Ignore the Alarmists, Social Security Is Not Going Broke

Markets sure are calm in light of the fact that the United States is said to be flirting with default on its debt. According to panicky economists, pundits and politicians, default would be “catastrophic,” interest rates would “skyrocket,” and a “global recession” would ensue.

Except that actual markets are once again calm. Which is the point. Those with actual skin in the game aren’t worried, and for obvious reasons: there’s nothing to worry about. Even if no debt-ceiling deal is reached such that bills cease being paid, there will still be no major domestic or global freakout.

The reason why there won’t be is that U.S. Treasury collects way too much revenue now, and the clear market expectation is that it will collect quite a bit more revenue in the future. Gargantuan federal debt at the moment is an effect of these market expectations, as is the whole debt-ceiling debate in general. The only real reason Treasury still operates under a debt ceiling is because it’s well known that investors around the world would happily line up to purchase quite a bit more debt issued by the finance department of the federal government simply because Treasury is backed by the world’s most productive people.

We once again have a debt problem because we have a too-much-revenue-now-and-in-the-future problem. It’s as basic as that. To focus on the debt or the debt ceiling is to the miss the point altogether. Still, the too-much-revenue problem will perhaps calm the nerves of readers while arguably explaining market quietude in concert with political and economic types losing their heads.

In which case, stop and imagine what would happen if there is an actual “default” whereby Congress doesn’t vote Treasury the right to issue more debt. The previous scenario is unlikely when it’s remembered how Democrats and Republicans in Congress want to keep government operating in large size (hint: they all want to live well now, and in the future when they’re out of politics), but imagine if it does happen.

If so, there still won’t be major convulsion simply because it would be more than easy for federal entities to issue IOUs to those owed. Rest assured that markets for those IOUs would be highly liquid, and likely command near close to face value. See above if you’re confused.

Which brings us to Social Security. Those who’ve long clamored for Social Security privatization, or merely freedom to opt out of Social Security, have frequently rooted their passion in the laughable presumption that “Social Security is running out of money, and it might not be around in the future.” Yes, the presumption is laughable.

To see why consider the fact that Treasury keeps running up to the “debt ceiling,” all the while routinely adding ever more debt. That Treasury can borrow so easily and so cheaply is yet again a loud signal from the marketplace that tax revenues are extraordinarily high now, and they’ll be exponentially higher in the future.

About what’s been written, none of it is meant to cheerlead Social Security or other such programs. In an ideal world, the federal government wouldn’t be so large and its policy portfolio so expansive as to offer these kinds of programs.

At the same time, it’s worth considering the sanguine stance of the broad markets to so-called “default” with the future of Social Security top of mind. They’re well connected when you think about it. And the connection indicates that for good or bad, Social Security doesn’t face any funding challenges now or in the future.