Tuesday, November 08, 2011

Newt on the Trust Fund

The other night I watched part of a CSPAN televised "debate" between Newt Gingrich and Herman Cain. On the topic of Social Security, Newt straightforwardly acknowledged that the trust fund has real assets, that it holds a couple of trillion dollars of interest bearing government bonds, and that there's nothing inherently wrong with that. Since Newt's mouth often runneth over in unfortunate ways, it was nice to see him being sensible, especially at a time when so many know-nothings claim that Social Security is broke or that the trust fund has been raided. Bravo, Newt!

Newt's main criticism was that the trust fund encourages lawmakers to engage in more deficit spending than they otherwise would. His reasoning is that trust fund surpluses have been used to mask general fund deficits, giving the illusion of greater fiscal health than is warranted. He suggests moving Social Security's funding completely off budget so that there's no possibility of confusing it with the rest of the budget.

It's important to note that such a move would be but a psychological ploy, and Newt essentially admits as much. It's really just about how the annual budget deficit (or surplus) numbers are stated. Apparently Newt thinks a less misleading presentation of the numbers could encourage greater fiscal discipline. But nothing else would be different. And the proposal strikes me as much ado about nothing, for several reasons.

First, I doubt that lawmakers actually think much about the annual budget deficit, however it is presented, when making spending decisions.

As I have mentioned elsewhere, what matters is not the deficit but the debt, and the two are not the same thing. The debt is unaffected by whether or not payroll tax revenues are included when the annual budget deficit is stated. And even if Social Security provides deficit cover, lawmakers still need to periodically raise the debt ceiling to increase the national debt; the debt, more than anything, indicates the true state of the nation's finances.

In any case, the trust fund has recently gone "cash negative," and thus payroll tax revenue no longer masks the annual budget deficit. If anything, it makes the deficit appear worse than it really is.

So, Newt's proposal wasn't especially compelling, but his acknowledgment of the trust fund's solvency was significant, coming from a presidential candidate of the flat-earth party. Newt needs to go explain some things to his Republican buddies.

Copyright (C) 2011 James Michael Brennan, All Rights Reserved