Default

Brad DeLong on what does and does not constitute default on the bonds in the Social Security Trust Fund*:

It depends on what kind of Social Security reform we are talking about. There's one reform in which benefits are cut and taxes are raised but the equality:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)

is preserved. That's not a default. There's another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)

That is tantamount to default.

I don't see the logic in this distinction, nor do I see any practical difference. DeLong is saying, essentially, that it's okay to cut benefits (or if not that it's okay, at least that it doesn't necessarily amount to default), as long as we keep the really important promise: to use income tax revenues to pay for a portion of Social Security benefits.

I assume that this distinction is important to him because income taxes are progressive, while payroll taxes are regressive. But there are any number of perfectly legitimate accounting tricks that could be used to make "defaulting" and not "defaulting" functionally equivalent.

Social Security taxes are currently 12.4% of wages up to certain limit. Suppose that at some point in the future, 14.4% of wages would be needed to cover the difference. The government could levy a new payroll tax of 2% to supplement Social Security tax revenues. This would be no less legitimate than raising income taxes---the Sixteenth Amendment gives the government the power to tax income from any source derived, and has nothing to say on the topic of progressivity. Or it could reduce the standard deduction, or increase the rates in the lower tax brackets, or any of a number of other things that would have more or less the same effect as raising payroll taxes.

Putting aside logistical issues, it's not clear to me that DeLong's idea of what it means to default makes any sense. If a debt is owed (a dubious proposition in itself), it's owed to those who paid the taxes that were deposited into the SSTF. But then any cut in benefits must necessarily amount to a default. The question is not whether we repay the debt with income tax revenues or payroll tax revenues, but whether we repay it at all.

*Not to be confused with an actual trust fund.

Share this