February 22, 2005
Brad Setser Foams at the Mouth
He dislikes both the Bush administration's non-Social Security plan and the Washington Post:
Brad Setser's Web Log: The confused conservatives on the Washington Post oped page ...: The reform basically creates cash flow deficits in Social Security... where there were none from now until 2050 or so. In exchange, the reforms theoretically get rid of the gap between promised benefits and expected revenues after 2050.... The only certainty associated with the reform is that it will increase the amount of marketable debt in the near term, and that this increase will lead to a significant increase in the United States 'debt to GDP ratio', with debt here being 'debt sold to the public.' Any offsetting cost savings are purely hypothetical -- they are no more real that the CBO budget forecasts that assume the budget deficit will go away because the tax cuts expire. Any future benefit cut embedded in the reform could (and, if it is too draconian, almost certainly will) be reversed by future Congresses....
[T]he proposal effectively takes a government program that is now fully funded, indeed over-funded, on a cash flow basis, and creates a cash flow deficit in that program immediately. After all, if the rest of the government currently operates with cash flow deficits, why shouldn't Social Security too?
If you hold a 10 year bond, or even a 30 year bond with a residual maturity of 25 years, the cash flows of the proposed reform are negative until after your bond matures, and the reform would involve a substantial increase in Treasury issuance and the overall stock of Treasuries in the market while the bond you hold is outstanding....
Posted by DeLong at February 22, 2005 06:56 PM