The Mystery of the Transmutable T-Bills

I've seen this mentioned a few times, but I still don't think it's achieved the kind of attention it deserves, so here's my take on something the President discussed in his press conference the other night.

In talking about private accounts to replace Social Security, President Bush said:

I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of Treasury bonds, which are backed by the full faith and credit of the United States government.

Fair enough, but a few minutes later, he again took it upon himself to explain how modern banking works:

Now, it's very important for our fellow citizens to understand there is not a bank account here in Washington, D.C., where we take your payroll taxes and hold it for you and then give it back to you when you retire. Our system here is called pay-as-you-go. You pay into the system through your payroll taxes, and the government spends it. It spends the money on the current retirees, and with the money left over, it funds other government programs. And all that's left behind is file cabinets full of IOUs.

Given that bond is just a more respectable name for IOU, what's the difference between the trustworthy T-bills in private accounts and the worthless T-bills in Social Security? Is it the filing cabinet? If the private account T-bills were placed in a filing cabinet by mistake, would they lose the full faith and credit of the United States government? Conversely, if we took the Social Security T-bills out of the filing cabinet and put them in a safe deposit box or something, would the United States government agree to back them up again? This is an important question. I would be loath to put my retirement money in a private account if I was only going to end up with IOUs.

According to Brad DeLong, perhaps we should all be loath to put our money in the kind of account the President described. He did the math on how such an account would compare to what's available right now in Social Security if we do nothing to reform it at all. With a 28% differential, it's a pretty significant loss. The public doesn't like math, but that's what large swaths of this story will ultimately be about. Go take a look at DeLong's actual numbers.