A Reckless Political Stunt
My jaw dropped when I read this AP story about Bush’s trip on Tuesday to Parkersburg, West Virginia:
President Bush on Tuesday turned a government file cabinet in the hills of West Virginia into his Exhibit A for why Social Security needs urgent change. To dramatize Social Security’s future solvency problem, the president peered into the four-drawer ivory cabinet inside the Bureau of Public Debt office here along the Ohio River. In the second drawer was a white three-ring binder filled with pieces of paper providing physical evidence of $1.7 trillion in Treasury bonds that back Social Security benefits. “Imagine,” Bush said in a speech a short time later at West Virginia University at Parkersburg. “The retirement security for future generations is sitting in a filing cabinet…It’s time to strengthen and modernize Social Security for future generations with growing assets that you can control, that you call your own – assets that the government can’t take away.”
This Knight-Ridder article has another Bush quote from the same event: “”There is no trust fund, just IOUs that I saw firsthand, that future generations will pay.”
The key thing to keep in mind here is that the Social Security trust fund consists of special issue Treasury bonds. Here’s what the Investment FAQ has to say about Treasury bonds: “Treasury bills, notes, and bonds are the standard for safety. By definition, everything is relative to Treasuries; there is no safer investment in the U.S. They are backed by the ‘Full Faith and Credit’ of the United States.” And the Social Security Administration has this to say about Social Security’s special-issue bonds: “…the investments held by the trust funds are backed by the full faith and credit of the U.S. Government…The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the federal government.” Even during the Great Depression, the US honored its Treasury bond obligations. But as far as the President is concerned, they’re “just IOUs” that the government might not honor.
For a while now Bush has been suggesting that you can’t rely on the Social Security trust fund, but until now he was never willing to clearly say why. But now he’s said it: he thinks (or, at least, he wants you to think) that at some point in the future the US just might stop honoring these Treasury bonds. That is, the government might just walk away from at least some of its debt obligations. And all of the $7.8 trillion federal debt is in the form of Treasury bonds. You don’t want to mess with the market’s confidence in Treasury bonds.
A more charitable interpretation of Bush’s comments is that, instead of simply denying Treasury bond obligations, the federal government would make a more narrowly targeted move: severely slash or eliminate Social Security payments to retirees. That is, the government would essentially reclaim the Treasury bonds in the trust fund and not make the promised payments to retirees who spent their working lives paying into the system. This way they’d avoid a technical default on the bonds since retirees do not directly own them. But I would argue that’s a distinction without much of a difference: if investors see the government reneging on the bond payout that was promised to those who paid into Social Security, seeds of doubt would be sown about the US’ commitment to honor its other debt obligations. It would be seen as an Enron-style accounting gimmick, causing the “Full Faith and Credit” of the United States to come into question. And international finance is all about confidence. Defaulting on our debt – or even just concern in the marketplace that we might – would lead to a massive devaluation of the dollar. The ironic end result of it all would be not only worthless Social Security Treasury bonds, but worthless dollars in private retirement accounts as well.
For a US President to talk like this pretty much represents the apex of fiscal and political irresponsibility. The logical conclusion of Bush’s “just IOUs” comment is that we might someday join the ranks of other nations that have defaulted on their debt obligations in recent decades: Argentina, Ecuador, Pakistan, Russia, Ukraine, and Uruguay. The only reason his speech didn’t garner more attention and send shockwaves through the international markets is because everyone in those markets is smart enough to know it was just a political stunt. Think about what that says about Bush’s standing in the world community when it comes to the discussion of fiscal matters.
