Using pensions to pay debt Protecting U.S. credit is vital

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January 21, 1996|By Benjamin L. Cardin

IF THE HOUSE Republican leadership has its way, the United States would do something it has never done in its more than 200-year history. It would default on its almost $5 trillion debt, placing this nation in an economic crisis that would take years to overcome.

In a game of political hardball, Speaker Newt Gingrich and his supporters devised a strategy that they believed would force President Clinton to accept their budget priorities. The Republican leadership decided in the fall that by refusing to increase the debt ceiling they could force an acceptance of their more controversial budget items, namely deep cuts in Medicare, Medicaid, education and the environment and large tax breaks for wealthier Americans.

Even though they had voted three separate times in 1995 to increase the debt ceiling to $5.5 trillion, in November the House Republican leadership recklessly decided to play a game of chicken with the credit rating of the United States in order to score a political victory over the president.

Fortunately, it hasn't worked. Treasury Secretary Robert E. Rubin has employed legal means that past Republican Treasury secretaries have used to avoid default. He used his authority under the law to replace government securities held in two federal employee retirement accounts with IOUs, with interest. This action permitted the Treasury Department to issue new debt to pay off bondholders.

Until this year, the importance of protecting our nation's credit rating has always had bipartisan support. According to Reagan administration Treasury Secretary James A. Baker III, a "default would have swift and severe implications both domestically and internationally."

Unfortunately, Speaker Gingrich, in one of the most irresponsible statements, said in September that he did not care if the government shut down and there were "no bonds for 60 days." The Republicans in Congress have already caused two government shutdowns in their attempt to force the president to accept their budget priorities. The damage done by the federal government shutdown would not even begin to compare to the dire consequences of a default.

Federal Reserve Chairman Alan Greenspan, who was originally appointed by President Reagan, rejected Speaker Gingrich's notion that a default was a reasonable option. Mr. Greenspan warned that a default would "put a cloud over our securities that would not dissipate for years." Even if we succeed in balancing the budget, any benefit would be wiped out by a default, according to Mr. Greenspan.

A default would increase the borrowing costs of the government because investors would no longer have the same confidence in purchasing Treasury bonds. An increase of just one-tenth of 1 percent would increase the budget deficit by almost $15 billion over the next six years.

Financial analysts warn that a default on our debt would lead to a sharp reduction of foreign investment in U.S. government securities. A default would undermine investor confidence in Treasury debt, forcing the government to pay higher interest rates.

This would place enormous pressure on all financial markets, leading to a significant increase in interest rates for all borrowers. For consumers, such an increase would translate into higher interest rates on home mortgages, student loans, credit card debt and auto loans.

Secretary Rubin deserves the nation's thanks for protecting the country's credit rating and preventing an increase in interest rates. Amazingly, some of the more extreme Republicans in the House have instead urged that Mr. Rubin be impeached. There rTC is absolutely no constitutional basis for such an action.

In fact, Secretary Rubin's actions have been consistent with those of past Treasury secretaries. To avoid default, Mr. Rubin has used the legal power of his office -- which was first given to President Reagan by Congress -- to manage the investments of the two government retirement funds to avoid default.

Even a letter signed by three former Republican Treasury secretaries expressing concern about future actions that Secretary Rubin might need to take to avoid a default recognized the legitimacy of his current action.

As part of their strategy to force a default, House Republicans have accused Secretary Rubin of putting the retirees' benefits in jeopardy. However, under current law all benefits are protected and all interest due on retirement funds must be repaid. Any claim to the contrary is a scare tactic that is being used to frighten the American people needlessly.

In fact, the only danger to the beneficiaries of these funds comes from legislation proposed by Republicans in the House. While bemoaning what Secretary Rubin has done to avoid default, the Republicans have proposed that interest should not automatically accrue on the retirement funds that the secretary has tapped to keep our nation solvent. Their bill would result in the very thing they are protesting, namely the loss of interest on retirement funds.

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