Felix Salmon objects to something Dean Baker said:
Let’s agree, for the sake of argument at least, that the social security trust fund exists, chock-full of government bonds. Like any trust fund, its trustees have control over what it pays out and when. If the trust fund reduces the amount it pays out, or only pays out later than currently mandated, that’s a change in the trust fund. It is not a bond default. Insofar as the bonds in the trust fund exist, they will continue to receive their coupon and principal payments. It’s what the trust fund does with those payments that’s being debated.
James Hamilton agrees:
I would suggest first that the word “default” is completely inappropriate for this discussion. The term “default” has a very clear and very narrow legal meaning, used to refer to a situation in which one has promised to make a specific identified dollar payment to a specific individual at a specific date, and the payment is not made.
But there’s an ambiguity at play that Brad DeLong clarifies:
It depends on what kind of Social Security reform we are talking about. There’s one reform in which benefits are cut and taxes are raised but the equality:
(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)
is preserved. That’s not a default.
There’s another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:
(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)
That is tantamount to default.
Most proposals for Social Security reform that start out with statements like “The Social Security Trust Fund doesn’t really exist” are proposals of the second kind.
Brad, Dean, and I have all said we’d be in favor of the first kind of reform. Andrew Samwick is also a member of this coalition. I think most of us would recognize that the suggestions made by James Hamilton could be part of the first type of reform.
But let’s be honest – the Bush Administration has no serious proposals of reducing the massive General Fund deficit, which is why they allude to the second type of “reform”.
Update: Andrew Samwick weighs in on this debate – and provides links to several of his previous contributions.