January 4, 2005

#171: A Ponzi-analysis...


In Stopping the Bum's Rush (01/04/05) Paul Krugman continues his head-in-the-sand series on why there is no Social Security crisis and why the President's privatization initiative is an evil conspiracy to end this venerable entitlement. In this column he tries to explain why the oft-mentioned date of 2018, the date when withdrawals from the SS trust fund are scheduled to begin, is really meaningless and is being used by privatizers as a scare tactic. He implies that his answer today is the "short version" of a much longer explanation written elsewhere (www.bepress.com/ev). We read the other article (which is on a pay site) and found, as we expected, that the long version is the same as the short version. So here's what he has to say about the integrity of the trust fund:

"The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund. There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees."

The chart below describes what Krugman is talking about. The upper portion shows that in about 2018 the Social Security cost rate (payout) rises above the income rate (pay in) and stays above it forever given current law. The lower portion of the chart shows the same phenomenon from the perspective of the Social Security balance. The balance swings negative in 2018 as the trust fund begins to be drawn upon

Social Security Chart 1-05-1

What Krugman does not tell us is that this trust fund does not really contain funded assets as he slickly implies, but unfunded treasury debt that is backed by a dedicated payroll tax. This is not that different from a dedicated bridge or turnpike tax. When you need more roads and bridges, you just raise the tax. Of course, for Krugman this is no biggie since he is always ready to raise taxes. But his analysis obscures the main point as to why there is a crisis looming in the first place, namely, that as the trust fund is drawn down beginning in 2018, the dependency ratio – the number of beneficiaries per 100 workers – will be rising sharply. That's the crisis!

Until Krugman acknowledges the crushing taxes that will be required around 2030 on the 2 workers that will be available in the labor force to support each retiree (it's currently about 4 workers per retiree) and makes some attempt to justify these taxes, his ponzi analysis has no credibility.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ] Posted by John Weidner at January 4, 2005 10:31 AM

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