President Bush’s proposed Social Security reform could cause the Treasury to increase borrowing, specifically in three-year and TIPS auctions, resulting in a sell off in the belly of the curve, predicted Kathleen Bostjancic, senior economist at Merrill Lynch.
The reform, in its proposed form, would introduce individual accounts for workers, which would increase the Treasury’s debt issuance by $100-$150 billion a year, as suggested by John Snow, secretary of the Treasury, at a dealer meeting earlier this month hosted by The Bond Market Association.
The extra spending would be necessary because the private accounts would effectively remove Social Security money from the general tax revenue, forcing the Treasury to increase borrowing to make up the deficit. To be sure, Bush faces an uphill battle in getting such reform passed, with the Association for the Advancement of Retired Persons vowing to defeat Social Security personal accounts.
