April 12, 2005,
President George W. Bush traveled April 5 to Parkersburg, West Virginia to visit the so-called Social Security Trust Fund: a filing cabinet filled with paper. "There is no trust fund just IOUs," backed by no economic assets whatsoever, Bush noted.
Senator Jon Corzine (D., N.J.) called the president's remarks misleading. In a conference call with journalists, Corzine said: "U.S. Treasury securities have the ability to be paid under any circumstances based on the ability of the government to print money." While Corzine's press secretary denies this comment was a concrete proposal, at this writing, the senator proudly highlights this quote on the front page of his website.
So, as Corzine sees it, come 2041, when the federal government's plunging tax revenues will cover only 70 percent of its exploding pension obligations, Washington will trigger Treasury Department printing presses to finance Social Security checks.
Inflating the currency is a dreadful idea that has landed much of Latin America in massive trouble. Like a latter-day Evita Peron, Corzine smiles upon the Argentine economic model: skyrocketing prices, a currency as disposable as Kleenex, and rising social chaos.
Democrats have said many silly things in their crusade to scuttle President Bush's personal retirement accounts, but this must be the stupidest. And to think that Jon Corzine once ran Goldman Sachs!
Corzine's statement has left economists aghast.
*"It's true that we can always pay them [America's Social Security bills] by printing money, but that would mean inflation," says Milton Friedman, the 1976 Nobel laureate in economic science and a senior research fellow with Stanford University's Hoover Institution. "He [Corzine] is right when he says this, but that doesn't mean we don't have to be worried about it," Friedman adds by phone from his San Francisco apartment.
"It's never advisable to print too much money," Friedman warns, due to ensuing inflation. "That's a different form of taxation. It's a hidden form of taxation, but it's taxation nonetheless."
Asked what to expect if Corzine's concept were implemented in 2041, Friedman predicts: "It's going to be a serious problem."
"The 1970s give us a clear indication of what this would be like, but this would be the 1970s magnified," says Krzysztof M. Ostaszewski, actuarial program director and professor of Mathematics at Illinois State University in Normal, Illinois. "There would be inflation only if the Federal Reserve accommodates the federal government and actually adds the money supply. If they do, this could be substantial, because the shortfall amounts to about a quarter of Social Security benefits, and there will be a simultaneous, probably larger, Medicare shortfall, all of this amounting to something like 5 percent of GDP. So realistically this kind of inflationary policy could lead to a shock five time stronger than the current oil price increase, which already has slowed the economy and is felt throughout."
Ostaszewski, an adviser to the Cato Institute's Project on Social Security Choice, sees trouble brewing much sooner.
"I actually think that the pressure will start around 2008. That will be exactly 62 years after 1946," the year the first baby boomer was born. The youngest boomers then could opt for early retirement. "The cost starts rising sharply that year. Either we do something before 2008, or 2008 will become a crucial election. Similarly, the Medicare crisis will start in 2011, because Medicare benefits start at age 65."
"In any case," Ostaszewski adds, "in 2031, Social Security alone already will be missing 2 percent of GDP, and if this is monetized, as Senator Corzine suggests, then we are looking at a 2 percent increase in inflation every year. So, imagine having this inflation scenario starting with current 2-percent inflation: 2 percent, 4 percent, 6 percent, 8 percent, ... and so on. This, of course, would cause a disaster in our bond market, and the value of the currency. For anyone to propose that, as government needs money, we should just create money supply is really quite dangerous."
*"I think one always should be a little worried about someone saying we should not worry about government running the printing presses," says Steve Hanke, a Johns Hopkins University professor and a Forbes columnist. "The thing that isn't being said is that the money going into the trust fund IS NOT SAVED in capital letters. It's just a captive pool of money that the government taps into to finance general government expenditures other than Social Security."
"I think the senator should be much more worried about a clear accounting on Social Security," Hanke continues. "The idea that the pay-as-you-go concept is a sound savings and retirement system is a fraud. As concerned as the senator has been about transparency in corporate governance, he should pay equal attention to transparency in government accounts. That would include quite a massive restructuring and a lot more transparency in the Social Security system."
*One top Wall Street economist sees Corzine's approach cutting the dollar's value by more than one-third in the first year.
"The monetary base (M0) runs roughly 7 percent of GDP," he says in monetarists' parlance. This is "$768 billion M0 right now versus $12 trillion nominal GDP. Assume that ratio is the same in 2041. The Social Security benefit/receipts gap will be about 2.5 percent of GDP in 2042, I think. So printing that gap with high-powered money would dilute the dollar by 2.5/7 or 36 percent in the first year, so it would weaken that much at least."
This economist defines "high-powered money" as "MO." This includes physical cash plus bank reserves.
"Turkey used to do this (assume some of the budget deficit is printed)," he continues. "Until they dropped six zeroes from their currency last January 1, the Turkish lira was 1.35 million per dollar."
"You're right to make a big deal of it," he adds, requesting anonymity. "The negative consequences are huge, whether the government prints the money, raises taxes to pay the benefits, or suddenly cuts the benefits."
Senator Corzine deserves a sliver of credit for finally hinting at a Democratic answer to Social Security's mounting woes. With that pat on the back, the Garden State's senior senator should step away from the printing presses and go back to the drawing board.
Deroy Murdock, a media fellow with the Hoover Institution, is on the advisory board of the Cato Institute's Project on Social Security Choice.