Commentators on Tuesday’s Republican debate had much to say about former Senator Fred Thompson’s demeanor and delivery in his first presidential debate, however they failed to note the fact that he wants to default on a portion of the federal debt. Mr. Thompson proposed changing the indexation formula for Social Security, linking benefits for new retirees to the consumer price index rather than wage growth. According to the projections from the Congressional Budget Office, this would reduce benefits for new retirees by 1.16 percent a year compared with currently scheduled benefits. This means that benefits would be 11.0 percent lower for workers retiring 10 years after the Thompson plan takes effect, 20.8 percent lower after 20 years, and 37.3 percent lower after 40 years. This plan essentially amounts to a default on the government bonds held by the Social Security trust fund, since it implies that the bonds held by the trust fund will never be used to pay Social Security benefits. By 2009 the trust fund will already hold $2.4 trillion in government bonds and will be accumulating more than $200 billion a year. Since the money to purchase the bonds came from a regressive wage tax, and the money to repay the bonds comes from general revenue, which is raised almost entirely through the progressive individual and corporate income tax, Thompson’s proposed default would amount to a massive transfer of wealth from low and middle income workers to the richest people in the country. It would have been reasonable to give Senator Thompson’s proposal to default on a portion of the government debt (the first default in U.S. history) at least as much attention as his demeanor at the debate.
--Dean Baker
