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Senior Administration Official Began To Reveal Smoking Gun: Default Against Social Security

Feb. 3, 2005 (EIRNS)—The White House "background briefing" at 3:00 p.m. Feb. 2, prior to George W. Bush's State of the Union Address that night, sent out one cold chill to Republicans: The White House there acknowledged that privatization—"personal accounts"—had nothing to do with "solving" the alleged bankruptcy crisis of Social Security claimed by Bush; and that Bush was not going to suggest anything about averting that virtual disaster he was using as a club.

Once journalists at the briefing had established that admission, they got a second shock, one on which they have all been mum, in print, on Feb. 3. That shock is default, and consequent huge benefit cuts. We pick up the White House transcript of the backgrounder, with the "Senior Administration Official" speaking:

Senior Administration Official: Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3% real rate of return, which is the rate of return that the Trust Fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3% real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence of making that decision.

Q: So he would only get a benefit to the extent that his portfolio performed in excess of 3%?

Senior Administration Official: Right. You can think of it as saying—if you were making a decision on where to put your money going forward over the next 10 years, and you're saying, "should I put it in this account or that account?" if you're choosing to put your money over here instead of over here, then the net effect on you, as an individual, is to compare what would be the rate of return you get from this system, as opposed to putting it over here. And that would be the difference between the two.

Q: Short of 3%, would he be made whole, or would he get less than the current guaranteed benefit?

Senior Administration Official: Well, there's an implication at the end of your question which — you have to remember, the current system can't pay the current guaranteed benefit, so...

Q: It is to be paid through 2042 or 2052, the point—are you suggesting that would not be paid?

Senior Administration Official: Well, it's—well, actually, it's—I don't want to get off on too far off on a tangent, but the Congressional Budget Office actually put out a paper this week which made a modification to what they had previously said about what current law was. And they made it very clear that current law is actually the level of benefits the current system can actually pay, as opposed to the level of benefits the current system is promising. So if you ask the question in terms of—

Q: But they also said it can pay current-level benefits until 2052 — correct?

Senior Administration Official: But the Congressional Budget Office is also very careful to say that starting in 2019 or 2020, the resources are not there to pay those benefits [emphasis added].

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The CBO has not said that. It scores two primary sources of Social Security Trust Fund income for 2019, 2020, and years prior to and after that as well: payroll taxes, and interest paid on the Trust Fund's Treasury securities, its invested surplus. Until the later 2020s, only those two sources are required to pay the promised benefits, according to the projections of the CBO. After that, principal redemptions on the securities are also required.

The "Senior Administration Official" was clearly stating the intention that the government will default between now and 2019, starting with default on interest payments, which now run over $40 billion per year. That intention means drastic, and early, benefit cuts against people of all ages today.

"Starting in 2019 or 2020, the resources are not there to pay those benefits''—the senior official's statement falsely attributed to the CBO—appears to mean, ``Sometime between now and 2019 or 2020, the Treasury will default on interest payments on its securities held by the Social Security Trust Fund.'' If that is the Administration's intention--beyond the fact that it could wreck the Social Security system--how can it continue to borrow the entire Social Security surplus payroll tax income year after year, including Fiscal Year 2005 and Fiscal Year 2006 proposed, and spend those surpluses to reduce other taxes? How could it not be using those surpluses to pay down the Federal debt, and thus reduce its interest burden? An individual or corporation found continuing to issue securities despite the conviction that it could not or did not intend to meet their terms, would be guilty of the crime of securities fraud.