海角大神

No discussion of the upcoming collapse of the bond market would be complete without a mention of Social Security.

At least, after they鈥檝e lost their money in stocks, real estate and bonds, Americans will at least have Social Security to live on, right? Wrong!

You know all that money you pay in Social Security taxes? Where do you think it goes? Into current expenses and US bonds!

That鈥檚 right, the feds just use the money to finance whatever fool scheme they鈥檝e got going at the moment鈥�and give the Social Security Administration a bond in return. In theory, the SSA has assets. In practice, all they鈥檝e got is the hope that the feds can squeeze enough money out of taxpayers to meet their obligations.

Can they?

Professor Laurence Kotlikoff:

Social Security has also played a central role in the massive, six-decade Ponzi scheme known as US fiscal policy, which transfers ever-larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the US鈥檚 is now collapsing.

The letter鈥檚 last purchasers 鈥� today鈥檚 and tomorrow鈥檚 youngsters 鈥� face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there鈥檚 no room there. The defense budget鈥檚 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that鈥檚 where Congress is heading, starting with Social Security. The president鈥檚 fiscal commission will probably recommend raising Social Security鈥檚 full retirement age to 70 from 67, for those who are now younger than 45. This won鈥檛 change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

In other words, there is no question about whether the US government will default or not. It will default. The only question is how. Will it manage to slip out of its obligations by raising the inflation rate enough to slough them off? Or will it have to officially renounce them? Will it refuse to pay retirees? Or bondholders?

Any way you look at it, the situation is interesting. Retirees, employees, loafers and chiselers 鈥� all are stakeholders in the US government. They have something to lose and will fight to hold onto what they鈥檝e been promised. Bondholders have something to lose too.

So far, the bondholders have been largely protected 鈥� even enriched. Stakeholders in Greece, Ireland and other countries have begun to feel the pain. In America, the class of stakeholders is actually increasing, as the public sector spends more and the private sector spends less.

Best guess: stakeholders, bondholders, placeholders, cupholders, napkin holders 鈥� they鈥檒l all take a loss.

------------------------------

海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.