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I see that no less a figure than Paul Krugman has now taken two cracks at the clawback issue, eliding the issue of the Trust Fund default which Kevin Drum semi-questions. I think liberals are offering Bush too much benefit of the doubt on this subject, making cute suggestions that the White House press corps ought to try and demand a straight answer, etc. Here's the case.

The White House is now emphasizing that private accounts do not, alone, constitute a solution to whatever Social Security's problems are. The White House has repeatedly defined Social Security's move into cash flow imbalance starting in 2019 as the problem. One can dispute whether or not this is, in fact, problematic. It is clear, however, that it only is problematic if you think there's something problematic about paying the money back. We should, therefore, take the president at his word and assume that when he proposes unspecified benefit cuts large enough to bring Social Security into balance he means cash flow balance, which means trust fund default. I note that the major idea floated by the White House -- price indexing of all benefit calculations -- is a bigger-than-necessary cut if you use trust fund accounting. I also note that the clawback provision in the private accounts isn't properly motivated unless you assume the program to be in cash flow balance.

Last but by no means least, Jacob Sullum wrote a column which advocates defaulting on the Trust Fund debt ("[S]ince this fund consists of IOUs from the Treasury, the relevant date is 2018, when benefits promised to retirees will start exceeding payroll taxes and the system will begin running a chronic annual deficit . . . higher [income] taxes . . . Social Security's fiscal crisis begins in about a dozen years, so the focus on 2042 is misleading."). This column received a response from House Republican Conference Director Greg Crist who called it "a great article" and then complained about Sullum's use of the term "privatization." If the House GOP had some kind of objection to Sullum's view that the cash flow deficit is the problem Bush is planning on addressing, they had an ideal opportunity to do so. So, yes, a reporter should ask Bush about this. But until the White House offers some kind of credible, explicit denial, liberal bloggers and pundits ought to assume that the White House understands the implications of their words and is, in fact, planning on not repaying the money.

February 4, 2005 | Permalink


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» Defaulting on the SS Trust Fund from Freiheit und Wissen
...The word going around is that Mr. Bush plans to default on the SS Trust Fund... [Read More]

Tracked on Feb 5, 2005 12:27:00 PM


Just so we all understand where the trust fund has come from, it's worth noting that the entire trust fund surplus is a result of the 1983 SS deal that raised taxes on low and middle income taxpayers.

All figures are percentages of national GDP:


9.2% Income Tax Receipts
6.2% SS Tax Receipts



6.7% Income Tax Receipts
6.7% SS Tax Receipts


So we can see that the trust fund surpluses have enabled a significantly lower income tax burden, which is heavily weighted toward rich taxpayers, of course.

And, of course, the whole point of the Bush gambit is to avoid the explicit point of the 1983 deal, that income taxes will have to cover the burden again in 2018, after a 35 year tax holiday.

Posted by: Petey | Feb 4, 2005 5:11:19 PM

Shrub has already defaulted on a balanced budget right now. I don't know why the rest matters....

Posted by: AlGore | Feb 4, 2005 5:13:40 PM

I think the SS issue is just a smoke screen or a trojan horse. The White house does not care about fixing a system for the average american.
All they want is to find enough people to agree that there is a need to fine tune thing, one of them could be to have a "New generation of saving accounts". This is exactly what wealthy Bush supporters want, an other why to avoid taxes. These account like the 401K's would be barely used by the average american but would once again lower the marginal tax rate of the richer.

Posted by: remi | Feb 4, 2005 5:15:52 PM

And I've said it before and I'll say it again. The word "clawback" is one of the greatest gifts the administration could have possibly handed us, short of calling their plan the "Make Granny Eat Dogfood Act of 2005".

Posted by: Petey | Feb 4, 2005 5:17:09 PM

"I think liberals are offering Bush too much benefit of the doubt on this subject, making cute suggestions that the White House press corps ought to try and demand a straight answer..."

Trying to get the WH on the record with a straight answer about trust fund default is not "offering Bush too much benefit of the doubt". It's simply good politics.

Take what is politically unattractive about the Bush plan, and make them defend it.

Posted by: Petey | Feb 4, 2005 5:21:06 PM

Well -

Now that we know Bush plans to default on the Trust Fund,

What is the wording that makes it the most unpalatable to the marginal voter?

Is "stealing" too shrill?

"Breaking the promise"?

Posted by: Barry Leopold | Feb 4, 2005 5:22:01 PM

Bush quite clearly wants to see a default on the general fund obligation to pay back the trust fund in favor of preserving his tax cuts. The funny thing about this is that this cannot occur until ten years after he has left the presidency. The thing that exercises me is that this is money I paid into the trust fund with the promise that it would be available to support me.

Posted by: Bob H | Feb 4, 2005 5:27:58 PM


There's this episode of this show called Family Guy where Stewie is at a baseball game and catches a fly ball. The kid next to Stewie asks Stewie if he will trade the ball for his baseball bat. Stewie agrees and trades the ball for the bat. Stewie then beats the kid with the bat and steals back the ball.

Assuming the GOP really is trying to screw the Chinese (and various other foreign holders of debt), it would explain why they want to spend that debt on military build-up. After all, all them foreigners should be grateful that we defeated communism and terrorism and maybe another ism by then, and should accept that the money they loaned us was really spent on their defense. Just like Kuwait should have realized that the $14 billion in loans to Iraq was spent in their defense from Iran.

Posted by: TheJew | Feb 4, 2005 5:29:44 PM

And now that it seems clear that piratization depends on defaulting on the Trust Fund, we all need to start asking the question: why the hell should we pay that extra 4% enacted in 1983 from this minute forward? A default in 2019 means that we will get the shaft for 14 more years.

Posted by: Nat | Feb 4, 2005 5:32:45 PM

"Breaking the promise"?

How about "Breaking Reagan's promise"?

Posted by: Paul Callahan | Feb 4, 2005 5:34:42 PM

"Bush quite clearly wants to see a default on the general fund obligation to pay back the trust fund in favor of preserving his tax cuts."

Quite clearly to those paying attention, but it's still a good idea to keep asking the questions necessary to get the administration to defend the scheme out loud.

Posted by: Petey | Feb 4, 2005 5:34:44 PM

Some googling reveals Kos beat me to it. Referring to the SS trust fund as the "Reagan Trust Fund." I like it!


Posted by: Paul Callahan | Feb 4, 2005 5:36:25 PM

We can pay out the proper benefits to Social Security retirees AND keep the tax cuts. All the governmetn needs to do is sell off some of that federal land. The government owns more than half of Nevada, for example. Let's start selling it to private interests - but at fair market value, not at sweetheart prices to the well-connected.

Posted by: Glaivester | Feb 4, 2005 5:38:01 PM

"Breaking Reagan's Promise"

"Raiding the Ronald Reagan Social Security Trust Fund"

Using the "Reagan Trust Fund" to pay for the Bush tax cuts.

Sounds pretty good to me. What do you think Matt?

Posted by: Barry Leopold | Feb 4, 2005 5:45:15 PM

Say there is a small town. 100 people in this small town are going to retire in 20 years. The town government is doing all their savings. The town annually collect taxes for those savings (S), and also needs to pay for current expenditures (E). The town doesn’t actually invest money equal to S but rather creates “bonds” equal annually to S; these bonds constitute promises to pay the retirees in the future. So, while its annual expenditures are E, because it collects taxes equal to S for the retirees, it lowers other taxes by S, i.e., it collects E - S annually in other taxes. (This assumes away other borrowing, which would complicate matters without changing the conclusion.)

Once the 100 people retire, the town will need to pay normal expenditures E and pay the retirees their retirement, 100 x R. So taxes will need to be E + 100 x R. BIG problem.

Say 10 retirees opt out, and save their own money. Therefore, taxes need to be E + 90 x R. Less of a problem.

There is no need for paranoid fantasies about defaults to understand any of this.

I hasten to add that the more I read about Bush's plan the less I like it, but for other reasons.

And Petey, “clawback” is a perfectly normal word long in use.

Posted by: ostap | Feb 4, 2005 5:47:28 PM

I can remember back in 1995, during the government shutdown battles between Gingrich and Clinton, when some Republicans seriously threatened to vote DOWN the increase in the debt limit and thereby default on a portion of the national debt.

The shere insanity of such a proposition is self-evident: our fiscal worth is entire based on good will. If we default then why would ANYONE do any business in dollars ever again?

Even SUGGESTING such a think should be grounds for stripping someone of any political power whatsoever.

(Note: this is a different from a country that is already in severe fiscal straights doing something similar. It's one thing for a third world basket case to default. It's another thing for the world's financial super power to do it.)

Posted by: Chris Andersen | Feb 4, 2005 5:47:33 PM

"And Petey, “clawback” is a perfectly normal word long in use."

I wholeheartedly agree that "clawback" is a perfectly normal word. So is "privatization". And so is "rapacious". I hope the WH uses all three in their SS destruction efforts.

Posted by: Petey | Feb 4, 2005 5:59:45 PM

"There is no need for paranoid fantasies about defaults to understand any of this."

No paranoid fantasies necessary. The WH is being quite explicit that one of the "problems" they are trying to solve is avoiding the redemption of the trust fund treasury bonds and the resultant pressures on the general fund.

"I hasten to add that the more I read about Bush's plan the less I like it, but for other reasons."

No matter where you stand on the ideological spectrum, you can say the same for any "policy" on any subject coming out of this WH.

Posted by: Petey | Feb 4, 2005 6:18:20 PM

Steve Sailer quotes a reader's interesting take on bushimus Maximus.

Essentially, Bush sees himself as the new FDR, but will give more welfare to the rich.

As I say on my blog, that is all.

Posted by: Glaivester | Feb 4, 2005 7:06:17 PM

Guess what! The government will have no choice but to default on its debt. I think the plan is to print dollars, valuation be damned, and get your hand on the spigot that controls the flow of the last remaining cheap oil on the planet.

Resource control is the name of the game.

Posted by: brisa | Feb 4, 2005 7:43:31 PM

I think you are exactly right about this. My friend at The Ward Report has been making this point for at least a couple months.

It good to see it is finally getting wider attention.

Posted by: Jake | Feb 4, 2005 7:49:00 PM

Isn't it clear that Bush doesn't plan to do anything? Not only will Bush not be in office, but he will have been out of office so long that it would be difficult to blame any difficulty in paying off the debt on him. Or for his supporters to credit him with solving the "crisis."

Whatever law is passed, whatever policy is adopted, it will not bind the Federal government to do anything. Whoever is in power in 2018 will decide what happens. And I highly doubt that they will decide to default on the national debt, even if it is only on the portion owed to SS. Can you imagine a logic that says we should default on debt owed to retirees but not on that owed to Japan and China? Do you think financial markets would buy it?

I can't foresee the question being put to the President, or one of his flunkies, and being answered in the affirmative. That Bush may talk about pressures on the general fund is just a way of still implying that his "plan," whatever it actually is, has some bearing on the solvency of SS. One can talk all one wants about Reagan's promise, about some implicit deal made in 1983, but it's an empty promise, since Reagan could not, and Bush cannot, bind future American leaders to a course of policy, unless there is a constitutional amendment.

If people want to keep their eyes on the ball, it's still about transition costs. Transition costs will either result in greater annual deficits, or in higher taxes. And they will do so as soon as any privatization plan is implemented. That is far more likely solution that a default on the debt. Of course, such consequences would have political costs (probably negative ones) for whoever has to deal with the mess. Since the plan would start in 2009, it wouldn't be Bush, so he can honestly say that he cannot decide how the transition costs would affect the country's fiscal policy. It won't be his decision. And a total evasion of responsibility.

Posted by: Phil | Feb 4, 2005 8:00:57 PM

ostap wrote:
'Say 10 retirees opt out, and save their own money. Therefore, taxes need to be E + 90 x R. Less of a problem.'

Yep, I think everyone gets that. The one bit you leave out of your discussion, however, is that those 10 retirees opt out BEFORE they retire, which means they are contributing some amount, P, to their private accounts before they retire. Which means that the government is actually collecting (E-S) - 10*P annually right now. Which means that the government must either cut expenditures or raise taxes NOW, or issue more bonds and generate more debt.

We all know Republicans won't raise taxes, and Bush has been vague about where he's going to cut spending. Given his track record of the past four years, more debt seems to be the likeliest alternative.

And given that privatization advocates keep talking about 2018 as the year the 'crisis' begins, rather than 2042, it's no paranoid fantasy to entertain the possibility that the Republicans don't intend to make good on that debt. Especially when you hear conservative pundits repeatedly insist that the Social Security trust fund -- that is, the pile of bonds issued to pay for the war, tax cuts and so on --- doesn't really exist.

Posted by: edwardpig | Feb 4, 2005 8:05:37 PM

A few questions: The new cure for all financial security seems to be to invest in the stock market. First IRAs for retirement, and 401Ks. Then Medical Savings accounts to help the insurance companies. Now private SSI accounts that moves the SSI taxes into the stock market.

This is a huge flow of investment into a limited choice of investment options. Wouldn't the result be an unstable ballooning of stock prices compared to the actual value of the businesses being invested in?

This would be a government controlled program. They would have to apply a criteria, or a filter, to your choice of investments for your "private account." This implys a federal power to favor corporations who are sympathetic to government policies, and to fiscally punish other corporations for undisclosed reasons. Is this constitutional?

Posted by: Yondertree | Feb 4, 2005 9:23:28 PM

I have little hope that this will actually be read, but here are two questions that I haven't seen asked yet:

1). Does Congress, the White House, or the Department of the Treasury actually have the legal power to simply default on T Bonds?


2). Has anyone given any thought to what the holders of the remaining $5.2 Trillion worth of T Bonds will do should the Administration go ahead and void the Bonds in the SS Trust Fund?

I have no answer for the first (I strongly suspect no-one has this authority at present, barring some act of Congress), but as to the second...

Posted by: Joseph Connell | Feb 4, 2005 9:45:25 PM

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