Do Federal Bonds Have Any Value?

Allan Sloan must not think so:

The last time we “fixed” Social Security was 1983, when we followed the Greenspan Commission’s recommendations and raised Social Security taxes and cut back benefit growth. Social Security’s number crunchers declared the system solvent, but the problem wasn’t fixed. That’s because although the plan created temporary Social Security surpluses, they’ve gone to subsidize about $2 trillion of other government spending rather than being saved to pay future benefits. The problem is that the Social Security trust fund owns only Treasury securities. So when the system starts running a cash shortfall in a decade or so, it will ask the Treasury to redeem some of the securities in the trust fund. The Treasury will have to borrow the money to do that – which amounts to the Treasury borrowing to pay the benefits. Hence, the trust fund is useless.

Oh Lord – that old canard again! Let’s call Dean Baker up to the microphone:

Now, if Mr. Sloan understood how government bonds worked, he would know that they have value, that’s why people all over the world hold them and in fact are willing to hold them at a very low rate of interest. When Social Security starts drawing on the trust fund it will simply redeem its bonds at the U.S. Treasury, just as tens of millions of people, corporations, and banks have done over the years. Of course, the Treasury will need the money to repay these bonds, just like it need money to repay the bonds held by individuals, corporations, banks and foreign governments. The bulk of the money the Treasury gets to repay its bonds comes from individual and corporate income taxes. Now, if Alan Sloan had some basic understanding of how U.S. bonds work, he might want to point out that the debt of the government and the annual deficit are considerably larger than the conventionally used numbers which only refer to bonds held by the public (the debt an deficit are approximately $3 trillion and $200 billion larger, respectively). But, this is not an issue about Social Security financing, it is an issue about the general budget. If economics columnists knew how government bonds worked, perhaps the public would be better informed on budget issues.

Thanks Dean! Since Sloan began his discussion with the 1983 Reagan reforms, let’s remind him that the reason why the payroll contribution was increased so much was to build up a Social Security Trust Fund reserve to pre-fund as it were the retirement benefits of the baby boomers. We’ve been over this many times and I’m sure Mr. Sloan gets the point. So what is he really trying to say? That the Reagan and Bush43 General Fund deficits have made all Federal bonds worthless? If he really believes that, I’m be glad to take them off his hands for a few pennies on the dollar. Email me Allan – and we can cut a deal!