Barron's:Partial cure II, to Baumol's Disease:
OT/Paying off our debt & saving Social Security
" It would be the end of Social Security as we know it,
========================================
ending the threat posed by the most likely 2lst century financial disaster. "
====================================================
TA
=========================================================
Barron's:Paying All Our Debts
February 12, 2001
Editorial Commentary
Paying All Our Debts
A plan for national debt retirement should include Social Security
By THOMAS G. DONLAN
The Right Stuff
Now that our fiscal statisticians say we have a chance of paying off the national debt,
we should consider what the national debt really is.
It's much bigger than we usually think:
It consists of:
the overt debt, in the form of bonds held by citizens;
the covert debt, in the form of bonds held by government trust funds;
and the unacknowledged debt,
=========================
mostly in the form of the
government's promises to Social Security recipients,
Medicare beneficiaries and its own future pensioners.
The total is way beyond anything that 10 or 12 years of projected
federal surpluses can ever erase.
Federal finance is not actually confusing; it's overwhelmingly simple.
Federal accounting is strictly on a cash basis, using a fiscal system that
would endanger the financial stability of a mom-and-pop candy store.
The only differences between Uncle Sam's candy store and one in the real world
are that Uncle Sam can force his customers to pay any price for his services,
and that if that's not enough he can (so far) borrow as much as he wants, whenever he wants.
Debt held by the public stands at about $3.4 trillion.
Debt held by trust funds and other government accounts add $2.2 trillion.
Estimates of contingent liabilities run about $10 trillion for Social Security,
$5 trillion for Medicare and another $5 trillion for an assortment of government insurance programs
and loan guarantees for housing and other things.
Current policy pays off debt held by the public
while piling up debt to the Social Security trust fund and other similar accounts.
On top of that mistake, the government completely ignores its contingent debts.
If we are going to talk about trying to reduce the national debt,
we should treat all the debts alike.
Securitizing Social Security
To make a start on the contingent debts, we can combine a payoff
with Social Security reform by giving every participant in the government's old-age
benefit program a stack of postdated checks on the U.S. Treasury.
Each would represent the monthly Social Security payment each citizen
would be entitled to after age 62, based on earnings up to a certain date, such as January 1, 2003.
The stack of checks would carry the full faith and credit of the United States,
and their value would be acknowledged as federal debt.
Each check would also have a special peculiarity:
Any check dated after the eventual death of the original recipient would expire worthless.
Since Social Security benefits are indexed to inflation, and since that feature
is one of the most valuable parts of the Social Security promise,
these check-bonds would also be indexed, using the same process
as current inflation-protected Treasury bonds.
But they would not pay any other interest.
Each check would be an inflation-adjusted zero-coupon bond.
Although the check-bonds could not be cashed until the dates specified,
they still would be as tradable as any other Treasury security.
Any Social Security participant could sell his benefits on the open market
at a discounted price that would reflect the time value of money, prevailing interest rates,
the market's estimate of future inflation, and the life expectancy of the original beneficiary.
But the only use to which the participant could put the proceeds would be to make
a deposit into a rollover IRA providing for his personal retirement income.
Mutual fund companies, life insurance companies and banks would find
compelling reasons to invest in such extra-long-term, inflation-protected securities.
They would compete vigorously for participants' business.
Investment bankers would also bundle purchased check-bonds into
multi-million-dollar packages, slice and dice them like mortgages and sell tranches to big investors.
The Treasury itself would enter the markets for check-bonds and for
securitized packages of them, using its spare cash to retire that form of
the national debt in the same way that it currently retires bonds notes and bills held by the public.
Paying Off
Although it would add $10 trillion to the recognized national debt
and more than triple the sum we admit we owe, the benefits of the plan are clear:
Every Social Security pensioner and working participant would receive
a Treasury security bearing the full faith and credit of the United States
in exchange for the much less reliable promise that Congress
will continue the Social Security program indefinitely.
Most participants still do not understand that their benefits are not guaranteed;
===============================================================
this plan would give them the security they imagine they already have.
Many participants would acquire retirement savings accounts that
would be their personal property to replace illusory Social Security accounts.
They would become instant capitalists, responsible for providing for
their retirement and provided the means to do so.
The nation would have a clear accounting of its biggest contingent liability.
It would know the market price of buying back all its debt and
it would know whether projected surpluses are indeed going to be
big enough to see it through the financial stress caused by the retirement
of the Baby Boom generation.
The world financial community would continue to have a tradable supply of
U.S. Treasury bonds, which it currently uses as a proxy for a theoretical "risk-free" security.
We cannot be sure how current plans to retire all bonds, bills and notes
held by the public would affect world markets, but we are reluctant to undertake the experiment.
It would be the end of Social Security as we know it,
========================================
ending the threat posed by the most likely 2lst century financial disaster.
====================================================
Ending Social Security, however, would not end the need
to provide for those incapable of providing for themselves.
Congress would have to enact a new retirement program with
a government minimum benefit, but this time it could be one
based on common-sense capitalism.
For that new program, we also have a suggestion.
Let the government endow every child born in America with an Individual Retirement Account,
funded the first year with a $2,000 gift from Uncle Sam.
Parents with adequate means would be required to fund it each succeeding year
until the child reaches age 18, while the government would continue to make deposits
for those parents below a selected income level.
Even if a child never made another deposit on his own, the tax-deferred compounding of interest,
dividends and capital gains on his $36,000 would grow to a nest egg adequate
to treat him to a better retirement than the Social Security minimum now provides.
As with any plan that attempts to pull the United States out of the financial hole
that two generations of politicians dug for it, this Social Security reform plan will be expensive.
But the expense has already been incurred invisibly by the people who made the promises.
This plan would accrue and acknowledge the Social Security debt so we can deal with it honestly. |
