Social Security card

Joseph M. Firestone suggests another course for social security.

Dear Mr. President,

Over the past 3 years you’ve returned again and again to the idea that Social Security has a long-term solvency problem, and therefore needs “reform,” even though, as of the end of 2012, the “Trust Fund” had nearly $2.7 Trillion in it. In spite of this healthy trust fund asset balance, SS Trustee projections, say that the trust fund will be down to zero by 2033 and that thereafter, until 2086, SS will be able to pay roughly only 75% of scheduled benefits without either cuts or increased sources of revenue.

As time has passed, your favorite entitlement reform proposal continues to be the “chained CPI”, which, you claim, is a better measure of cost of living changes than currently used, but which would cut SS benefits by using a new COLA formula which makes SS cost-of-living adjustments smaller and smaller over time, as seniors adjust to price increases in commodities they buy by shifting to less pricey goods. Smaller cost of living adjustments translate to lower benefits paid out and to more years of projected “solvency” for the SS program. The objective for achieving projected “solvency” is 75 years.

Critics have replied to this proposal by pointing out that “Chained CPI” is a less accurate measure of the real cost of living for seniors than the current COLA. As many have remarked, the chained CPI will say that the cost of living for seniors has decreased when they try to protect themselves from price increases in salmon by shifting to catfood instead. So, this measure makes attempts by seniors to adjust to inflation by lowering their standard of living work against them by ensuring that they will get less money in the future to cope with inflation.

I’m sure you will agree, when you think about it, that this chained CPI measure is blatantly unfair to seniors. It is not an accurate measure of actual cost of living increases, as you and others in your Administration and in the media have contended. What makes this proposal to “reform” SS even more unfair is that many think that there is no impending SS solvency problem at all, and we wonder why you claim that there is.

Indeed, if you think that lack of full Social Security solvency after 2032 is really a problem, and you also really want to “strengthen Social Security,” then we wonder why you don’t just do this?

– Direct the Secretary of the Treasury to open a separate spending account at the New York Federal Reserve Bank on behalf of the Social Security Administration.

– Direct the Secretary of the Treasury to use his authority under 31 USC 5112(k) to have the US Mint create a $3 Trillion proof platinum coin, and deposit that coin in the Mint’s Public Enterprise Fund (PEF) account.

– Once the Fed credits the PEF with that deposit of legal tender, sweep the Mint’s account for the nearly $3 Trillion in seigniorage reserves resulting from the deposit and crediting by the Fed of the Mint’s account, into the Treasury General Account (TGA), the primary spending account of the Federal Government.

– Then transfer the $3 Trillion into the new Treasury spending account established on behalf of the SSA, giving it a balance of $3 Trillion, and direct the Secretary to invest the money in Treasury Securities, in such a way that the redemption of these beginning in 2033 will cover the projected spending beyond projected revenue.

– If projections continue to show a lack of full 75 year solvency as the years go by, then a future President can once again use a platinum coin to extend the solvency period.

This proposal has the following advantages:

First, it doesn’t involve a benefit cut to a group many of whose members have seen the collapse of two of the “three stools” (private sector pensions and home ownership related savings) of their retirement plans.

Second, Democrats won’t have to risk defeat in 2014 by supporting you in concluding a “grand bargain,” part of which involves a very unpopular cut to Social Security. It will be hard to blame such a cut on the Republicans when you have been the one persistently advancing the idea of the “chained CPI.”

I suspect you think that might not matter because the Republican position on SS is even worse than yours has been. However, if you think back to 2010 you must remember that pointing out that the Republicans are worse than Democrats was not enough to avoid a disastrous Republican sweep, resulting in deadlock at the national level, austerity at the State level, and widespread gerrymandering, creating mountains for Democrats to climb in future elections. I doubt that blaming Republicans will be enough in 2014, when the public will think that the party it voted for, in part because it said it would protect entitlements, becomes the party that sold out SS.

Third, this proposal involves no tax increases on anyone.

Fourth, you can implement this yourself. Congressional action isn’t necessary.

And fifth, doing this will have no inflationary impact. The SSA won’t be spending any of this money until 2033 and beyond, and even then it won’t be spending any more money than it is currently scheduled to spend. So, the fear of inflation need not be a concern in this decision.

Downsides?

Well, you’d be using Platinum Coin Seigniorage with high face value coins in the Trillions. No one’s ever done that before. You’d be right up there with Lincoln’s greenbacks; but you’ll get lots of blowback, both political and legal from the Republicans. I’ve discussed and evaluated the legal issues at some length in this new Kindle e-book, as well as the political problems involved in using High Value Platinum Coin Seigniorage (HVPCS) involving coins with face values of $30 Trillion and above. I’ve explained why I don’t think either of the two classes of problems is significant in the book.

The legal situation is a bit different here from what I’ve previously discussed. Those in opposition to the President’s action might object that he had no right to fill the Treasury’s purse with seigniorage earmarked for SS spending when Congress has yet to make appropriations for spending those funds. I don’t think this argument is a good one however, since there’s no prohibition in the Constitution or in legislation preventing the Executive from filling Treasury spending accounts with seigniorage, and that’s all that Treasury would be doing here. The account established for the seigniorage funds would still be a Treasury account at the Fed, just like the TGA is. It would still be up to Congress to provide the authority to spend the funds going into that account on SS payments beginning in 2033.

The political problems are also a bit different here, and are probably somewhat less. Doing this to avoid any cuts to SS would, I think, be enormously popular. When you explain that no taxing and no inflation are involved, the reaction from most people will be “what’s not to like?” There may be a few cries of “printing money.” But you can easily counter these by repeating that none of the money will be spent for 20 years, and then what will be spent is only what is scheduled for SS benefits anyway.

Of course, the Republicans will be very angry that you’ve done this. But if they complain, then they get charged with not wanting to save SS without inflicting hardship on people. That’s a losing argument!

In my book, and in the past, I’ve argued that incremental Platinum Coin Seigniorage of this type doesn’t really produce a solution to austerity politics; and I’ve proposed using a $60 T coin to change the overall political climate surrounding fiscal policy. I haven’t changed my mind about this. It would be far better to pay off the national debt over time, and cover deficits for 15 – 25 years, so that people could come to understand that our government has no solvency constraints, but only inflation constraints, and that we can always create the money we need to allow the Federal Government to enable us to solve all of our current problems. That understanding would certainly also lead, in short order, to a system of automatic funding for all entitlement programs, not just SS.

The more incremental action of minting a $3 Trillion coin I propose here would be a great way to “strengthen Social Security.” But, it wouldn’t solve the problem of austerity politics. In addition, if you acted on it, it would create a Republican and corporatist priority to repeal your platinum coin seigniorage authority at the earliest opportunity.

On the other hand, the lesson would also not be lost on Republicans that any further debt ceiling hostage tactics, or other budget negotiation hostage taking, might well be met with more platinum coin seigniorage in the low trillions of dollars, or perhaps even with HVPCS itself and a $60 T coin, ending the whole game of pleading poverty as an excuse for imposing austerity on the American people.

I hope you’ll agree that this would be a wonderful result of an action on your part using platinum coin seigniorage to remove any further irresponsible talk of a long-term SS crisis. And I hope, also, that you will choose the course I’ve outlined and recommended here, rather than the course of joining with the Republicans to further impoverish seniors and the middle class by cutting Social Security.

Respectfully,

Joseph M. Firestone
(letsgetitdone)

Cross-posted from New Economic Perspectives.