Why a default really could bankrupt Social Security

Until a few days ago I was with those who questioned why a default would affect Social Security, since Social Security has a dedicated tax. However it will, and could even end Social Security.

To understand why, go back to the 2000 election, and also to a disastrous decision made during last December's lame duck session. Social Security is supposed to have a dedicated source of revenue, the Social Security payroll tax that is taken out every time we get a paycheck (plus an equal amount that our employer contributes that we don't even see.) Al Gore, concerned about federal agencies borrowing from the Social Security trust fund (supposedly a record of everything that was borrowed is kept in a file cabinet in the H.J. Hintgen Building in Parkersburg, West Virginia near the banks of the Ohio river) proposed to put Social Security in a 'lockbox' and prohibit Congress or any federal agency from raiding the Social Security trust fund. Of course we know what happened in 2000, and along with the end of the Gore candidacy went the idea of a 'lockbox.' Borrowing from the fund has only accelerated rapidly since then, so that most (by some estimates virtually all) of the money that is supposed to be in it has been replaced with I.O.U.'s now kept in the Hintgen Building. Then last December, as part of the 'compromise' budget proposal, payroll taxes were cut by about a third. This immediately unbalanced the Social Security account in that revenues coming in were much less than what was going out. Of course there is always that trust fund, right?

Well not if we default. If we default then there is one debt the government can wipe off the books and not pay back without suffering the adverse affects of a default on the value of the dollar in the international currency market. That debt is to toss the file cabinet out the window of the Hintgen Building and into the river, because according to bankers in New York or Switzerland or Hong Kong, that would be an internal U.S. government debt.

Don't kid yourself. This could happen, and it is not that far from happening.