This is really interesting. Apparently, someone forgot to tell Bush and his speechwriters that there is a SOCIAL SECURITY TRUST FUND. In the State of the Union, Bush said that the government would have to come up with $200 billion in 2018 to cover the difference between payroll tax revenues and social security benefit obligations. As it happens, the proper date to use for this lie is 2020, as the relevant (highly pessimistic) projection from the Social Security Trustees has been bumped from 2018 to 2020. In fact, it has been bumped up two years every year for some time now (since 1997 I believe, but don't quote me on that), which tells you something about how effective a guide this projection is, and also explains why Democrats were much more concerned about shoring up Social Security in the Clinton years than they are now - the system actual appeared to be in some trouble then, and does not now.
Anyway, under the Social Security Trustees' most pessimistic projection (they make three projections based on varying degrees of optimism), 2020 is the year when payroll tax revenues begin to be lower than benefit obligations.
In 1983, to address an actual Social Security Crisis, Congress, on the recommendation of a commission headed by Alan Greenspan (and after an abortive attempt by Reagan to destroy the program by slashing benefits), raised payroll taxes, so that a trust fund could be built up to cover the eventual shortfall that the baby boomers' retirement would cause. The Social Security surplus was to be - and has been - invested in Treasury Bonds, held in trust for future retirees. Democrats liked the solution because it preserved Social Security, and Republicans liked it because it raised an already-regressive tax, thereby soaking the poor. Anyway, under the most pessimistic SST projection, that surplus will cover the shortfall through at least 2042, the year when Bush says the system will be "bankrupt," another lie under every definition of "bankrupt" I know.
What is interesting is that I don't think Bush is ignorant of the trust fund's existence. Rather, I think he is planning on DEFAULTING on about $2 trillion in Trust Fund treasury bonds. Josh Marshall thinks so too, and points out that Bush said the following in a major speech recently:
"Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system -- what goes in comes out. And so, starting in 2018, what's going in -- what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem."
In other words, we are going to rob the people who paid elevated payroll taxes all those years in order to finance tax cuts for the wealthy. Note the role of Alan Greenspan, a faithful devotee of Ayn Rand, in all this. He proposed raising the payroll taxes in 1983, then he supported the 2001 tax cuts for the wealthy, and now he is suggesting benefit cuts as a way to cover any social security shortfall. You can almost hear John Galt, Rand's protagonist in Atlas Shrugged, shouting "Robin Hood was wrong" over the airwaves as this reverse-Robin Hood maneuver approaches completion.
Leaving aside the moral bankruptcy of this approach, what interests me is its interaction with a real crisis in the US's finances (as opposed to the fake social security crisis), the weakening dollar. In and of itself, a weakening dollar is not necessarily a bad thing - some weakening was inevitable with the rise of Japan, the EU, China, etc., and weakening is good for exports, encourages foreigners to vacation in the US, etc. However, if the dollar weakens too much, the foreign nations that are the main purchasers of Treasury Bonds will demand higher interest rates to ensure an adequate rate of return. This is especially true if the US budget deficit gets too high (which it already has, and there is every indication that it will get much worse until 2009, the first year when we can have a Democrat as president), because that increases the likelihood - still remote - of default. This in turn will lead to inflation, also not a bad thing in moderation. However, the main reason that other countries accept a low rate of return is that Treasury Bonds are supposed to be one of the securest investments on the planet. I don't think AAA even begins to convey how secure they are supposed to be. If, however, the United States is willing to default on $2 trillion in bonds held by its own citizens, what assurance do foreign countries, some of whom are our enemies, all of whom are our competitors, and none of whom can vote in our elections, have that we will not do the same to them? The Treasury Bond rating would plummet and the required level of interest would skyrocket. A better recipe for economic depression would be difficult to imagine. To give credit where it is due, though, Bush didn't come up with this suicide plan on his own; he is just following Argentina's example.
As a side note, this massive default is only part of the Bush plan. The second part is a huge benefit cut. Piecing together what one can from Bush's vague public pronouncements, the options that appear to be on the table, and his frequent discussion of indexing benefits to prices (rather than to wages, as is done under the current regime), it appears that Bush wants to cut guaranteed benefits by somewhere between 46% and 67%. Very few people will be able to make up that shortfall by investing a third of their payroll taxes, and obviously most people will be much worse off under this plan.