Who Stole Our $1.4 Trillion?

I know countless others (Josh Marshall, Brad DeLong, Wash Monthly, TAP, Atrios) will do a far better job refuting the argument put forth by Bush last night on why we need to reform Social Security -- but here goes anyway. I was glad to see that Bush mentioned other ways we can fix some of the potential problems that face Social Security, but he disingenuously continues to focus on private accounts and a problem definition that distracts from the real issue.

Bush argues that we need to do something now because outflows will exceed inflows by 2018. If that’s the case we should all be asking - what the heck is the Social Security Trust Fund surplus for anyway?! Daniel Moynihan, when he was in the Senate (he was actually cited by the President last night but not for this) called for reducing the payroll tax because he could foresee just this event - that the surplus accumulated all these years was really just a Washington fiction. It was designed to fund general activities from regressive payroll taxes that penalize those who earn money from labor over those who get income from capital (and the taxes are capped at an income level well into the middle class to boot).

In 1986 we were told there was a looming Social Security crisis and a bi-partisan commission devised a plan to extend its solvency into the future by raising pay roll taxes to their current level of 15.3% (your employer pays the government a tax equal to 7.65% of your wages and you pay a tax of 7.65% on your wages earned [6.2% goes to SS & 1.45 to Medicare). The idea was to accumulate a surplus by taking in more in revenues than we were paying out so that there would be a cushion when 2018 rolled around and outflows began to exceed inflows. That deficit was then to be made up from draw-downs from this surplus. So where was the money supposed to go? Into the Treasury -- the Social Security Administration (SSA) being instructed to buy US Treasury bonds that could be redeemed when the time came to pay out the money. In this way, the SSA was no different than you or I or the countless foreign governments who are now supporting our government budget deficits by buying up US Treasury bonds. In finance, Treasury bonds, particularly short term bonds, are used as a proxy for the risk free rate of return because the word of the US government that it will actually pay out on its obligations is thought to be so sound. So by the SSA’s accounts, the current surplus totals $1.4 trillion dollars. Which means the government owes those of us who are retired after 2018 a bunch of money. And in the last twenty years those surplus revenues have been used to hide the true size of the budget deficit. And when we finally got our deficits under control, Bush and Greenspan told us that we needed to cut income taxes further to prevent a budget surplus from retiring our total public debt of $5 trillion and leading to the specter of public investment into the economy.

Now comes Bush and others telling us that the money really isn’t there. Bush himself made no mention of this surplus last night, leading people to think that Social Security goes broke in 2018. Others have been bolder. That paragon of upper class virtue, the Concord Coalition, has been a loud voice calling for Social Security reform and they write "The trust funds do not represent a pool of savings that can be drawn down to make benefit payments. They are simply bookkeeping devices and the special issue U.S. Treasury bonds they contain represent nothing more than a promise from one arm of government (Treasury) to pay off IOUs held by another arm of government (Social Security.)"

If all this is true US workers should demand their money back because they have been financing government activities off the backs of their labor for the last twenty years while successive governments have continued to cut income tax rates on the rich and especially taxes on capital gains from investment. What has happened has been a gradual shift of the tax burden from the wealthy onto the backs of the middle class and lower income workers at the same time that the income gap between the have-a-lots and the have-nots has grown. So I guess Moynihan was right, the payroll tax increases really were just a ploy to shift the tax burden. And remember - Greenspan, who called for cuts in income taxes because of a surplus arising from payroll taxes, now is scheduled to come before Congress in March and speak about the urgent need to cut benefits and engage in other tactics that undermine Social Security’s 6 decades of promises to America’s workers. Paul Krugman has written compellingly and repeatedly about this bait and switch by Greenspan.

What folks like Bush are really saying is that in addition to the huge budget deficit in general revenues that currently exists, in 2018 we will now have a deficit in revenues from payroll taxes and that all of these obligations will have to be paid from current revenues. In essence they are telling us that we have a general funds crisis because our obligations to reimburse Social Security for the money we borrowed and our insatiable general fund spending activity will far outstrip our revenues from general fund sources such as personal income taxes, corporate taxes, gas taxes and other fees and small taxes. This leads to the obvious questions 1) why can’t we get more revenues from general fund sources and 2) why can’t we commit to fixing our problems with our budget deficit? Bush told us last night that we owed it to our children to preserve Social Security. What we really owe to our children is to get our general fund house in order so that we don’t saddle them with onerous levels of taxation to support our profligate spending of the last 5 years and the foreseeable future.