Two parallel debates currently going on. The first is between Charles Krauthammer and the Obama Administration over the current insolvency of the Social Security Trust Fund. The second is a renewed assault on Meredith Whitney and her fellow Cassandras over the financial condition of many states and cities.
Krauthammer recently penned two columns in which he stated the obvious : Social Security is technically insolvent. There is no lockbox. There are zero tangible assets in the Trust Fund. It is long past time for Obama to seriously discuss a combination of reducing benefits and raising revenues to pay current and future retirees. Since outlays already exceed what is being taken in by payroll taxes, the Social Security Trust fund is insolvent now. Right NOW !
Jack Lew, Obama's Director of OMB claims the system is solvent until 2037 and that the "special issue" bonds issued by the Treasury have "real value". As Krauthammer points out, both contentions are total and complete fiction. Lew concedes that the Treasury has been spending the Social Security surpluses for decades. The bonds that Treasury has been depositing in the Trust Fund are nothing more than a bookkeeping measure; an accountant's trick. They have NO VALUE. They cannot be bought and sold on any equity market. Unlike bonds bought by the Chinese, Goldman Sucks et.al. the "special issue" bonds are NOT counted in calculating either the budget deficit nor the National Debt. These intragovernmental bonds are NOT included by anyone in any debt to GDP calculation.
If we default on bonds held by the Chinese, Japanese and private investors, there will be disaster as the dollar collapses and our ability to borrow is killed. We lose our Triple A credit rating and go the way of defaulting countries like Mexico, Argentina and Greece. In contrast, if Treasury defaults on money "owed" to the Social Security Trust Fund, it will have ZERO effect on PUBLICLY held debt. It will mean that Social Security will have to be means tested ( no more checks for Warren Buffet et.al. ) as the retirement age is raised along with the income cap for payroll taxes.
Mr. Lew and others claim that the Treasury "special issue" bonds are backed by the "full faith and credit" of the U.S. Government. The fact remains that those IOU's do not have any real value. There are no real assets behind them. They are nothing but a record of PAST borrowing by one part of the government from another. The most damning argument Krauthammer used in response was to ask: whether if Treasury had borrowed twice as much from the Trust Fund and replaced those funds with twice as many IOU's, would the Fund be twice as strong ?
Now, as the "Baby Boomers" retire they will only get their Social Security paid by future taxes and borrowing OR a reduction in benefits. Period.
As I noted in another thread, Meredith Whitney is catching more than her share of flak for predicting as many as "50 to 100 " state and municipal defaults. While some have attacked her credibility, others have questioned her numbers. Silliest of all are the latest group who actually say that the defaults she has predicted are just not going to happen. And she should keep her mouth shut. Why ? Just because a state or municipal bankruptcy is just so unthinkable ! Some of these ninnies actually say that current state and local fiscal difficulties are all because of the recession and that once things turn around, everything will be fine. I am not making this up. Read Mr. Klein's Op-Ed piece in today 's N.Y. Times. Many , including Mr. Klein either barely mention or completely ignore the STRUCTURAL deficits in many state and local budgets. While revenues are increasing slightly, current expenses and FUTURE obligations for both pensions and health care have exploded.
Generally speaking, tax increases are NOT an option. Not if they want to retain anything resembling economic competitiveness with other states. While states like Indiana, Wisconsin and arguably Florida and N.J. have gotten serious, others like California and Illinois continue to kick the can down the road and have yet to get serious about controlling spending. The jury is out on N.Y. despite Cuomo's media blitz. The fact remains that he has done is make PROPOSALS. The 500 pound budget gap gorilla ( $ 10 billion approx.) is still sitting in the room in Albany.

