Krauthammer: The lockbox is empty

Charles Krauthammer is a syndicated columnist for The Washington Post.

President Barack Obama's budget chief, Jack Lew, recently took to his White House blog to repeat that the Social Security trust fund is solvent through 2037. The claim provides the intellectual justification for precisely the kind of debt denial and entitlement complacency that his boss is now engaged in.

Lew acknowledges that the Social Security surpluses of the last decades were siphoned off to the Treasury Department and spent. He also agrees that Treasury then deposited corresponding IOUs -- called "special issue" bonds -- in the Social Security trust fund. These have real value, claims Lew. After all, "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."

Really? 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-to-GDP ratio. As calculated by everyone from the OMB to the CIA, the debt-to-GDP ratio counts only publicly held debt. That means bonds held by China, Saudi Arabia, you and me. The debt ratio completely ignores the kind of intragovernmental bonds that Lew insists are equal to publicly held ones.

Why? Because the intragovernmental bond is nothing more than a bookkeeping device that records how much one part of the government (Treasury) owes another part (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.

If we default on Chinese-held debt, decades of AAA creditworthiness is destroyed, the world stops lending to us, the dollar collapses, the economy goes into a spiral, and we become Argentina. That's why such a default is inconceivable.

On the other hand, what would happen to financial markets if the Treasury stopped honoring the "special issue" bonds in the Social Security trust fund? A lot of angry grumbling at home for sure. But externally? Nothing.

This "default" would simply be the Treasury telling the Social Security Administration that henceforth it would have to fend for itself in covering its annual shortfall. How? By means-testing (i.e., cutting the benefits to the rich), changing the inflation formula, raising the retirement age and hiking the cap on income subject to the payroll tax.

Plug in whatever combination of numbers you prefer for the definition of "rich," for the slope of the sliding scale of benefit reduction, for the rate of the retirement-age increase or any other variable. Whatever the formula, we will have been forced to adopt the very reforms needed to keep Social Security in balance for years to come -- the kind Obama's own deficit commission recommended.

Invoking the "full faith and credit" mantra for those IOUs in the trust fund is empty bluster. It doesn't change the fact that, as the Office of Management and Budget 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 trinkets will pay off seniors for the next 26 years.

Nonsense. That money is gone. If Treasury had borrowed twice as much from Social Security in the past -- producing twice as many IOUs sitting in the lockbox -- would this mean the trust fund is today twice as strong? Of course not.

The trust fund "balances" are mere historical record-keeping. 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.