Social Security: The Club for Growth Claims Americans Can’t Save

Did Jonathan Swanson read Kash’s post? He replies with some odd logic:

Too bad the solution does not address the Social Security shortfall, nor does it provide a feasible investment strategy for the demographic group it targets … one can benefit from the wonder of compound interest only when one has disposable income to invest. The demographic group AmeriSave accounts target can’t afford to save in this manner; the glaring deficiency in the Democrats’ proposal is that if low-income Americans could afford to invest in retirement programs like 401(k)s and IRAs, they already would doing so … AmeriSave accounts presuppose that 1) Social Security benefits are “guaranteed” benefits, and 2) investing a portion of payroll taxes through Personal Retirement Accounts destabilizes the current Social Security system. This logic is faulty for two reasons. First, Social Security benefits are anything but guaranteed … Secondly, voluntary Personal Retirement Accounts offer retirees a better return on their payroll taxes that the government can never take away.

Swanson’s first premise is that after-tax income for some Americans is so low that they choose not to save for retirement. While this suggestion might be true for some households, the GOP fiscal agenda – including their Social Security agenda – would likely lower the after-tax income of these households.

Swanson’s claim that Social Security benefits are not guaranteed might be a concern if the U.S. Treasury will one day default on its obligations because of the Bush fiscal agenda or never tax, always borrow. While Donald Luskin often makes this claim, his latest on the yuan issue (also see Mark Thoma) makes this claim:

What Krugman won’t see is that China has chosen to hold U.S. bonds as collateral because they are the highest-quality and lowest-risk securities in the world. That’s why they make such excellent collateral. The fact that China chooses to hold our bonds is proof of our strength and their need to hang on to a piece of it.

What the Club for Growth does not seem to understand is that the Trust Fund is also holding Federal bonds, which pay the same interest rate as the bonds held by the Chinese Central Bank and the same rate that would be paid to bonds in those DeMint personal lock boxes. As I noted in a comment under Mark’s post – Luskin must think the Trust Fund is holding corporate bonds issued by U.S. airline companies.

Addendum: Luskin’s use of the word “collateral” is extremely odd. Consider this definition:

Collateral is a word used for assets that secure a loan. For example, in the case of a mortgage the house serves as the collateral for the mortgage-loan. This way, the bank is secured against the default risk of the borrower not being able to meet the interest payments. In case of default the bank can sell the house and get its money back.

The U.S. government wishes to borrow and the Chinese government becomes the lendor. The Federal bond is the financial instrument that we see as the loan. It would be odd that the same financial instrument that was the instrument of the loan was also used as the collateral. Now one could suggest that collateral was not needed as the probability of default was nil.

While we are on the topic of odd use of financial terminology, consider Luskin’s mentee: Roland Patrick (we know him as Patrick R. Sullivan) and his critique of Krugman:

Second, it doesn’t appear that Krugman grasps the difference between buying dollars and buying bonds.

Of course, Krugman was clearly referring to dollar-denominated bonds. What was Patrick’s first “point”:

First, it’s an open question what China’s spending its dollars on oil, Napa Valley wine, Washington state cherries, Boeing airplanes …

Of course, most of us know that China is buying oil from other nations but they are not buying very much in the way of wine, cherries, or even airplanes from our West Coast relative to the amount of goods we buy from China. A Luskin wannabe should sharpen his knowledge of the data and his ability to understand simple financial terminology before he decides to take on the writings of Dr. Paul Krugman.

But let’s hope the Chinese decide to purchase more planes from Boeing. But then as economists advocate a yuan revaluation, we are relying on changes in relative prices to increase Chinese demand for our goods. Most economists understand this simple point – even if the econopundits at the National Review do not.