Monday, March 11, 2013

On Senator Ron Johnson Vs Krugman




Paul Krugman had another of his nasty moment on TV Sunday when he took on Senator Ron Johnson (R, WI) (ABC -Link). The topic was Social Security. I want to throw my two cents into this fray.


Senator Johnson made the comment:


Social Security is in danger of “going broke” unless action is taken. “When I hear people saying Social Security is solvent to the year 2035, it’s not.”


Krugman fired back with:


Your facts are false. The Social Security thing—Social Security, it has a dedicated revenue base, it has a trust fund based on that dedicated revenue base. You can’t change the rules midstream and say, ‘Oh well, suddenly the trust fund doesn’t count.’ ”


Is SS going broke as the Senator claims? Or is Krugman right, when he says that SS is solid because it has a big Trust Fund?


There is not much ‘out-there’ on this topic that could could convince either side. You have the vast majority of the conservative thinkers/writers who have concluded that the SSTF is a sham, and you have all of the progressives who see it in precisely the opposite light.

I would like to use two credible sources on this issue in an attempt to determine who’s correct. The Office and Management and Budget (OMB) has opined on this, so has the Congressional Research Service (CRS). I think these sources are as credible as can be had. The CRE is supposed to be apolitical, while the OMB is decidedly political. The following information from OMB comes from 2010, a period when Peter Orszag was the boss at OMB. Given that Pete was running the show, one would have anticipated  a Populist ‘spin’ from OMB on the question of TFs; not the case at all.

Neither OMB or CRS have said anything relevant regarding the Social Security Trust Funds. The observations were made regarding the Trust Fund for the Federal Employee Retirement Fund (FERS). I’m not going to spend a 1000 words convincing you that FERS = SS. (But if PK asks me to, I will). They are very similar entities, they collect revenues, they invest surpluses in Special Issue Treasury Securities and they make benefit payments to covered workers. 


CRE had this to say about the TF for FERS (Link):


The assets in private-sector pension funds represent a “store of wealth” that firms can use to meet pension obligations as they come due. The CSRDF, however, is not a store of wealth for the federal government.


Got that PK? The CRE says there is no wealth (aka money) in the TF:


The OMB  provides more clarity on TFs. From the Budget of the United States Government, Fiscal Year 2010: Analytical Perspectives (Link)


Balances in the trust fund are available for future benefit payments and other trust fund expenditures, but only in a bookkeeping sense.


Ah! There is no money in the TFs. They are bookkeeping entries. OMB concurs with CRE – TFs are not a store of wealth. More:


The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits.


How many ways does OMB have to say this to convince PK? Another:

The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.


Is this getting through to progressives like PK? This is not the tin hats talking PK. This is your “guys”.


Senator Johnson made the statement that the SSTF accounting was similar to a person who writes themselves an IOU for $20, and then somehow believes he actually has an asset. PK objected. This is what the OMB has to say about it; no wiggle room for PK with this:


These trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the Government as a whole.


Got that PK? The Senator was correct. Writing an IOU to oneself nets to zero. If the OMB was the arbiter of the TV debate, it would have said that the Senator had the facts, and Krugman was blowing smoke.

Krugman, on the other hand, is claiming victory. He still believes that the SSTF has real fairy dust in it. He maintains that he alone has the facts. In his typically snarky manner:: (Link)


I have to say, it’s extremely telling that conservative Republicans don’t seem able to make their case without resorting, right from the beginning, to obviously dumb fallacies.


Who’s right? PK or the Senator? Which side is suffering from “dumb fallacies?” This is a critically important point to resolve. Either we continue to live in PK’s fantasy land, or we recognize that SS is a here-and-now issue. There is no middle ground. One side or the other is “right” on this one. For the US, it’s a make-or-break issue.



Where did the ‘money’ go that PK thinks is available today? It was spent years ago.

The ‘economic miracle’ of Bill Clinton was bought with money looted from SS. Bill sucked out $565b in his eight years. No one even noticed.

George Bush really raided SS. A total of $1.5T leaked out during his years. Who ‘paid’ for Iraq and Afghanistan? SS did.

If anyone is upset about the status quo, they can point to either a Republican or a Democrat. They’re equally to blame. But looking backward, and laying blame, is a fool’s game. The fact is the money is gone and SS is Paygo today. It’s running big annual deficits. SS will produce $75b of red ink in 2013 (equivalent to 10% of the deficit).  The deficits will pass $100b in 2016 and explode from there on. The beast is howling – and Krugman thinks it’s his cat purring.









  1. “Ah! There is no money in the TFs. They are bookkeeping entries.”

    Everything is just bookkeeping entries, including in the corporate world. The relevant question is, do the entries represent a promise to pay or not?

    • Calvin Harris says:


      a promise with an asset is not the same thing as a promise with nothing but blue sky behind it.

      • But when the promise was made, it was in terms of special draw treasuries. Treasuries are supposed to have the full faith and credit and taxing power of the United States behind them. You can argue that there were “no assets”, but the same thing would apply to treasuries. Can the government decide to default on treasuries? Sure. But there are constitutional and many other serious ramifications.

      • I think your point is not correct here. Which asset can you think of which conveys future consumption through time and space? The only way to be sure of the delivery of a physical commodity at a fixed price is to buy it and store it. Not really feasible when it comes to food, unless you like tins. Pretty tough when it comes to electricity. And a real pain when it comes to future nursing care, unless they let you buy people again.

        So speaking of promises. Lets take a look at some others. US Treasuries? Are they promises with assets or promises without assets?

        US dollars? Promises with assets or without?

        I think DRW is right. The question is which promises do we wanna keep. Me, Im ok with lots of old people eating cat food. Screw them. Why should young people pay for retirement benefits old people voted for but didnt pay for? My worry is the old people concerned will change their mind when they open their first tin of kitty cat and dont fancy it. I know, I know. They should have put more away in the 401k. They shouldnt have selected Enron as their main holding, and they shouldnt have voted for Bill and Dubya. But they did and now they are doomed to cat food. How do you think they will feel about that?

        • Wait a minute Harry. I certainly agree that the young should not be stuck with the debts of their predecessors but let’s not lay the blame on “old people”. These outrageous deficits and the consequent accumulated debt is largely a result of unfunded spending on wars and bailouts that the population did not support. Let’s put the blame where it belongs. On those who planned or allowed or supported these expenditures for their own benefit. Call them the military-industrial complex (should add the FIRE group to that) or the ‘power elite’. The current structure of government allows the elected officials and top bureaucrats vast benefits for accommodating the desires of those who benefit from the unrestrained appropriation and spending by the government, through the exercise of power and influence, the opportunity to participate in the revolving door between the regulators and the regulated, etc.
          One has only to review the treatment of the Ron Paul camp to understand that no candidate who presents a threat to the continued centralization of power, let alone the status quo, has the least chance of being successful. Your vote counts for shzt. There is no serious difference between the warfare/welfare party (Republicans) and the welfare/warfare party (Democrats). The electorate is given false choices which mean nothing. At this stage all one can do is refuse to participate, in order to avoid giving any legitimacy to the (preordained) results (ie only a status quo supporting candidate can win, regardless of which party).
          We will have to see how obvious the insolvency of the country has to be before the paradigm fails and is rejected. This could take a long while yet: “There is a great deal of ruin in a nation. – Adam Smith”. It may yet take additional futile or lost wars on top of the more conventional economic ‘errors’.

  2. a different tom says:

    Had a “discussion” with someone over the weekend on this very point and they finally conceded that yes, the $2.5+T trust fund will start getting “converted” from internal debt to external debt. Their conclusion was “Meh, spread over the next 10-20 years this represents a relatively small amount of additional debt. After most of the baby boomers have died off things will get back to ‘normal’.” What do you think? Does the guy have a point?

    • nuttin' honey says:

      Not so sure about getting back to normal. It’s not like there won’t be any more old people. The baby boomers are a spike but not that big of a spike. The real question in any ponzi scheme is, ‘Are there more people entering the system than there are leaving the system?’ The US seems to be holding it’s own as opposed to Europe, Japan and China. You would have to ask an expert on population demographics to determine if we ever get ourselves out of this hole. My guess is maybe but not for several generations – much longer than you would expect. An interesting read is, Fewer: How the New Demography of Depopulation will Shape our Future, by Ben Wattenberg

    • That is the point. It is not just SS it its TF. FERS is part of the problem too. The total TF is today about $4.7T. All of that plus another Trillion in interest has to be paid back in the next 16 years.

  3. nuttin' honey says:

    It is too bad the senator was not as well equipped with the information that Bruce has given us. That is at least part of what is wrong with our politicians, they are over-employed and under-informed. I guess one rhetorical question might be, ‘Does anyone REALLY know anything about anything, and even if someone did know something about something, would you trust them?’ That too far along the epistemology path, so to simplify and with respect to this post: do I trust a politician or do I trust an economist? Hmmmm.

  4. But What Do I Know? says:

    It might be more helpful to think of the paper in the SSTF as “IOMe’s” instead of “IOU’s”. After all, the federal government is borrowing the money from itself. And by calling them IOMe’s, it should become obvious that their value depends on the ability/willingness of the government to redeem them with money it gets from somewhere else (self-created or othewise).

  5. Calvin is spot on.
    Just because there is a promise to repay does not mean the promise is backed by a tangible asset.
    Rather, it is backed by an intangible asset, goodwill, the full faith and credit of the U.S. Government.
    What does that mean?
    It does not nean the promise is a s good as gold , for we print our own currency and are the world’s currency.
    It means something more concrete and solid, such as our dollars are worthwhile, for the revenues are a high percentage of our expenses.
    With deficits per year running about 30 cents for every dollar of revenue, I would say honoring our faith and credit is suspect.
    Don Levit

  6. Bruce is correct almost to the last word and then his footnote says that Clinton and Bush stole and squandered the money in the SS trust fund. But given the central premise of the article, that the trust fund is just an illusion, it hardly makes sense to write that this illusion was stolen and squandered. It was never there, so the theft, too, was an illusion.

    Oh, yes, Clinton and Bush did use accounting tricks with the trust fund to disguise their deficits, but that is not quite the same thing as stealing something of value from the old folks.

    Every governmental expenditure must be drawn from producers either at home or abroad. Whether it is offset by a tax, or a bond or just a newly created dollar is immaterial. In this sense the supposed value of the SS trust fund was, indeed, stolen but it was stolen, when the government created the special bonds which it first placed in the so-called trust fund.

    The only alternative would have been to create a fund of true assets, but that would have meant government ownership of those assets, i.e., communism. Now the government simply has a tax claim on private assets. This might seem to amount to the same thing, but at least private entities do manage the assets until the tax claim is exercised.

    Perhaps a gold standard would allow the government to hold an asset of value, gold, without acquiring ownership of the means of production.

    • There was a true surplus in the Clinton and Bush years. Real money – not phony IOUs. The government took that money and spent it and then issued these IOUs.

      What if that ‘real’ money had been converted into something that had real tangible value OUTSIDE of the government. If this surplus had been converted to gold back then (or even stocks) , I would not be writing about this today. There would be no problem with SS.

      • They took real money out of my paycheck for over 50 years, they even moved the goalposts for future retirees. Glad to see it acknowledged that the money was used for other ” priorities” like the Cheney wars. Here’s how to solve everything: end the forever wars, get our troops the out of all the hellholes around the world, and cut the Pentagon budget accordingly, so that it’s an actual “defense” dept. instead of the meddling in other countries business dept. Who gives a shit if North and South Korea blow each other up? Same for the Middle East; they’ve been at each other throats since the time of Moses and they’ll be that way right up to the end of the world. In the meantime those of us who did save for retirement are getting screwed by Uncle Ben’s ZIRP and actually need the SS money taken from our paychecks for all those years.

  7. Holy smokes!

    Some of the narrow minded idiocy on this topic blows my mind.

    Just because the fund was “raided”, that doesn’t mean that there is no obligation to refill the till. If doing that results in issuing more fiat debt, then so be it. This country is doomed anyway, so might as well keep dancing while the music is playing.

    I could extrapolate this same “the money is gone” BS to Treasury bills, bonds, notes — If I buy a bond, my money is “gone”….so I guess the UST has no obligation to pay me back


    Give me a break

    • nuttin' honey says:

      Not exactly the same Trader. The government can, and probably will, stiff future SS recipients; after all they are “only” lowly US citizens. It would be a different story defaulting on US treasuries, notes or bonds, 60% of which I believe (without looking it up) is owned by foreign governments. The bond holders will get screwed in the end, but only if everything else has gone toast first. And I don’t think we really want to be around in that scenario.

    • Does the debt we owe to China ever get paid back? No. It is rolled over, it is never paid back, Only the interest is due. But the principal on SS IOUs has to be paid back in full. It is a very different form of debt. Much more problematic.

      • That is kind of interesting. I would be happy with an interest payment on what I have contributed to SS. I don’t ever expect to get back what I put in – those gravey-days are gone.

  8. Inter-agency debt represents cash collected by that agency at some time in the past, withdrawn into the general Treasury, and spent. Government bookkeeping leaves a note in the form of special bonds which the Treasury promises to pay back in the future. All such payback would require funds from taxes, borrowing from the public, or monetary inflation by selling bonds to the Federal Reserve.

    For example, the Social Security Trust Fund is inter-agency debt. The special, non-marketable, Treausury bonds in that fund represent the SSec taxes collected over time in excess of immediately required distributions. These days, about $50 billion more is being paid out than received in SSec taxes. That is, $50 billion in trust fund bonds are being presented to the Treasury for repayment each year. The Treasury repays with cash derived from current taxes and borrowings.

    The SSec trust fund is about 2.7 trillion in these special bonds (political promises). But, this fund is not directly related to the liabilities (promises) of SSec in the future.

    A Payroll Tax Increase would pay for government’s promises on Social Security and Medicar
    05/15/09 – Forbes by Bruce Bartlett [edited]
    === ===
    Social Security’s unfunded liability in perpetuity is $17.5 trillion (the trust fund is meaningless [See the article -AMG]). Social Security would need that much money today, [real resources] in a real fund outside the government, earning a true return [3%] to pay for all the benefits that have been promised over and above future Social Security taxes. We don’t have that fund. Alternatively, the payroll tax rate would have to rise by 4 percentage points [from 15.3% to 19.3% of payroll].
    === ===

  9. Social Security’s Sham Guarantee
    05/29/05 – Cato by Michael D. Tanner [edited extract]
    === ===
    Social Security benefits are not guaranteed legally because workers have no contractual or property rights to any benefits whatsoever. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that Social Security taxes are not contributions or savings, but simply taxes, and that Social Security benefits are simply a government spending program, no different than, say, farm price supports. Congress and the president may change, reduce, or even eliminate benefits at any time.

    As a result, retirees must depend on the good will of 535 politicians to determine how much they will receive in retirement. And what could be less guaranteed than a politician’s promise? In fact, Congress has voted to reduce Social Security benefits in the past. For example, in 1983, Congress raised the retirement age.
    === ===

  10. Andrew:
    You bring up an important point.
    There is a distinct difference between taxes used to pay for SS benefits and contributions from individuals and companies to buy Treasuries.
    Taxes are used for the general welfare, and cannot be tied to specific benefits.
    The FICA contributions go to the Treasury’s general fund, not the SS trust fund, and are indistinguishable from other taxes.
    Contributions to Treasuries are tied to specific benefits and are an explicit liability of the federal government, the highest of 4 levels of liabilities.
    So, in response to Trader Joe, there is a distinct difference in Treasuries, and the obligation the government has to make good on its promises.
    Just because the general public may not be aware of these differences, does not change the strength of the obligation for the government to fulfill its promises.
    Don Levit

  11. Andrew:
    So.. All Bernie Madoff has to do is convince the Supreme Court that the money he received was just another tax?

  12. The discussion wanders off to a consideration of what pecking order the defaults ought to take, assuming the breakdown of the “Full faith and credit” of the Federal Government takes an orderly, legalistic, formally “correct” path. Whether this occurs, or rather rioting, insurrection, blood in the streets, and bodies, (probably the wrong ones, once the mob gets going,) only time will tell. But for now we can just say, the Senator was correct, and Professor Krugman is a lying gobshite. (Pardon my Irish, but I worked eight years in Dublin.)

  13. I thought taxes would be an asset,say like a utility bond issued by a municipality.

  14. Zorba The Greek says:

    Krugman’s nobel prize in economics is worth about as much as
    Obama’s nobel peace prize. (not capitalizing nobel intentional)

  15. I don’t think this addresses the issue. Perhaps the government did run a surplus some years ago. Exactly how could this have been carried forward to make benefit payments today? Obviously, the government would have had to have bought some real asset back then, held it for a period and now be selling it. Since you understand that treasury bonds are not real assets in the hands of the same government which issues them, that leaves stocks, corporate bonds, real estate, foreign currency and gold. If the government invests in private firms they cease to be private and we have a form of communism. If the government buys real estate, same thing. And selling those assets back to the citizenry only means that the government reacquires its own paper dollars which we agreed do not constitute real value anyway. Foreign currency will work in theory if it can be sold to acquire something of value from other countries, but what if they choose to renege via devaluation?

    The crux of the matter is that old folks demand more services today than they provide today but one cannot simply take their “surplus” services from earlier years and redeem into services today. Rather the services they require must be rendered by younger people today in real time. An individual may “save” by acquiring a store of obligations from other individuals but the economy as a whole can only “save” by acquiring obligations from those (foreigners) outside itself. Getting those pesky foreigners to pay up to support our old folks can be a bit dicey especially if their own economy has the identical issue.

    Perhaps some young nations will agree to furnish the necessary services and consumption goods if we just give them our country piecemeal in return. Oh, wait, strike “perhaps” and change “if” to “as.”

  16. The Founders believed government to be inherently untrustworthy based on historical experience. The Inheritors believe the opposite despite all contemporary experience.

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