Bankrupt Critique

So, Bush got heckled during the speech, and then critiqued on the CNN after-commentary by Sen. Feinstein (and probably a couple other talking heads I didn't see) for using the term "bankrupt" to describe Social Security in 2042. But I'm not clear exactly why that is wrong. We all realize that people who declare bankruptcy are not totally out of money, right? Their debts just exceed their holdings. Which (even if you count the trust fund as a real asset) would be true of Social Security. It could still (assuming no reform) pay 70 percent of scheduled benefits, but isn't that consistent with the more familiar sort of bankruptcy? In other words, the bankrupt person's assets get divvied up, and they get to keep working and eating even if they can't fully discharge the debts. Now, "bankrupt" has a stronger connotation than "unable to pay all benefits," and maybe the intention was to mislead somehow. But, at least technically, isn't it an admissible description?

Comments

[raymond]

The layman hears:

bank?rupt

totally lacking in a specified resource or quality

The person giving the speech is:

bank?rupt

A person who is totally lacking in a specified resource or quality: an intellectual bankrupt, a moral bankrupt.

In other words...

[R C Dean]

Way to dowdify your definition, there, raymond. The "totally lacking" definition isn't a financial definition, so those who pretend that it is are being dishonest. The president was using the term in its financial sense, insufficient assets to cover their debts, which is perfectly accurate.

[Josh]

By this logic the federal government has been bankrupt for quite some time.

I find it odd that he plans to overhaul SS on the grounds it is going bankrupt, all the while he and congress raid its substantial surpluss year after year to pay for items in the general budget.

[Randolph Carter]

Funny, I was flipping through the cable news channels for commentary, and Bill Kristol said the above paragraph almost verbatim after Pelosi's response.

[digamma]

That bankruptcy date will only occur if the economy grows at a rate significantly slower than it has for the last half-century. And if such slow growth occurs, private accounts are going to be in a world of hurt too.

Social Security Crisis : Privatization :: WMD's : Iraq War

In both cases, there may be good arguments for the policy, but the main argument is bullshit.

[Semolina]

Missed the speech. Re the heckling: who/when/why/how bad?

[Josh]

"Missed the speech. Re the heckling: who/when/why/how bad?"

Just barely audible shouts of no were heard on the audio feed after he said that Social Security was going bankrupt.

[Isaac Bartram]

I find it odd that he plans to overhaul SS on the grounds it is going bankrupt, all the while he and congress raid its substantial surpluss[sic] year after year to pay for items in the general budget.

Josh

This didn't start with Bush. There is no provision in the law to do anything with the SS "surplus" but use it "...year after year to pay for items in the general budget". In return SSA gets special Treasury bonds to hold as the Social Security "Trust Fund".

What do you want them to do with the "surplus", stuff benjamins in the mattress in the Lincoln bedroom?

Anyway, bankrupt is an inapt term for anything to do with SS. Social Security's "solvency" is entirely dependent on Congress' willingness to levy sufficient taxes (or borrow) to cover its payouts.

Oh, and by the way, I think Shrub's "privatization" plan is just as nuts as the current program.

[Anon]

Julian,

This is an unusual argument. You are suggesting that the response to the phase "Social Security bankruptcy" is not in keeping with the formal definition of bankruptcy -- as if that is what Bush intends to indicate. But, to quote Rex Nutting's pretty readable article on the subject (as pasted into Brad deLong's blog):

The Social Security system cannot go "bankrupt," for it has no creditors. By law, the trustees will continue to pay reduced benefits even if the trust fund is exhausted. Payroll taxes will continue to come in and benefits will continue to be paid. According to the trustees' intermediate economic forecast (neither doom nor boom), the trust fund will be able to pay about 73 percent of scheduled benefits in 2042 and about 68 percent of scheduled benefits in 2078. Future presidents and Congresses could also choose to fully fund scheduled retirement benefits from general tax revenue.

This just reiterates Isaac Bartram's point about, that Social Security solvency really depends on the will of Congress, and therefore this discussion should properly focus on the bankruptcy of Congress. Take that phrase as you will.

Anon

[Isaac Bartram]

Anon

It should be pointed out that in order to "cash in" the trust fund to pay benefits, revenue will have to be raised through general taxation or borrowing.

This is my main complaint about SS. Why do we have go through this complicated (not to mention deceptive) charade about "contributions" and "trust fund"? Why not just levy enough taxes year by year to pay for this program?

[matthew hogan]

Haven't done the math but has a connection been drawn, or should it be drawn, between a relatively generous immigration reform proposal and its likely effect of creating new labor, and especially temporary labor, in increasing the long-term revenue base for SS?

[james]

Ya'll aren't thinking about the children. Congress will keep putting off fixes to get elected. And my kids, who may make it to 2078, sure as hell shouldn't have to pay for the big spending you boomers are benefiting from now.
At the risk of being booted from this blog again, I have to say Bush has got it right, and ya'll that are blocking this plan are greedy mother fuckers.

[phil]

Julian,
I am no lawyer, but bankruptcy is not just having fewer assets than liabilities. That definition describes most people under 30 (and a few over) who have a lot of debt and no assets. To win a bankruptcy petition, you have to prove that you cannot pay your debts off with your assets and your income cash flow. A newly minted doctor with $200,000 in debt, no assets and a $250,000 income is considered in good shape, because paying a few thousand in debt payments a month out of cash flow is a snap. The government will not have any problem paying benefits out of general tax revenues. Many here would not like to pay those extra taxes, but not wanting to pay does not create bankruptcy, only inability to pay does. That is the reason that the bankruptcy wording is wrong, even it serves a political point to help control taxation.

[Ruthless]

Reminds me of "impeachment."
Repuglickins impeached, but they still weren't able to dislodge the asshole.

[joe]

"We all realize that people who declare bankruptcy are not totally out of money, right? Their debts just exceed their holdings."

That's not what bankruptcy means, either.

Most homeowners owe more on their mortgages than they have in assets, and they're not bankrupt.

[Todd Fletcher]

"Most homeowners owe more on their mortgages than they have in assets, and they're not bankrupt."

That doesn't make sense. If they owed more on the mortgage than the value of the property, the bank wouldn't finance it.

[joe]

Now you've got me wondering, Fletch - do I count the entire value of my property as an asset that I own, or just the equity I have in it?

My point was, most homeowners' debt exceeds their equity in their home + car, furniture, and savings account.

[SR]

Todd, the market value of your home is not an asset of yours, only the equity you have in the home is.

[Isaac Bartram]

joe & SR

If you count your mortgage as a liability, you count your home as an asset. The difference betwen the two is your equity which is part of your net worth.

[Ignorant Law Student]

Technically, a "bankrupt" legally is someone (including the legal persons that are corporations) who files for bankruptcy. You do not have to be insolvent (the term for when debts exceed assets, which describes almost everyone) to file for bankruptcy, although your case may be dismissed for "bad faith" if you aren't.

So, if Bush was using "bankrupt" in the Title 11 of the United States Code sense, he was saying that he didn't think Congress was going to be willing to foot the bill for Social Security after a certain time and would seek relief, not that debts necessarily exceeded assets.

[Anon]

Isaac,

I agree to your response aboe. I belive digamma once called for just putting SS up for renewal every year -- let the seniors fight for their dollars!

And thank you for clarifying about homes as asset or equity.

Anon

[Mo]

This isn?t my ideal situation, but it?s what I hope we could just turn SS into. Get rid of the payroll tax and pull all the money out of general revenue. The payroll tax is awful. Means test it and keep the same name because it sells better than ?Elderly Welfare.? Increase retirement deductions so you can put money in private accounts if you want. The best of both world, everyone gets a ?private account? if they want one, but it?s run by a company that you choose and actually competes in the free market instead of for the government contract (hence lower management costs). Plus, the poor elderly, that we?d pay for if they f?ed up their private account investment anyways, still won?t end up in the gutter.

I don?t trust the government to manage 300 million retirement accounts semi-effectively and there will be some major screw-ups that will end up costing us way more in the long-run. Between Bush?s plan and the current situation, I?ll take the devil I know.

Now Medicare, there?s a boondoggle.

[Mark Draughn]

(Not that this has anything to do with what Bush was talking about, but...) Technically, as a general rule, talk of bankrupting the United States government (or any part of it) is almost always wrong because the government is not like the rest of us. First of all, the government has the broad power to tax. The government could simply take what it needs to pay the debt. Second, most of the U.S. debt is owed in U.S. dollars. The government prints U.S. dollars. If necessary, the government can print the money to pay the debt. Both taxation and devaluation of the currency on this scale have terrible consequences, but bankruptcy is not one of them.

[Skeptikos]

Another point:

I can't remember which one right now, but when they first started taking SS money and applying it to the budget, on of the Senators stood up and claimed that this was embezzlement. His fellow s's said, no, because we still "owe" ss this money.

SS is only Bankrupt if it was "embezzlement". If it is a debt that will be repaid, then it is a temporary shortfall. What Bush is really declaring his refusal to pay the US Govs IOUs. This is disturbing for a number of reasons. One of them from a Global Investor's point of view, (And I have already had this convo as part of a bigger convo, about why I hold my international investments as Euros now and not Dollars, with a fellow from Sweden) is that it signals a potentialy greater shift to the potential for a declaration of US bankruptcy.

In other words, imagine your bank won't pay you the miney that you have in the bank. You may at that time have to declare bankruptcy, just as SS is being declared Bankrupt. But it is not Bankrupt in the common way we use, it is bankrupt due to refusal to realease the funds to pay the debt, not because the funds do not exist.

[Isaac Bartram]

I can't remember which one right now, but when they first started taking SS money and applying it to the budget,...

That would have been right at the beginning. There has never been any other provision for the excess payroll tax to be used for any other purpose. As I said above "What do you want them to do with the "surplus", stuff benjamins in the mattress in the Lincoln bedroom?"

In the original debates one side wanted SS in its current form. The other side proposed a means tested plan paid out of general revenue.

The response was that this would condemn the elderly to a life on welfare. There has always been a strong atipathy to welfare in the US, so pretending SS wasn't welfare was particularly important to its proponents.

[thoreau]

I like Mo's idea. Why create an additional system when the current one could be simplified?

[thoreau]

And fwiw, my understanding is that all of the accounting gimmicks with the SS surplus are just a fancy way to disguise the fact that the SS surplus goes into general revenues. Instead of selling bonds to the public, they "sell" bonds to the SS system and leave behind an IOU. As long as the SS system has a surplus, the bonds are rolled over upon maturity, and the surplus continues to be diverted into general revenues.

At some point there won't be a surplus. At that point, instead of rolling over the bonds the SS administrators will collect on them, so money from general revenues will be sent over to SS.

So all it really means is that payroll taxes are put into SS, excess payroll taxes are diverted into general revenues, and if payroll taxes aren't enough the gap will be covered by general revenues.

It's a sleazy way to shuffle the money and maintain appearances, but once you strip away the fancy labels the system is pretty straightforward. I don't like it, but I don't see it as any less sound than any other program relying on general revenues.

[Dynamist]

Following from the popular misconception that SS is a separate pension plan fully funded by payroll deductions, it is facing a possibility of future bankruptcy. The deductions cannot continue covering the obligations for benefits at present rates. Any entity other than a national government would be bound by this math.

As it works, the US has the power to tax and make good on any promise until the burden is great enough to cause revolt. The deficit in the "separate pension scheme" can be paid as long as citizens render to caesar, so there would be no discharge of debt in a bankruptcy court.

And there's the important bit of bankruptcy: it is a discharge of debt, due to an inability to fully honor the debt. Can the productivity of the nation pay for the promises it is making? Bonds are fixed contracts, with defined payments. SS is a defined-benefit program, the cost of which increases as workers live longer. As future medicine helps people's lives in their non-productive years, they draw more funds than today's actuaries calculate.

There's less future uncetainty risk in bond-funding a war than in making an open promise of $862.12 for every month you continue living. A major influenza epidemic in about 10 years could solve the problem (financially).

[keith]

Can the ss trustees make the call to liquidate their "special bonds"? China, Japan and India have enormous dollar reserves (thanks to the trade imbalance) and represent the primary buyers of traditional US public debt. If the ssa made the call that they had to make payments and sold the bonds to the foreign holders, would that not be "problem solved" for the old farts, and simply a double-down for America on the current geopolitical/monetary exhange tableau?

[Jennifer]

I know this is slightly off-topic, but there's one MONSTROUSLY unfair and fraudulent thing about the current Social Security system that I've never, EVER seen mentioned in the news; maybe most people don't know about it.

Get this: I've been working (at least part ime) since 1986, and have paid SS taxes for years and years.

However, I haven't paid into SS for my entire working life. I taught for three years in Massachusetts (where certain public employees do not pay into Social Security because they belong to the state retirement plan), and I had an SS-free job for a few years before that, too.

Now I work in the private sector again, and paid a big chunk of FICA last year, but when I got one of those "benefit forms" from SS I saw that if I became disabled or forced to retire tomorrow I'd never see a dime of SS money, because in order to get SS you need to do more than work a minimum number of years; you also, apparently, have to make sure you've been paying into the system for the majority of the past ten years, or else anything you did before that no longer counts toward your work total.

So despite having paid steadily into the system from 1986 through 1995, and for about 18 months in 1999 and 2000, as far as Social Security benefit calculations are concerned I've only been paying into the system since January of last year.

The form also told me I won't be retiring until I'm 67. This whole thing would irritate me more if I hadn't decided years ago that I'd better plan for my old age based on the assumption that I'll never receive a penny of the money I paid to FICA, even if I live to be ninety.

[Gilbert Martin]

"This is my main complaint about SS. Why do we have go through this complicated (not to mention deceptive) charade about "contributions" and "trust fund"? Why not just levy enough taxes year by year to pay for this program?"

Because then they'd have to raise general taxes to pay for all the other stuff they've been spending the excess FICA taxes on - or quit spending money on it. And that would mean they would have to get serious about setting budgets and spending priorities RIGHT NOW instead of kicking the can years down the road when it will be some other politician's problem.

[Isaac Bartram]

Gilbert Martin

BINGO!

Now you know why FDR and the New Dealers structured SS this way.

keith at February 3, 2005 04:00 PM

The "special bonds" held by the SSA are a completely different class and cannot be held by any other entity. When the SSA needs money over current payroll tax receipts it will present so many "bonds" to the Treasury and it will get so many dollars. Treasury will get this money thru taxation or by borrowing. In other words the same way it gets all it's other dollars.

Do not confuse the future crisis in SS to the crisis that could happen if all them furriners decide to cash in their T-bills. Anybody remember when Tricky Dick had to slam the Gold window closed on DeGaulle?

[Isaac Bartram]

keith at February 3, 2005 04:00 PM

By the way the answer to your question (last sentence) is yes. Likely as not Treasury will borrow from the usual suspects to "redeem" the SS "bonds". This will cause a change in the ratio of debt held by the govt to that held by other institutions and private individuals.

Does this prospect make you feel better? 🙂

[Dynamist]

Or...libertarian, georgist, or some yet-to-be-discovered philosophy could sweep the nation, removing much of the tax and regulatory limits on value creation, and we actually grow enough to pay off the promises. It will take something more dramatic, I think, than just righty capitalism.

Please don't crush my dream... 🙂

[The Wine Commonsewer]

The only reason that social security has any alleged surplus at all is because social security taxes now account for 15.3% of the first 90 grand of every individual's wages.

That's ten times the dollar amount of wages subject to tax and nearly double the percentage rate of tax that was effective the day I started working.

SS is obligated for more than the entire wealth of the country.

The system IS broke, it's always been a Ponzi scheme, and the fact that GWB brings that up doesn't make it a crock of crap.

And that's just the pragmatic argument. There is also a moral argument that is the true third-rail of politics..........

Can't just let all those people starve in the streets.

[Joe Smith]

Bankruptcy
A state of insolvency of an individual or an organization ? in other words, an inability to pay debts. The U.S. bankruptcy code is divided into chapters that provide different types of relief from insolvency. Under Chapter 7 bankruptcy, you petition the court to be freed from all your debts following the liquidation of almost all your assets. Certain assets, like your house, are usually exempt from liquidation. Chapter 11 allows you to remain in possession of your assets, but a repayment schedule must be negotiated with creditors.