Thursday, March 25, 2010

Social Security will never go bankrupt

The NYTimes leads:
The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
There is nothing important about this threshold. Alan Greenspan, whose star has sunk quite a bit since his days as the Maestro, continues:
“When the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s, said on Wednesday.

That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.
This is not correct. When the level of the fund falls to zero, the Treasury, who cuts social security checks, and continue to write checks and the checks will not bounce.

The Government prints money whenever it spends, and is thus never operationally constrained in its spending. Spending too much will, of course, cause inflation, but whether the system pays out more than it takes in, or whether it accumulates a "trust fund" (which is a meaningless concept) or exhausts this "trust fund" has no bearing on anything.

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