury telling the Social Security Administration that henceforth it would have to fend for itself in covering its annual shortfall. How? By means-testing (cutting the benefits to the rich), changing the inflation formula, raising the retirement age and, if necessary, hiking the cap on income subject to the payroll tax.
So eventually, my son’s circumstances will change and he will have to earn the money he owes me. So he will have to cut the grass, wash the car, fix dinner, etc. I don’t effect his credit ratings, but I will make his life more difficult.
So when we hear about cost cutting measures regarding Social Security – know that the money is not in the Treasury to pay what they promised, and they are looking at funding issues in the short term because the money is not in the Treasury.