Some comments I made to a column by Charles Krauthammer:
Yes, I agree with this assessment. Technically the bonds in the social security trust fund are "backed by the full faith and credit" of the US government and so you can naively say "well, there's no safer investment than US government bonds, so the trust fund is flush and set for years to come!" But the key thing is, those government bonds will have to be paid off with real assets/revenue, and where does the US government get these real assets/revenue? From us taxpayers, of course. Social security has not been a problem so far because the yearly new intake of money from payroll taxes has more than covered the outflows (i.e. checks to seniors). But starting last year this changed, and going forward the trust fund will need to be tapped more and more to send out seniors' checks, and revenue (i.e. taxes) will need to rise to pay for it (or benefits reduced, etc.)
Its basically the same situation as if more and more of the foreign holders (China, Japan, etc.) of US treasury bonds all of a sudden start redeeming their bonds and demanding that the principal be returned; revenue would need to be increased to be able to handle these increasing redemptions. Same for social security going forward.
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One more thing I want to emphasize. Krauthammer and others of a like mind are not saying that the bonds in the trust fund are wothless and have no value; they do have value and are a real obligation of the US government, just like all the other bonds held by foreigners. The key issue is the economic consequences to the United States from fully honoring this obligation. The money to pay for the redemption of these social security trust fund bonds will have to come from us taxpayers and could require tax increases, and that will have real economic consequences (reduced economic growth, etc.)
So yes, technically the trust fund bonds must be honored, but it is us as taxpayers who is doing the honoring. So we as a country need to decide: is it better to fully honor the debt obligations to the social security trust fund (and then have to face the negative economic consequences of that); or would it be better to lessen those obligations somewhat (raise retirement age, means test, etc.) which would require smaller or no tax increases and thus lessen or avoid negative economic consequences. They are both bad options and you'd rather not have to do either, but that is basically the choice we face. So which of these is the least worst solution for our country as a whole?
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Actually, in thinking about this some more I wonder what the relative real economic consequences would be of the two options I wrote (i.e. fully honor social security obligations and raise taxes to fund, or lessen the obligations and don't raise taxes). Basically, it is all our (i.e. United States citizens) money here and the key decision is just how to divvy it up among ourselves. Do we give more to seniors (by social security) and take away from younger workers to pay for it; or do we give less to seniors and let younger workers keep more. So the key question is what is the optimal allocation of the money among different age groups and classes of US citizens, and the answer to this would depend on your priorities and moral persuasion. Are we trying to optimize growth of the US economy? Do we value a comfortable retirement for seniors over growth? Etc.
But then again, the size of the pie is the same and so maybe the economic consequences are the same no matter what we do. I.e. a dollar taken away from a current worker in taxes to fund social security is a dollar that the worker can't spend in the economy; but that dollar goes to a social security recipient who CAN spend it. Alternatively, a dollar kept by the current worker can be spent in the economy, but then that is a dollar NOT being spent by a social security recipient. In either case, a dollar is getting spent in the economy, the difference is just who is doing the spending. So maybe it is just a moral question. Do we value the needs of retired seniors over the needs of current workers? Probably too simplistic (e.g. current workers might be more likely to spend the dollar than seniors, etc.) but one reasonable way to think about the problem nonetheless.
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But then again, maybe the real issue is that you ideally want all your citizens to be productive members of society, i.e. adding real economic output. It sounds cruel of course, but technically retired seniors are not productive members of society, in that they are consuming resources without giving back in productive use of their time and energies to help produce those resources (i.e. not working, which is the definition of retirement). So you ideally want a small percentage of retired people in your population, but for us this will be increasing going forward. So there will be a relatively smaller productive work force supporting a relatively larger group of retired seniors. This is just a fact and not much you can do about it (maybe raise retirement age a bit but there are physical limits to this); not sure what we can do about this.
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