Market Overview

Debt Limit Bill and Social Security Benefit Cuts

(cross posted at SocialSecurityDefender.blogspot.com)

Well the first line of attack is opening up. Lindsay Graham is threatening to hold up the Debt Limit Increase Bill, and so potentially throw this whole country and perhaps the world into default unless he gets cuts to Social Security.

This is insane on several levels, not least because the two things have nothing to do with each other to start with. To understand this we have to back off and examine four different categories of debt: Public Debt, Debt Held by the Public, Intragovernmental Holdings, and Debt Subject to the Limit. Total Public Debt and Debt Subject to the Limit are essentially the same dollar figures (an explanation of the difference here: Limit Difference), so when you compare the dollar total for the former from this link with the current limit as reported in the papers you can see how close we are: Debt to the Penny. So yes something needs to be done, but how does Social Security fit in?

It doesn't. As you can see 'Public Debt' is the sum of 'Debt Held by the Public' and 'Intragovernmental Holdings' which latter includes the current $2.6 trillion Social Security Trust Funds. But cutting Social Security benefits in the short to medium term just makes Public Debt GO UP (or at under some formulations stay even).

If Social Security on a combined basis (OASDI) or for either component (OAS or DI) takes in more in taxes than it spends those surplus dollars plus interest on the existing Trust Fund get credited to the Funds in the forms of Special Treasuries. But those assets, though real as any other bond, also respesent obligations and so add to Debt Subject to the Limit. Meaning that any action that reduces the flow out in the form of benefit cuts/retirement age or increase the flow in via cap increases simply add to the bottom line and so make the country reach the Debt Limit FASTER. Now some big name economists say this isn't really true, that instead the net effect is a wash. Well okay, I don't buy it thinking they have confused an textbook accounting identity for a real world operation, but either way cutting Social Security benefit cuts DOES NOT HELP IN ANY WAY WITH THE DEBT LIMIT.

It is not clear whether Lindsay Graham understands that he is simply holding the world's economy and the retirement benefits of millions of people in the future hostage to a simple hatred of the New Deal. But no one else should be fooled, cuts to Social Security and particularly phased in cuts in future decades have nothing to do with U.S. actual debt obligations in Spring 2010. It is pure blackmail.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

 

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