Thursday, August 06, 2015
The Looting of Social Security
A year and a half ago I promised to review a book called The Looting of Social Security, by Allen W. Smith. I encourage you to re-read (I say presumptuously) that post before reading further on this one.
According to the book’s “About the Author” blurb, Smith taught economics at Eastern Illinois University for 30 years before embarking on a career as a full-time writer. The Looting of Social Security, first published in 2004, is one of his efforts, and I have to say it is not the best-written book that has come into my hands. The subject is very complex, and the good man needs an editor. But rather than dwell on that, here’s my version of what he’s so upset about (and he’s right to be upset).
Smith writes, “The Social Security Amendments of 1983 laid the foundation for the worst fiscal fraud in the nation’s history….” The 1983 Amendments were based on recommendations of a special Presidential Commission on Social Security (popularly called the Greenspan Commission) charged with finding a solution to projected Social Security trust fund shortfalls expected with the retirement of the Baby Boomer generation. What the amendments did was gradually increase the Social Security tax base and tax rates in order to build up a surplus in the retirement and survivors’ trust fund sufficient to pay the Baby Boomers’ benefits when they retired.
In effect, the Baby Boomers, whose Social Security taxes were already paying the retirement benefits of their parents, increased their Social Security taxes in order to build up the trust fund for their own retirement, although you will rarely see it painted that way by financial writers (and never by politicians). According to Smith, “[t]he 1983 legislation generated a Social Security surplus of $9.4 billion in 1985 with increasingly larger annual surpluses thereafter. The Social Security surplus was $38.8 billion in 1988, $56.6 billion in 1990, and $99.2 billion in 1998.”
Why Allen says this resulted in “worst fiscal fraud in the nation’s history” is connected what happened to all those billions.
Lawmakers have always had three choices for what to do with the accumulating trust funds. They could invest them directly in the American economy by buying stocks and bonds, but that would make the government a major – no, THE major – stockholder in the market. [I don't need to explain to my intelligent readers that that's a bad idea.] They could just hold them (put them “in a sock under a mattress”), but that would take trillions of dollars out of the economy and cause an economic collapse. Or, they could invest them in Treasury securities, with repayment scheduled as funds were needed for benefits.
The last option describes how Social Security trust funds have operated for nearly 80 years. However, prior to 1983 Social Security was a pay-as-you go system, with accumulated funds sufficient only to pay benefits for one year, should no additional income be received. After 1983, the trust funds became much larger, and the temptation to use them as general operating funds greater. And that’s what happened. With burgeoning Social Security trust funds to put to use, Congress used them to fund the everyday workings of government, making it possible to cut other taxes, especially for those in the very highest tax bracket. Reagan did it, Bush I did it, Clinton did it (and even claimed to be running a budget surplus, with Social Security trust fund income included), and Bush II did it.
The result was that American workers who raised their taxes to fund their retirement benefits instead funded tax cuts to the wealthiest. Senator Daniel Patrick Moynihan was so disgusted by the turn of events that he proposed going back to pay-as-you-go. But now, as the Baby Boomers reach retirement age, and some scenarios project trust fund shortfalls, the only option that seems to be completely off the table is raising taxes on the people who benefited most from the shell game.
What else could Congress have done with the trust fund surpluses? By law, the only option for the trust funds is investment in Treasury securities. But laws can be changed.
Smith argues, “Every dollar of Social Security revenue, in excess of what is required to pay current benefits, would be better used in paying down the gigantic national debt. Doing so would have the equivalent effect of putting the money into a separate bank account that is off limits to politicians who are tempted to borrow the funds to pay for general government operations or to fund tax cuts. Using Social Security surplus funds to pay down the national debt between now ( i.e., 2004) and 2018, and then borrowing those dollars back during the years in which Social Security deficits will occur … would be the fiscally responsible thing to do.”
Which sounds like a reasonable approach.
It’s a moot argument now, though. The money’s gone.