Treasury Secretary Paulson in Wonderland

The US Government recently set a borrowing record—on Tuesday the national debt hit $9 trillion. As a concerned citizen I clicked over to the US Treasury Department to see if Secretary Paulson was concerned. Sorting through his recent press releases about debt limits and capital market competitiveness I noticed three items, oddly enough, about Social Security.

Social Security? Isn’t that the program running massive surpluses? Yes it is. Why, I wondered, would the Secretary be issuing press releases about that program. Ahhhhh…perhaps he’s is concerned because two of the nine trillion owed by the US Treasury is to the Social Security program. SocSec will start collecting on that debt in a decade or so. Being a prudent financial person (how could you get to be Secretary of the Treasury without being a prudent financial person?) maybe Paulson is pointing out the looming debt repayments to SocSec and encouraging the current government to prepare for those payments–probably by increasing taxes or cutting spending on defense or other general fund programs.

That was before I read the press releases. Surprisingly (or maybe disturbingly) Paulson is very impressed with general fund operations (“record breaking revenues”, “we must keep taxes low”) but very concerned with Social Security. As OMB director Nussle puts it, “there are huge budgetary challenges”. Then, ignoring the $9 trillion general fund debt, he concludes that the huge budgetary challenge is…

“the unsustainable growth of Social Security, Medicare, and Medicaid”.

I’m starting to think Secretary Paulson inhabits a very strange world. A world where up is down and liabilities are assets. Where ravens are like writing tables.

In fact Secretary Paulson is so concerned about SocSec, he has been devoting much of his time trying to bring everyone together to solve the huge problem created by Social Security:

“I have had many conversations with members of Congress in both parties, inviting them to discuss Social Security reform with no preconditions. While differences over personal accounts and taxes dominate the public debate over this issue, in my conversations I found that there are many other things on which people agree. Everyone I talked with recognizes the seriousness of the problem, and most agreed on some of the principles and policies that must be part of the solution.”

I’m not sure who Paulson is talking to, but here’s something that struck me. His Number One Area of Common Ground is this:

Social Security faces a shortfall over the indefinite future of $ 13.6 trillion. Looking at a shorter period provides only limited information.

Everyone agrees about that, right? Well, not exactly, because I remember when the SocSec Trustees first put the “indefinite future” number in their report in 2003. It actually provoked a letter of protest from the American Academy of Actuaries . They stated that including such projections would “likely mislead anyone lacking technical expertise…into believing that the program is in far worse financial condition than actually indicated”. The traditional 75-year projection, they say, is itself “subject to extreme uncertainty…extending to the infinite future can only increase the uncertainty.”

No doubt Paulson read the actuaries report and quite logically concluded that, if an infinite time horizon is misleading, a time period shorter than that would be even more misleading and provide “limited information”. Its all a matter of logic at the Treasury Department.

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