A pair of very interesting articles.

First come the Washington Post’s article on Sunday which discusses the problems with the Social Security program in very honest and stark terms. 

For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees. Replacing cash lost to a one-year payroll tax holiday will require an additional $105 billion. If the payroll tax break is expanded next year, as President Obama has proposed, Social Security will need an extra $267 billion to pay promised benefits.

Then comes Paul Krugman’s attempt to dismiss it.  For his part, Krugman talks about a myth and presents it as fact:

You see, the WaPo makes a big deal of the fact that Social Security is currently taking in less in payroll taxes than it’s paying out in benefits. Yet this means nothing, except as a favorite point used to create confusion by those who want to kill the program.

I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

It is the latter that is correct.  There is no “dedicated source of revenue” per se.  Hasn’t been for years.   What exists instead is a pile of Treasury bonds … IOUs the government wrote itself.   Congress, years ago, spent the money supposedly to be set aside for Social Security.

Krugman then tries to wave away the fact that even if the “dedicated source of revenue” doesn’t exist, heck, it’s a legal and untouchable (entitlement – must be paid, at least under the law as it exists now) part of the budget and the government will fund it.

That means that regardless of revenue, the government must pay.  

So tell me again how, given the unfunded future obligations of Social Security, it matters if the money comes from the mythical “lockbox” that has never existed or the general fund?  In either case, unless taxes are drastically increased, the money will have to be borrowed.  In either case, Social Security is in the negative – paying out more than it is taking in.  Nothing changes that.

Krugman’s last sentence is absolute hogwash.  Of course it would have a “deficit” if it was a part of the federal budget.  It has a set requirement to pay a certain amount out in benefits.  It is a mandatory entitlement by law.

The defense budget is discretionary.  There his postulation is correct.  That budget is whatever Congress says it is each year. 

For Social Security, the deficits would come from unmet and underfunded obligations – note the word: obligations- and it would require the federal government to either raise more revenue or borrow to meet those obligations.   That is not true of the defense budget.  Playing word games and false analogies to try and wave the truth away doesn’t change that.

But it does cement forever the fact that Paul Krugman has become much less of an economist and much more of a hack than I thought possible.

~McQ

Twitter: @McQandO