Monday, April 22, 2013

The Real Social Security Crisis

I just figured out why Social Security is in a crisis. There is a crisis, but it is not a governmental crisis, a senior crisis, or any of the other things that would concern the average American. Whether there is a crisis depends on your point of view. The crisis is that Social Security reduces the interest rate that the US Government pays on bonds.

When you look at who owns the national debt, Social Security is the second largest owner at just over $2.7 trillion, or about 1/8 of all debt the government owes. The second largest holder is the Federal Reserve at $1.66 trillion currently. Social Security has run a surplus for over 30 years now, and that surplus is reinvested in government bonds which over a long time has added up to a large surplus.

By providing the government easy money to cover the deficit we have run since the Bush tax cuts in 2001 (before which we had 4 years of a growing surplus) it diminishes the interest rate. Here is a chart I made demonstrating a constant demand rate, but a diminished supply, the simplest of economics graphs:
Basically, by having social security run a surplus year after year, which I have already blogged about, the US government pays less on the debt which means that we have easy access to a large amount of credit annually. This is good for the tax-paying American.

However, there are some people who don't benefit from such an arrangement, which is every Amrican who borrows more in bonds than he/she pays in taxes. Mostly finance people who work at banks who get easy money from the US government by selling bonds, at almost no risk. The money that they get from the government comes from taxes and future bonds. If the government was to run a surplus the government would not need to sell bonds and the interest rate would collapse because the supply would be 0, which would force banks to invest in other ways. Since the government routinely runs a deficit, there is always a need for bonds to be sold in order to cover expenses, so bonds will pay people money so the government can continue providing services that Americans rely on. If the government was to balance the budget or run a surplus this easy money would be gone.

By eliminating social security, as some Republicans want to do, or by reducing the tax rate and payments little by little until nothing is left, the government will lose this revenue that diminishes interest rates and income taxes beyond the level they would be otherwise. If Social Security was eliminated we would see that the interest rate the government pays on bonds would rise because they would need to sell more bonds to the private market in order to raise enough revenue, and the banks that buy large amounts of bonds will make more easy money.

If we eliminated the Federal Reserve as some Libertarians want to do, the government would lose the other major holder of American debt which further decreases interest rates. A lot of Tea Party Republicans claim how it is "monetizing the debt" which they say is a bad thing. While I agree that debt shouldn't be used in all times I recognize as a Keynesian that during recessions it is worth taking on debt to get the demand curve up to where it was to end the recession. But I do understand that if too much money is printed beyond the demand for it you could create runaway inflation which looking at a number of countries where inflation is out of hand is clearly bad for the economy. The people who would have the most to gain out of eliminating the Federal Reserve would be the people who would benefit from controlling monetary policy directly. I don't usually read CNBC, but they wrote a really good article on how creating a central bank under the executive or legislative branches would create endless problems of politics here that I don't feel like I need to duplicate. The system we have now is the best we are going to have in terms of monetary policy. Their leaders are appointed by Congress and are able to make quick decisions without needing constant political debate within their mandate. In other words, between the money it provides to reduce interest rates on American bonds and stabilization, ending the Federal Reserve would be a very bad idea.

Source on who owns the debt:

Social Security Surplus by Year

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