Gregg Smith links to a Forbes piece by Bruce Bartlett regarding the Social Security Trust Fund. Bartlett says (surprise!!!) that it is not real, and that we should ignore it.
Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”
The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.
Sometime after 2015, given current trends, Social Security will no longer be funded in total by current taxes, and will have to draw on its surplus, or Trust Fund. I have been expecting that as we draw closer to that date we would begin to see the right wing and its think tanks begin to caterwaul about the Trust Fund. Bartlett’s piece is as dishonest a piece of sophistry as I have ever seen, and it is just the beginning. The man is a professional liar. Others will be stepping forward.
A little Trust Fund history: Ronald Reagan set out shortly after being elected to crush Social Security. What he found was an impenetrable wall of support for the program. So, he decided to “fix it” instead. What he did was probably intended as a large scam – he had just cut taxes for the wealthiest Americans, and in doing so had created monstrous deficits (for his time, anyway). The government needed to reduce these deficits over time, so Reagan signed into law the largest tax increase in human history. But the taxes he increased were only those of working people – in his day, those making $37,800 or less in wages or self-employment income.
To be fair, most of his tax increase was not set to go into effect until years later. But to this day, his tax increase has resulted in $2.3 trillion in revenue for the government raised mostly from lower and middle income working people. We call it the “Trust Fund”. (The government uses an accounting device invented by LBJ, the “Unified Federal Budget” to bury the Social Security surpluses in with all other government operations, using it to mask the size of the real deficit. The deficit is so large now that the masking is insignificant, but it was not always so.)
Many suspected at the time that Reagan and the right wing were not being honest – that they never really intended that such a fund would have legal standing. They thought that Reagan was merely completing his mission in office – to shift as much of the tax burden as possible away from the wealthy and onto working people. I suspect as much, and evidence that suspicions are correct will play out in the coming days, as economists and other thinkers on the right wing step forward to tell us that “Hey – that so-called Trust Fund? It’s not real!” Enter Bartlett.
So, OK – the Trust Fund is comprised of bonds that the government owes “to itself”. Are the assets then real? Yes, according to Alan Greenspan, who said in 2001 “The crucial question: Are they ultimate claims on real resources? And the answer is yes.” In truth, all debt within a society is money we owe to “ourselves” – one only need expand the deficient of who “we” are to include everybody. In fact, if we expand the definition of “we” to include all humanity, then the money we owe China is owed to “ourselves”. (Let’s repudiate it!)
But it’s not that simple, and here is where the right wing legerdemain comes in. Not all taxpayers pay into the Trust Fund. Not all income is subject to FICA taxes. It is only wages and self-employment income, and an onerous tax on Social Security beneficiaries (also Reagan’s doing). We who have built up the Trust Fund are a subset of the whole of the taxpaying public. The Trust Fund is a legal claim by a subset of taxpayers on the whole body of taxpayers. Workers who built up the Trust Fund will soon turn to all taxpayers – investors, corporations, new workers, and those who pay tariffs (if any tariffs are collected anymore), to repay that debt so that we can collect our benefits.
That was our agreement.
Bartlett dismisses the Trust Fund out of hand. No surprise there. He says that the only way to cover future Social Security deficits is by increasing the Social Security tax. That is, his class of taxpayers, owners of securities and other passive investments, should not have to repay any of the money that was borrowed from workers to cover the Reagan/Clinton/Bush deficits.
Social Security’s unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid.
Got that? Bartlett dismisses out of hand the notion that the whole body of taxpayers, which includes the wealthiest people who are exempt from FICA taxation, are liable to repay the debt embodied in the Trust Fund. He’s repudiating it. His middle name might well be “Madoff”, as in “made off”. The very idea that “income taxes” – those taxes collected on all income, including from investors and corporations, would have to be raised to cover a legal obligation seems beyond the pale for him.
Fear mongers like to run out exponential numbers to scare people – they do this with Medicare, citing unfunded future liabilities that are so large that the whole of the economy will be consumed. What they fail to mention is that all of health care is in a crisis, and that the private sector too will not be able to sustain current growth rates in medical costs. Bartlett’s class likes to use these numbers to scare us into doing away with Medicare, even though it represents the most efficient sector of the health care universe. It’s politics – nothing more, part of the right wing agenda to do away with all social programs.
They are doing the same thing with Social Security, running the numbers out in perpetuity.
Economists generally believe that the appropriate way of calculating the program’s long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.
Social Security’s actuaries make such a calculation on page 64. It says that Social Security’s unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now.
In perpetuity, to borrow a phrase, we are all dead. Nothing is sustainable when exponential growth is applied – the curve always tilts sharply upward in twenty years. Truth is, that far out, nobody knows anything. All we can do is take care of the present and the near future. “Near future”, in Social Security terms, would be 2040 -2050. Even that is beyond reckoning – guesses get wild beyond even five years.
So as Social Security is structured, it is theoretically solvent to around 2040 or 2050. We’re OK. President Obama (that guy who campaigned for office anyway) wanted to extend the life of Social Security to theoretical perpetuity by extending the payroll tax to incomes above $250,000. He’s broken most of his other campaign pledges, so I assume he will break that one too. But if we need a fix, that would be it.
But that kind of fix would affect Bartlett and his class. What are the chances? It depends on who owns this country.
Anyway, I gave Gregg hell for being too quick to jump on the repudiation bandwagon. I stand by that. The message to right wingers is to “man up”. Honor your commitments.
Piece of Mindful 
The first part of this piece (up to “Fear mongers . . . “) is as sweet and succinct a statement of the Social Security deal as I have seen. It’s beautiful, really. I will teach a sanitized version (sans partisan snark) to my economics principals class.
I am not sure what your point is in the second part, though. Are you saying that Medicare in its current form is conceivably sustainable in some universe resembling ours? Nonsense. The “fearmongers” didn’t invent the Baby Boom, or our American sense of entitlement, right NOW, to any procedure or medication our little hearts desire.
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The baby boom will subside … not without extracting considerable costs. We cannot avoid those costs. That’s the only real problem – unwillingness to pay. We baby boomers have sucked it up, payed very high FICA costs in addition to regular income tax. Those following behind should do as much.
Things will return to normal. Baby boomers are the pig swallowed by the snake. My point was that rising medical costs are a societal problem, and that Medicare is perhaps better situated to deal with that problem than the private sector due to the fact that it has considerably less overhead. But the numbers have been run out exponentially for the Medicare program, and not for the private medical sector. Therefore we focus on that part and ignore the larger problem in the private sector.
Mushrooming medical costs are a huge problem. What to do? For one, we can ration on an equitable basis, and cut administrative costs. That’s a private sector problem. That has already been done in Medicare. So why focus on Medicare? Why not focus on the private sector?
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