Et tu, Setser?

Brad Setser runs one of my favorite blogs on economics. So I was a little disturbed to see him jump on the “Social Security Trust Fund has lots of assets” bandwagon. My feelings on this score are pretty close those expressed in the Chieftain of Seir’s essay J’accuse (Though I have to say that the Chief is a little over the top).

The strange thing is that I don’t even understand what set Setser off. Supposedly he was writing in response to this Washington Post article. If you just read Setser’s post you would think that the Washington Post article is letting Bush off the hook and blaming all our coming fiscal problems on Social Security. But that is not my understanding of what the Washington Post article is trying to say at all. Am I just missing something?

At any rate, Setser did not completely disappoint me. He at least came up with a novel reason as to why we should consider the IOU’s in the trust fund to be assets. But he does not advance this novel explanation until he is challenged by another commentator by the name of Emmanuel.

At first, Setser tries to shake Emmanuel off with a spurious analogy. But Emmanuel keeps after him and to his credit Setser gets serious and says…

Emmanuel —

One part of the federal government (soc sec) set aside $10 out of its current revenue. Another part (the rest of the gov) spent $10 more than it took it. The rest of the government promised to repay social security with interest …

at some point this will simply be reversed. the rest of the government will pay Social security $10 back plus interest (or borrow the funds needed to repay social security from the private market).

The social security surplus that finances a deficit elsewhere in the government will turn into a social security deficit financed by a surplus elsewhere (or my external borrowing).’

why does the internal accounting matter?

Simple — different parts of the government have different revenue sources. Social security is financed by a flat payroll tax up to a cap. That’s regressive (Soc sec benefits/ insurance is, by contrast, progressive). The rest of the gov. is financed by a progressive income tax.

The increase in the regressive payroll tax to build up the trust fund (keeping the progressive income tax or the deficit lower than it otherwise would have been) only makes sense in my view if the progressive income tax is used to collect the revenue needed to pay the social security system back.

Otherwise, as Dean Baker likes to point out, all those folks who paid more soc sec payroll taxes that needed to cover current soc sec benefits will have gotten royally screwed.

That is the best justification I have ever come across for the Social Security Fund. I don’t find Setser argument at all convincing, but I always enjoy reading arguments that I have never encountered before.

Still, I like challenging arguments that I have never come across even better, so I said….

Mr. Setser,

I have a lot of respect for you but I fail to understand the problem you have with the Washington Post article.

The strongest part of your argument seems to be that the Washington Post should not have said that the Social Security Trust fund will run out in 2017. But while I grant you that Washington Post’s terminology is incorrect, pointing that out does nothing to change their argument.

The basic thrust of the Washington Post article as I understood it is that as the baby boomers start to retire, the fiscal position of the Untied State Government is going to get a lot worse. Nothing you have said changes that argument and I don’t understand why you have a problem with it.

Nor do I understand why you seek to maintain the fiction that the Social Security Trust Fund has assets. To my way of thinking, assets are things that give you options. If I have money in the bank it gives me more options then if I don’t have money in the bank.

But the Social Security Trust fund does not give the government any more options to fund Social Security that it would not already have had without the trust fund. There is nothing to stop Social Security from being funded out of the general fund even in the absence of the trust fund.

To put it other way, would you say that it is all right for a private company to fill its pension fund with IOU’s and promise to pay them with profits? If one argued like you do, you could argue that such an arraignment is alright because those IOU’s will be paid out of company profits, not money taken from the workers….

The fact of the matter is that the retirement of the baby boomers is going to make the current fiscal situation a lot worse and the “assets” in the trust fund will do nothing to fix that fact.

One Response to “Et tu, Setser?”

  1. […] _uacct = “UA-1202685-1″; urchinTracker(); Map of the Ethereal Land The Ethereal Voice Front Page – Politics – Money – Knowledge – Art – Food – Fun Masthead About Et tu, Setser? By Ape Man | January 17, 2007 – 12:58 pm Posted in Category: Money Brad Setser runs one of my favorite blogs on economics. So I was a little disturbed to see him jump on the “Social Security Trust Fund has lots of assets” bandwagon. My feelings on this score are pretty close those expressed in the Chieftain of Seir’s essay J’accuse (Though I have to say that the Click Here to continue reading. […]

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