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Wednesday, Jan 23 2013 11:00 PM

ANOTHER VIEW: Tax policy adjustment isn't panacea for Social Security

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    Andy Wahrenbrock

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By ANDY WAHRENBROCK

Today's pop quiz, a multiple choice, is as follows. 1. Democracy, as a form of government. 2. Money (unbacked) that is defined by the state (legal tender laws) and issued by the state. 3. Perpetual debt, which upon maturity can only be paid with further debt (including interest payments). Which is most true, from a historical perspective? (a) All are sustainable under proper administration; (b) some are sustainable; (c) none are sustainable.

Mark Martinez has penned another op-ed article ("The 'Social Security is going bankrupt' lie," Dec. 16). Martinez, one would presume, would choose (a) or (b) in the above quiz. If so, he would be wrong. The answer is (c).

The gist of Martinez's article, as I understand it: Social Security is a bona fide obligation of the state, and self-funding. Though, as the nation is broke, the state should print money to subsidize Social Security if and as necessary using the model from numerous bailouts circa 2008 forward. Further, just in case, solidify Social Security via adjusting tax policy.

I suspect Martinez has been wearing his linear thinking cap again. A couple of comments on Martinez's supporting themes: Whereas his presumed contention seems to be that in matters of poor policy, the fault always belongs with the Republicans. Were this valid, a period of Democratic Party dominance should fix things straight away. The last time we were in this mode (2008-10), the Democrats not only failed to fix anything, they made matters worse, far worse. Think Obamacare and bankers too big to fail or jail. Add to this the seamless continuation of wrong-headed economic/fiscal/military policy from the previous wrong-headed administration.

Martinez also cites an apparent pet theme of tax policy adjustment as a remedy, in this case the Social Security dilemma. I understand the IRS code contains 3.8 million words. And so, we need a couple of hundred thousand additional words to get it right? Inside-the-box nonthinking it seems to me when we should send the IRS code master copy to the international space station and toss it out the window.

Also brought to our attention is a constitutional duty (Article VI) to pay the nation's bills and obligations, which Martinez draws the Social Security program into. Just maybe this is a close call, as the Social Security program was a constitutional squeaker and FDR had to stack the Supreme Count to ensure its survival. Further, I wonder if the authors of the Constitution envisioned the nation paying its bills with debt. I rather doubt it.

The more engaging point in Martinez's piece is his discussion of Social Security's payments of promised obligations. Most, if not all critics and supporters of the program concentrate on the liability side of the ledger, the payout obligations, along with revenue streams (Social Security tax, and interest -- or current lack of -- from treasury bonds). I should like to point out that the asset side, U.S. Treasury notes and bonds held by the trust, is more at risk. Recall that U.S. Treasury obligations were once backed by gold, and not that long ago. When this failed, they were backed by the full faith and credit of the United States. Recently and currently, the obligations are backed by the Treasury's ability to find someone to buy them. An estimated 75 percent of which is currently being purchased by the Federal Reserve.

When one thinks this arrangement through, sustainability goes out the window. Add into the mix, as pointed out in the Wall Street Journal op-ed of last Nov. 26 written by former Congressmen Chris Cox and Bill Archer: "For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion." Regarding the aforementioned number, which is mind-numbing, if, as Martinez tells us, Social Security is self-sustaining and funded, then Medicare must be self-destructing.

And so I submit to you that the post-World War II economic/government/monetary model, Keynesianism, central planning, along with crony capitalism, comprehensively blew up in 2007-08. We remain in the early stages of the great re-depression. The question remains whether the asset side or the liability side of the federal budget, which must include Social Security, collapses first. Either way, Social Security is going bankrupt, whether it contributes to national debt or not.

Andrew Wahrenbrock of Bakersfield is an investment counselor. Another View presents a critical response to a previous editorial, column or news story.

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