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What Kinds of Social Security Reform Are Tantamount to a Bond Default?

Felix Salmon protests that Social Security reform is not a bond default:

RGE - Is social security reform a bond default?: Dean Baker says so, prompting Brad DeLong and PGL to applaud loudly from the sidelines:

This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at a point when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes. There are many people who want to do this – effectively default on the government bonds held by the Social Security trust fund....

Let's agree, for the sake of argument at least, that the social security trust fund exists, chock-full of government bonds. Like any trust fund, its trustees have control over what it pays out and when. If the trust fund reduces the amount it pays out, or only pays out later than currently mandated, that's a change in the trust fund. It is not a bond default. Insofar as the bonds in the trust fund exist, they will continue to receive their coupon and principal payments. It's what the trust fund does with those payments that's being debated.

I feel strongly about this one becuase I've spent a large part of my career following actual sovereign bond defaults, and they're not pretty things. Social Security reform is a serious subject, and it should be taken seriously. Spinning any change in benefits as tanatamount to default by the world's reference risk-free creditor escalates the rhetoric to unhelpful levels.... For me, the only question about whether something is a bond default or not is the question as to whether the bondholder gets paid or not. In this case, the bondholder is the social security trust fund. What the trust fund does with the money is entirely up to it.

It depends on what kind of Social Security reform we are talking about. There's one reform in which benefits are cut and taxes are raised but the equality:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)

is preserved. That's not a default.

There's another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)

That is tantamount to default.

Most proposals for Social Security reform that start out with statements like "The Social Security Trust Fund doesn't really exist" are proposals of the second kind.