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Dean Baker's commentary on economic reporting


Post Columnist Advocates Default on National Debt

Washington Post columnist Allan Sloan called for defaulting on the U.S. national debt, or at least a portion of it, in his weekly column today. Mr. Sloan pointed out that the Social Security trustees project that the program will begin drawing on the government bonds in its trust fund in just over a decade. He said that repaying the bonds in the trust fund will be a burden to the government, and that his children, as future taxpayers, shouldn’t have to bear this burden.

Mr. Sloan probably would object to describing his column as a call for default on the national debt, but this in fact exactly what it is. In the column, he implicitly derides the legitimacy of the bonds held by Social Security by calling them IOUs. Of course all bonds are IOUs, but they are never described this way in normal discussions.

Under the law, the bonds held by the Social Security trust fund are legal obligations of the federal government. Social Security bought these bonds with the excess Social Security taxes paid by more than 150 million workers over the last two decades. (Taxes were deliberately raised to exceed benefits in order to build up the trust fund.) The trust fund current holds more than $1.9 trillion in bonds, approximately $12,000 for every active worker. Workers have every right to expect that the money they paid into the trust fund in Social Security taxes will be repaid in benefits that are financed out of general revenue. (This is not in one pocket out the other – general revenue comes primarily from the progressive individual and corporate income taxes, while Social Security taxes are highly regressive.)

Mr. Sloan’s kids may not want to pay their taxes (most people would prefer not to pay taxes, if they can avoid it), but as a moral matter, there is no greater justification for defaulting on the debt to Social Security than any other portion of the government debt. If a future Congress debates default on the bonds held by the Social Security trust fund then it would also be reasonable for it debate default on all other government bonds, including those held by banks, corporations, and wealthy individuals.

Realistically, if we fix our national health care system, then future budgets should not impose any extraordinary burdens on future generations of taxpayers. But, if default ever rises as an issue on the national agenda, then we should be talking about making all debt holders share the burden of the default, not just the debt holders that Mr. Sloan doesn’t like.


  • At 8:44 AM, Anonymous Erik L said…

    Dean- I don't think it is the same thing from a moral or practical point of view. If the US defaulted on the national debt it would rightly expect that no one would ever lend it money again. It would actually be ripping off the debt holders. The social security IOUs are money the government owes itself. Could you owe yourself money? Of course not. If you failed to pay yourself back would you cease to trust yourself and not lend yourself money again? Huh? The "trust fund"is a silly mechanism, a deception agreed to many years ago to hide the fact that voters today (or yesterday) are (were) basically voting to raise the taxes of people who were too young to vote at the time. The fact that they agreed to raise their own taxes at the time doesn't make that any more right.

    SS, is a "pay as you go" system. Morally I think each generation of voters has a right to decide what level of social security is fair.

    Don't worry though. Old voters will trump young voters for quite a while.

  • At 11:58 AM, Anonymous dale said…

    Sometimes it helpful to use the word "government" to mean all of us citizens. Sometimes its not. In this case saying "we" owe it to "ourselves" is misleading.

    "We" includes those who benefited from the Bush tax cuts- which if anything, was a premature distribution of Social Security funds to the wealthy- from one class of citizens to another.

    BushCO made this mess with their tax cuts and their elective war in Iraq- for which they borrowed the money instead of raising taxes or taking the money from elsewhere in the budget.

    Now, to tell working families that "we" don't "owe" this to "ourselves" is disingenous at best. Call it what it is- theft- class warfare.

  • At 12:55 PM, Blogger PGL said…

    There is a 2nd problem with Sloan's argument. Projections may show that benefit payments will exceed payroll contributions starting in 2018 but the same projections show that reserves will continue to grow for a few more years. Sloan has left out - as he always does - the interest income on the accumulated reserves.

  • At 1:07 PM, Anonymous Erik L said…


    That doesn;t really make any sense. I understand that you prefer a redistribution from the wealthy to the less so (and really that is still the case with respect to government policy despite some tinkering at the margins). Implying that the Bush tax cuts are the cause of potential future problems funding social security is simply wrong. First, we don't know that there will be a problem. Second, the cause of panic, at least during my lifetime, has always been the impending retirement of the baby boom and the smaller size of the generation following them (mine, sadly)

  • At 1:11 PM, Blogger Dean Baker said…


    under the law, the government bonds held by the trust fund are money owed by the federal government to the trust fund. Congress can change the law, but that is the law.

    As far as the impact of a default, that is a political question. If the retirees who get burnt decide that they should not be the only ones who suffer from a government default, then every person who lends the government money WILL have to worry that they will not see their money.

  • At 1:59 PM, Blogger PGL said…

    Erik - there have been a few Kevin Drum posts that suggests the proposed redistribution runs the other direction. We have known about the retirement of the baby boomers for quite some time, which is why President Reagan raised payroll contribution rates back in 1983. The accumulated reserves were supposed to pay for the benefits of the baby boomers. Alas, George W. Bush decided to use these funds to pay for a massive General Fund deficit led by tax cuts for the rich. Yes we can address the fiscal fiasco from the Bush income tax cuts by eliminated Soc. Sec. retirement benefits but maintaining those employment taxes. So let's call this plan what it really is - an increase in employment taxes (backdated to 1983) to pay for the elimination of taxes on capital income. I'd say - one heck of a redistribution.

  • At 2:52 PM, Anonymous Joe Populist said…

    I might suggest that while I'm on your side on the Social Security Trust Fund issue, I think you--like most liberals---are thinking about the problem all wrong.

    The root cause of the problem was first, Greenspan's original idea of raising the SS payroll tax---I think it was raised 3 or 4 times---to create a 'surplus'...Followed by the decision to dip into the surpluses for current expenses.

    In effect, the Corporate CEO classes, and the pimps for the Leisure classes such as Greenspan, knew quite well what they were doing. The Social Security system has become a income redistribution mechanism...distributing income from the working classes to the rich.

    The Election 2000 was about what to do with the Social Security Surplus. The Republican Plan was to give it back in a tax cut. The Democrat Plan was to continue using it to avoid raising taxes on the rich to pay for reducing the budget deficit.

    I really can't blame the working classes (who actually think of themselves as "middle class") for their resentment toward the Social Security System. First, the payroll tax places a unfair burden on them to take care of the underclasses, who can't pay what the SS they are using. And because the the rich don't pay taxes on incomes over $90,000, they are getting a free ride on paying their fair share of current expenses.

    All Gore's rhetoric about the "lockbox" sounded like a lot of gobblygook to the public, and I don't blame them. Most of them know that if the very argument that Sloan is making---that the government can't sell debt to itself---is true. The SS payroll tax should never have been raised, and then used to pay current expenses.

    What do we do now? Well I suggest turning the tables on the Leisure and CEO classes. The Social Security System should be 'fixed' by reducing the burden on the working folks, and raising the burden on the rich.

    Here's what we do: eliminate all SS taxes on income under $100,000, and BEGIN taxing all incomes OVER $100,000, with a sharp rise at $250,000, and at $1,000,000.

    There is no reason that the tax issue can't be turned around on the rich, and made to work for working folks for a while.

  • At 2:55 PM, Anonymous Dale said…

    I like Dean's point about defaulting on bonds owned by corporations and wealthy individuals. If we limit this defaut to American corporations and American wealthy individuals- then that too would be money we owed ourselves. The same moral claim.

    Those who support or justify the one should support or justify the other as well.

  • At 2:56 PM, Blogger Charles said…

    I very much agree with Dean Baker about the law requiring that SS bonds be treated the same as other governmental debt except for convertibility.

    I would add that the whole point of guaranteeing against default is to avoid the sort of panics for which the Great Depression was famous. Can anyone imagine the consequences if suddenly millions of elders couldn't pay their rent or their mortgages? A massive personal default could be as or more damaging than government default.

    As for Erik's claim that elders are taxing people who were too young to vote, that's more false than true. People typically work (and vote, if they like) for about 40-50 years and live another 10-15. They are for the most part taxing themselves for their own retirement.

    I had an interesting exchange with Sloan, in which he tried to pose this as a cash flow problem. At the end of the exchange, I was reasonably certain he had never prepared a cash flow statement for real. There's certainly a problem with the "flow of cash," but this is a political problem, not really a cash flow problem. Certainly his method of calculation, while defensible, is simplistic.

    His focus on cash flow is based on viewing Social Security as an enterprise that receives receipts, earns the T-Bill rate on interest, and disburses benefits and pays expenses. He even neglects the interest on those T-bills! If he'd ever done a real cash flow statement, he would know that that's a no-no.

    But the real enterprise is the United States (or, at the very least, the government), not the SSA. So, what's the real return on the Social Security investment? It's difficult to calculate, but it's large. It includes lower interest rates for general government debt, homes, and cars and the higher growth/lower taxes that allows. I could include other effects, but the interest rate effect can at least be estimated.

    My exchange with Sloan left me with what one of my co-bloggers calls an "Upton Sinclair" moment: it's difficult to get a man to see something that his salary requires he not. He told me that he knows that under very reasonable assumptions of growth and immigration, "Social Security is solvent forever," as Business Week put it.

    He just chooses not to allow himself to know it consciously.

  • At 3:55 PM, Blogger Kaleberg said…

    The problem with Social Security is that retirees expect to receive goods and services from working people. That's the transfer. Getting your hair cut twice today, does not mean you don't need a hair cut a month or two down the road.

    The trust fund, the payroll taxes, the benefits schedule, they are all just window dressing to justify and regulate how our society provides for the elderly.

    Personally, I'm banking on productivity soaring once the baby boomers start dropping out of the work force en masse. We may already be seeing this. The work force IS shrinking, otherwise our unemployment rate would be almost as high as France's. Productivity IS soaring, that is, if you believe he numbers. Wages are not rising. I'm wondering how much of the productivity surplus is already flowing to retired baby boomers?

  • At 5:45 PM, Anonymous chris said…

    The whole problem with the trust funds is the dishonesty it has led to.

    I.E., the only way we had a surplus under Clinton is because the surpluses from the trust funds were included in the total budget.

    You can't say the surplus is part of the budget while also using it as a future asset. It's either one or the other.

  • At 6:02 PM, Blogger PGL said…

    joe populist - love the sentiment but you might have the history a bit backwards. The Kemp-Roth tax cut was passed in 1981, which was the primary cause of Reagan's fiscal fiasco. The 1983 Greenspan reforms were the right thing to do in my view as far as the narrow issue of Soc. Sec. But Greenspan's advocacy for the 2001 tax cuts were sheer dishonesty on his part.

  • At 6:03 PM, Anonymous erik L said…


    I understand your point about the law. You must agree, though, that the law and morality are not the same thing. I thought you were making the moral argument.

  • At 7:00 PM, Anonymous howard said…

    just for the record, chris, the last one or two clinton budgets had surpluses outside of the benefit of the social security "pre-payment."

    my guess is that if there actually was a "default," we'd see the mother of all law suits. i've looked at this a tiny bit, and it appears that a dedicated tax cannot be spent on something outside of the bounds of the "dedication," which is to say that raising social security taxes to build a surplus, cutting personal taxes with that surplus, and then claiming that we have to default on the repayment of the borrowing of that suprlus means that the dedicated tax was not spent on its intended purpose.

    and allan sloan is, by definition based on this column alone, a dishonest swine.

  • At 11:05 PM, Anonymous Dale said…

    "The problem with Social Security is that retirees expect to receive goods and services from working people. That's the transfer."

    Kaleberg, doesn't this argument transcend retirees? Wouldn't it apply to anyone who lives off investment or inheritance income rather than working for a living?

    And what about folks who earn a living doing unproductive or destructive things? Aren't they also parasites upon working folks who do constructive, productive things?

  • At 11:24 PM, Blogger Tom Faranda said…

    PGL - I like your style. If only we had raised the taxes on all those rich lay-abouts sitting out there clipping their coupons, everything would now be hunky dory.

    So what do you think the maximum tax rate should be on earned income, and at what level of income should it kick in?

  • At 11:40 PM, Anonymous chris said…

    Even in 2000 when there was an 'On Budget' surplus (taking out Social Security), the federal debt increased. A surplus was created by still including accounts and trusts other than Social Security.

    The last time the federal debt decreased was in 1969.

  • At 12:06 AM, Anonymous Anonymous said…

    Erik: the deal in '83 was the regressive FICA and SECA taxes were raised to create a trust fund, (so-called IOUs ) to be cashed in by the retiring boomers. The immediate beneficiaries of this action was the wealthy: their income tax burden did not have to meet the obligations of the general fund since the SS surplus was (and is) counted against the general fund deficit in what is called the unified budget. I have read this bookkeeping arrangement was part of the deal for Greenspan.

    (As PGL indicated more politely, I think Greenspan is just a partisan punk.)

    It is absurd to think that the Boomers retiring in numbers and our greater life expectancy is some sort of surprise. It was the point of the '83 arrangement. A few things were missed, chiefly the number of those retiring due to disability.

    The problem in a nutshell: the deal, if kept, is essentially a tax burden transferred from the wealthy of 1983-2017 (who got a tax break) to the wealthy of 2017-2040 (who are going to see their taxes raised to pay off the trust fund.) The Boomer FICA and SECA taxes are the mechanism to bridge the gap. If the deal is reneged, it is so far, as PGL indicates, a $1.9 trillion (with a 'T'!) wealth transfer from working stiffs to the wealthy. And it is still going on with another trillion or so remaining to be collected. Plus interest. I call that greatest heist in history.

    There was an alternative funding opportunity that BushCo screwed up, aided and abetted by Mr. Greenspan. Instead of new taxes, the government could have borrowed the money post 2017 from China, the Saudis, whoever they borrow from now. Refinanced the deal, as it were. Spread it out over the distant future. But they have trashed the budget, trashed Medicare. The re-fi option has to get in line with our other fiscal problems.

    As for bonds and default: how about we stiff the Chinese and Saudis before stiff the wife and I? (Yeah, not gonna happen...) Those notes are not just one part of the government owing money to another: the money is owed to those of us whose retirement is looming. We not only supported pay as you go but also set money aside for our future. In '83 Greenspan said it was the responsible thing to do.

  • At 11:10 PM, Anonymous Joe Populist said…

    Kaleberg: The problem with Social Security is that retirees expect to receive goods and services from working people. That's the transfer...The trust fund, the payroll taxes, the benefits schedule, they are all just window dressing to justify and regulate how our society provides for the elderly...Personally, I'm banking on productivity soaring once the baby boomers start dropping out of the work force en masse.

    Of course, you are right. Ultimately, those that work must feed those that do not.

    However, the distribution of wealth, and the relative value of labor to finance must be allowed to enter into the equation.

    The current arrangement of using the payroll tax to finance current expenditures had little to do with providing a sound basis for SS. It merely a political move to redistribute current income from the working classes to the upper 20%.

    IF the babyboomers are retiring without savings, it was because their declining wages over the last 35-40 years can no longer give them the "middle class" lifestyle they assumed was their birth-right. After all, shouldn't they get the same deal their parents got?

    IF wages had not declined, then perhaps the babyboomers wouldn't be struggling so hard to make their paychecks cover the increasing costs of the "big ticket" items of middle class lifestyles: home, education, health care...Don't retirement savings usually comes out of what is left over after paying these expenses?

    Of course there is a relationship between declining wages and the increasing wealth of the top 20%.
    Consequently, it's not out-of-left-field to argue eliminating the burden of the SS payroll tax on incomes under $100,000 to correct the problem.

    After all, didn't we have 20 years of redistribution of wealth upward because the SS payroll taxes were substituted for higher tax revenue on the rich in paying for current government expenses? Or the redistribution that occurred when employee wages went down and CEO pay went up?

    It's payback time...the rich had a good 20 years of caviar and champagne and expensive cars and mega-mansions. Now that the babyboomers are retiring, they can pay it all back from the people they took it from in the first place.

  • At 2:10 PM, Anonymous Anonymous said…

    Whatever Sloan may have advocated, he did not advocate defaulting on the national debt. While Social Security holds government bonds, Social Security benefits clearly are not backed by these bonds. If you reduce benefits then fewer bonds need to be redeemed, and thus the trust fund lasts longer, but no bonds have been defaulted upon. "Default" is a neat line, but it's really just not true.

  • At 7:21 PM, Blogger Charles said…

    Anonymous, you're dancing a little too fast.

    The bonds are held because Social Security does provide benefits. Sure, the Congress can adjust the benefits up or down.

    But if it simply declares that the US will not redeem those bonds in order not to pay benefits, then it has defaulted on debt. Since Sloan calls for not redeeming those bonds, he is calling for default.

    A responsible Congress would secure the line of funding to fulfill the promises that it has made to the American public, rather than playing with demagigic rhetoric. Sometime in the not too distant future, a Democratic Congress will do just that.

  • At 11:55 AM, Anonymous Anonymous said…

    Debt can be an absolute nightmare when it starts to spiral Out of control. It best to get some debt consolidation advice if it starts to affect your health through the stress of it all. Then when your finally out of debt try and make sure it does'nt happen again!

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  • At 11:35 PM, Anonymous Anonymous said…

    This is Jack. Repaying of bonds will be definitely going to be burden for government. As the future tax payers such as his sons and daughters has no rights to pay their father's tax so it is going to effect the government..

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  • At 6:20 PM, Blogger Dr William J McKibbin said…

    I am collecting information for research regarding the advantages and disadvantages of a default in terms of dollars. A default carries many trillions of dollars in advantages for the defaulters. The question is what will the costs of servicing and retiring the national debt be as a alternative. More at:

    Thanks for the opportunity to comment...

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