SOCIAL SECURITY: ANOTHER CASE OF INNOCENT FRAUD?

 
 
SOCIAL SECURITY:NOTHER CASE OF INNOCENT FRAUD? WARREN B. MOSLER MATHEW FORSTATERA

BY

W

AND

Special Report 05/01

APRIL 4, 2005

Center for Full Employment and Price Stability

FEPS

By Warren Mosler

* and Mathew Forstater† The Economics of Innocent Fraud, John Kenneth Galbraith surveys athere's nothing to prevent the federal government from creating as muchThe question is, how do you set up aC-FEPS Policy Note 99/02

and the other papers cited in the bibliography at the end of this report). Now with the support of

the Fed Chairman, maybe we can gain some traction.

Let us briefly review, operationally , government spending and taxing. When government

spends it credits member bank accounts. For example, imagine you turn on your computer, log in

to your bank account, and see a balance of $1,000 while waiting for your $1,000 Social Security

payment to hit. Suddenly the $1,000 changes to $2,000. What did the government do to make

that payment? It did not hammer a gold coin into a wire connected to your account. It did not

somehow take someone’s taxes and give them to you. All it did was change a number on a

*

Distinguished Research Associate, Center for Full Employment and Price Stability

Associate Fellow, Cambridge University Centre for Economic and Public Policy;

†

Missouri-Kansas City

Associate Professor and Director, Center for Full Employment and Price Stability, University of

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computer screen. This process

by

That is what Chairman Greenspan was telling us:

only be self -imposed

And what happens when government taxes? If your computer showed a $2,000 balance,

and you sent a check for $1,000 to the government for your tax payment, your balance would

soon change to $1,000. That is all—the government changed your number downward. It did not

“get” anything from you. Nothing jumped out of the government computer into a box to be spent

later. Yes, they “account” for it by putting information in an account they may call a “trust fund,”

but this is “accounting”—after the fact record-keeping—and has no operational impact on

government’s ability to later credit any account (i.e., spend!).

Ever wonder what happens if you pay your taxes in actual cash? The government shreds

it. What if you lend to the government via buying its bonds with actual cash? Yes, the

government shreds the cash. Obviously, the government doesn’t actually need your “funds”

se

Put another way, Congress ALWAYS can decide to make Social Security payments,

previous taxing or spending not withstanding, and, operationally, the Fed can ALWAYS process

whatever payments Congress makes.

collecting taxes or borrowing has no operational connection to spending. Solvency is not an

issue. Involuntary government bankruptcy has no application whatsoever! Yet “everyone”

agrees—in all innocence—that there is a solvency problem, and that it is just a matter of when.

Everyone, that is, except us and Chairman Greenspan, and hopefully now you, the reader, as well!

So if solvency is a non-issue, what are the issues? Inflation, for one. Perhaps future

spending will drive up future prices. Fine! How much? What are the projections? No one has

even attempted this exercise. Well, it is about time they did, so decisions can be made on the

relevant facts.

The other issue is how much GDP we want seniors to consume. If we want them to

consume more, we can award them larger checks, and vice versa. And we can do this in any

year. Yes, it is that simple . It is purely a political question and not one of “finance.”

If we do want seniors to participate in the future profitability of corporate America, one

option (currently not on the table) is to simply index their future Social Security checks to the

stock market or any other indicator we select—such as worker productivity or inflation, whatever

that might mean.

Remember, the government imposes a 30% corporate income tax, which is at least as

good as owning 30% of all the equity, and has at least that same present value. If the government

wants to take a larger or smaller bite from corporate profits, all it has to do is alter that tax—it has

the direct pipe. After all, equity is nothing more than a share of corporate profits. Indexation

would give the same results as private accounts, without all the transactional expense and

disruption.

Now on to the alleged “deficit issue” of the private accounts plan. The answer first—it’s

a non-issue. Note that the obligation to pay Social Security benefits is functionally very much the

is operationally independent of, and not operationally constrained, tax collections or borrowing.constraints on government payment can.perfor further operational purpose.This process is not revenue constrained. Operationally,

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The Center for Full Employment and Price Stability

Kansas City dedicated to promoting research on and public discussion of issues related to macroeconomic and monetary policy,

especially employment and budgetary policy. The Center is interested in your feedback on the ideas put forward in its publications.

You can contact us at:

is a non-partisan, non-profit policy institute at the University of Missouri -

Center for Full Employment and Price Stability

University of Missouri – Kansas City tel.: 816-235-5835

Department of Economics; 211 HH fax: 816-235-6558

5100 Rockhill Road www.cfeps.org

Kansas City, Missouri 64110 cfeps@umkc.edu

In his recent book,

number of false beliefs that are being perpetuated among the American people about how our

society operates: innocent (and sometimes not-so-innocent) frauds. There is perhaps no greater

fraud being committed presently—and none in which the stakes are so high—as the fraud being

perpetrated regarding government insolvency and Social Security. President Bush uses the word

“bankruptcy” continuously. And the opposition agrees there is a solvency issue, questioning only

what to do about it.

Fortunately, there is a powerful voice on our side that takes exception to the notion of

government insolvency, and that is none other than the Chairman of the Federal Reserve. The

following is from a transcript of a recent interview with Fed Chairman Alan Greenspan:

RYAN… do you believe that personal retirement accounts can help us achieve solvency

for the system and make those future retiree benefits more secure?

GREENSPAN: Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the

sense that

money as it wants and paying it to somebody.

system which assures that the real assets are created which those benefits are employed to

purchase. (emphasis added)

For a long time we have been saying there is no solvency issue (see

SOCIAL SECURITY: ANOTHER CASE OF INNOCENT FRAUD?