Rivlin's Wrong

In a New York Times panel discussion on making changes to Social Security, budget expert Alice Rivlin makes a rookie mistake.  Given her long and distinguished service working, both inside and outside government, on matters pertaining to the national budget, she should certainly know better.

Here's what she said:

Social Security currently adds to debt, because it pays out more benefits than it receives in taxes. While it accumulated credits when the higher ratio of workers to retirees was bringing in excess funds, Treasury has to borrow to redeem these credits.

The "credits" Rivlin refers to are otherwise known as "bonds".  The Social Security Trust Fund has been, by design, running a surplus for decades.  That is now changing, exactly as anticipated. Because the Trust Fund's surplus was loaned to the government, the Trust Fund's assets consist of special issue, interest bearing, government bonds. These bonds are officially and openly part of the national debt (around $2.7 trillion of the approximately $16 trillion national debt consists of debt held by the Social Security Trust Fund), alongside Treasury bonds held by the public that are bought and sold in huge quantities on the financial markets every day.

Yes, the Trust Fund's bonds must be redeemed to pay Social Security benefits.  And yes, when the Trust Fund cashes in its bonds, the Treasury needs to come up with dollars to cover the redemption.  And yes, the Treasury needs to issue new debt (new Treasury bonds) to raise those dollars.

But none of this changes the overall level of national debt!

The only difference after this maneuver is that the Treasury has exchanged debt owed to the Trust Fund for debt owed to the public.

How can it be that issuing additional debt to cover Trust Fund redemptions doesn't, on balance, increase the national debt? Simple: With respect to the overall national debt, Trust Fund redemption conceptually does little more than move around a couple of offsetting numbers on a ledger. On the one hand, issuing new Treasury bonds increases government debt.  But the redemption of Trust Fund bonds decreases debt (because after the redemption the Trust Fund holds less government bonds), and in an exactly offsetting amount. Again, debt held by the Trust Fund is exchanged for debt held by the public. The Treasury ends up owing more to the public, but less to the Trust Fund. It's a wash. (Or, as a commenter in another forum put it more succinctly and eloquently than I, "one obligation is extinguished when the new one is created.")

Alice Rivlin surely understands this. How could she not? So why on earth would she confuse the matter by making such a statement?

I don't know what motives were behind Rivlin's claim, but I do know that almost everything the public hears about Social Security is wrong or misleading.  The perpetual stream of misinformation that has been flowing from officials and politicians over several decades is toxic because the public has become convinced that Social Security has big problems and needs to be "fixed".  We've been systematically softened up to where we may consent, out of ignorance, to unnecessary and unjust benefit cuts. It's especially shameful when this "fixing" of Social Security is sold as a necessary part of fiscal responsibility, because Social Security, which is self-funded, has nothing at all to do with any real or imagined debt problems the government may have.

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I've written previously on this topic. See: Why Social Security Is Not The Problem, Trust Fund Redux: A Parable, Newt on the Trust Fund, Durbin Agrees With Me On Social Security, Stating The Obvious, and Trusting the Fund: Can we rely on the government's Social Security nest egg?

Update March 11, 2013 - All New! -  More clearly and in more detail than past posts, this post explains why Social Security doesn't add to the debt, and why the Trust Fund is solvent.

Copyright (C) 2013 James Michael Brennan, All Rights Reserved