Krauthammer v. Lew on Social Security: Another TKO for the Hammer

The back and forth between Washington Post syndicated columnist Charles Krauthammer and White House Office of Management and Budget Director Jacob ("Jack") Lew continues. Thus far, Krauthammer has won both rounds, including his punch-out on Thursday.

It all started on February 21, when Lew issued a "rebuttal" to a USA Today editorial which called for near-term action to deal with Social Security's structural problems. In it, he claimed, among other things, that "Social Security benefits are entirely self-financing," and that even though tax collections are now less than benefit payments and will probably remain so indefinitely, the system "will have adequate resources to pay full benefits for the next 26 years." Ergo, per Lew, "Social Security does not cause our deficits." Zheesh.

A White House OMB Director issuing such patent nonsense should be news -- especially when, as Krauthammer noted in his March 10 column (discussed on March 11 at NewsBusters; at BizzyBlog), Jack Lew was saying the exact opposite thing (i.e., he was telling the truth) 11 years ago when he was also Director of the White House of Office of Management and Budget during Bill Clinton's final year. Nope; a Google News search on "Lew Social Security" (not in quotes, sorted by date) returns 66 items (the first page of results says "776," but it's really only 66). None of them is a straight news story about Lew's 11-year about-face.

Among other things, Krauthrammer accurately noted that: "The Social Security trust fund is a fiction"; "the Social Security trust fund contains - nothing"; and "What happens when you retire? Your Social Security will come out of the taxes and borrowing of that fiscal year." Ergo, Social Security, because of its taxes vs. benefits deficit, is a current fiscal problem, not something to forget about for the next 26 years.

Lew didn't take kindly to Krauthammer's slapdown, and went to his OMB White House blog to reply to double down on deception and to play the "it's Bush's fault" card one more tired time:

Hammer Misses the Mark

 

... Social Security benefits are self-financing, paid for with payroll taxes collected from workers and their employers throughout their careers. To prepare for the retirement of the Baby Boom and to keep Social Security solvent, I was part of the bipartisan effort in 1983 that built up trust fund balances to pay benefits owed to current and future beneficiaries.

 

Krauthammer is correct when he writes that there is no “lockbox” that keeps the money sent in by workers for until they retire. By design, when more taxes are collected than are needed to pay benefits, funds are invested in Treasury bonds and are held in reserve for when revenue collected is not enough to pay the benefits due. Yet these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are, making them anything but ”worthless IOUs” as Krauthammer suggests. The government has just as much obligation to pay back the bonds in the Social Security trust fund as we do to any other bondholders.

 

Responsibly honoring that obligation – one that we planned for and always knew was there –entails undertaking fiscal policies that would make it easier, not harder, to meet these obligations. When I last was OMB Director at the end of the Clinton Administration, the Congressional Budget Office estimated $5.6 trillion in budget surpluses over the next decade because of fiscally responsible measures that Democrats and Republicans, working together, had taken.

 

We are now in a very different fiscal position. When I returned to government at the start of the Obama Administration, the country faced projected deficits of more than $8 trillion over the next decade. These deficits primarily were the result of specific decisions made by the previous Administration and Congress to spend money on initiatives without finding a way to pay for them, notably the tax cuts of 2001 and 2003 and the Medicare prescription drug benefit.

 

... Krauthammer’s argument is inside out. We should not blame Social Security for our current fiscal problems when it is the irresponsible fiscal behavior of the past that has presented the country with future challenges to fund our commitments, including Social Security over the next two decades.

In his latest column on Thursday, Krauthammer wisely ignored the Bush-bashing, and went to the heart of the matter:

It’s still an empty lockbox

 

... If Lew’s claim were just wrong, that would be one thing. But it provides the intellectual justification for precisely the kind of debt denial and entitlement complacency that his boss is now engaged in.

 

... If these trust fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included? We measure national solvency by debt/GDP ratio. As calculated by everyone from the OMB to the CIA, from the Simpson-Bowles to the Domenici-Rivlin commissions, the debt/GDP ratio counts onlypublicly held debt. This means bonds held by China, Saudi Arabia, you and me. The debt ratio completely ignores the kind of intragovernmental bonds that Lew insists are the equivalent of publicly held bonds.

 

Why? Because the intragovernmental bond is nothing more than a bookkeeping device that records how much one part of the U.S. government (Treasury) owes another part of the same government (the Social Security Administration). In judging the creditworthiness of the United States, the world doesn’t care what the left hand owes the right. It’s all one entity. It cares only what that one entity owes the world.

 

... Invoking the “full faith and credit” mantra for those IOUs in the trust fund is empty bluster. It does not change the fact that, as the OMB itself acknowledged, those IOUs “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Yet Lew continues to insist that these “special issue” trinkets will pay off seniors for the next 26 years.

 

Nonsense. That money is gone with the wind. Those trust fund trinkets are nothing more than a record of pastborrowings. They say nothing about the future.

 

... As the OMB itself admitted, future payouts will have to be met by future taxes and future borrowings — or by Social Security reform that, by reducing benefits, makes such taxing and borrowing unnecessary.

 

There is no third alternative. There is no free lunch. And there is nothing in the lockbox.

Krauthammer might have been well-served to tell those who hadn't read his previous column that Lew was preaching the opposite thing 11 years ago. I'm also not as confident as Krauthammer when he claims in unexcerpted material that the world's bondholders wouldn't be shaken up if Uncle Sam were to default or otherwise shortchange the Social Security system's "special issue" bonds.

But at least he is fighting the good fight against the administration's serial denial of self-evident reality. The vast majority of establishment press members are disgracefully letting the administration perpetuate the myths, even though many of them surely know better, and even though the administration's own OMB Director was telling the truth when he held the same job 11 years ago.

Cross-posted at BizzyBlog.com.