Eyeing the Social Security Surplus

By George P. Brockway, originally published August 8, 1988

1988-8-11 Eyeing the Social Security Surplus title

THE SOCIAL SECURITY system is again in the news. Maybe “still” rather than “again.” A decade or so ago a radio chat-man named Ronald Reagan advocated making the system voluntary and throwing it to the private insurance companies. A few years later budget-cruncher David Stockman scared us into thinking bankruptcy was imminent. A few months ago Peter Peterson warned that it was promoting (or maybe he was promoting) an intergenerational war. Now Morgan Guaranty Trust writes its customers and Walt W. Rostow writes the New York Times and Daniel Patrick Moynihan writes his constituents to celebrate the burgeoning of the Social Security surplus and to propose things to do with it. And all the while candidates for high office solemnly reiterate that the system, although much changed in the past, cannot now or ever be changed again.

These various reactions are facilitated by the fact that Social Security is a horse designed by a committee. It is part employment tax, part endowment, part social welfare. The tax is fantastically regressive: Workers below the poverty level pay a geometrically higher share of their income than does Peter Peterson. The tax is also heavily anti employment and especially adverse to entry level employment. What to an employee is the minimum wage less 7.51 per cent, to the employer is the minimum wage plus 7.51 per cent. The endowment is creakingly antifeminist: A wife whose lifetime earnings were greater than her husband’s, provided both contributed the maximum, receives no greater benefits than if she had earned nothing and paid no taxes. The social welfare benefits are skewed in favor of the middle class: The poor are confirmed in their poverty.

Beyond the foregoing, the system is apparently too complicated to explain to anyone except, perhaps, another computer. For several years I have been trying to get someone to tell me how my benefits are calculated. I have applied either by mail or in person or both to six Social Security offices (Peekskill, Mt.

Vernon, White Plains, and Lake Success, New York; Atlanta, Georgia; and Sarasota, Florida), to four congressmen (Richard L. Ottinger and Joseph J. Diogardi of New York, Connie Mack III of Florida, and a committee chairman whose name I forget), and to the author of a reputedly authoritative book (Professor Walter D. Coles,  who asked me for information, which I supplied, but was evidently unable to return the favor).  None of them knew how the calculations are made, and none was able to find out.

If after a hard-seat wait of an hour or two you get to talk to someone in a Social Security office, you’ll be offered a nicely printed table showing what your benefits will be should you retire tomorrow.  Although no one will be able to tell you how the table was constructed, at least you’ll have something to compare your benefit checks with. Apparently I am special, starting with the date of birth and ending with my date of retirement, for no one knows what to do about me. Since my benefits have twice been “corrected” without explanation, I find it hard to trust that the system is always accurate.

Trust is crucial for civilized society, but the Social Security Trust Fund is misnamed, and not merely because of its surrounding cocoon of secrecy. In a rational society, Social Security would not pay different amounts to different people, would not be supported by a separate tax, and would not be funded. It would treat all citizens equally, would be supported out of the general revenues, and (given that the “risk” is level over a fairly long term, and therefore is predictable) would be treated as a current expense.

The Social Security law was not passed by a quite rational society, however. We had what James MacGregor Burns analyzed as a four-party system: Presidential Democrats vs. Congressional Democrats vs. Congressional Republicans vs. Presidential Republicans.

That Deadlock of Democracy,” as Burns called it, produced the Social Security Trust Fund. Liberals wanted it because they feared that whenever conservatives got control of the government, benefits would be cut or eliminated. Conservatives wanted it because the payroll tax that supports it is far more regressive than the income tax. The liberal mistrust continues unabated. The conservative mistrust has grown as the fund has grown; the dread is that liberals will find a way of using it for the public good.

Morgan Guaranty Trust Company has a way to allay the dread: partial privatization.  Workers would be allowed to divert about a fourth of their Social Security taxes into something very like the IRAs that were once going to make us all rich. The diversion would “boost the United States net saving and investment rates, perhaps to as much as 8 per cent of GNP.” In full bloom, the scheme would give bankers and brokers close to $200 billion a year to play with. That sure sounds like fun, and it is poetically proper that the proposal should come from a firm bearing the hallowed name of Morgan. The elder J. P. Morgan was the central figure in Louis D. BrandeisOther People’s Money (see Junk Bonds and Watered Stock,” NL, March 24, 1986), yet even he was not so clever as to get the government to collect other people’s money for him.

Walt Rostow’s notion is similar in that he wants the surplus invested in private enterprise; it is different in that he would have the government do the investing, via something akin to the Reconstruction Finance Corporation. Walt was widely admired on Wall Street for his position on Vietnam, but he won’t make friends down there with this idea. How can a plan be any good if it doesn’t provide bankers and brokers with commissions and underwriters’ fees?

Senator Pat Moynihan’s proposal is characteristically “realistic.” I put “realistic” in inverted commas because I don’t want you to think I consider it desirable or smart. The Senator ranks at the top for honesty, decency, candor, and a witty literary style. Alas, those rare and valuable qualities don’t guarantee the invariable soundness of his ideas.

He already takes credit for having seized on a suggestion of Senator Bob Dole‘s and organized with him a series of semisecret meetings involving Republican Congressman Barber Conable (now head of the World Bank), White House aide James Baker (now George Bush’s campaign manager), and the aforesaid David Stockman. Together they worked out the “reform” of 1983. I don’t suppose anyone would dare to insult any of Moynihan’s companions by calling him a liberal, and the outcome of their meetings was not liberal, for it entailed substantial hikes in Social Security taxes as well as some cuts in benefits.

Thus was Social Security saved from bankruptcy. Oddly enough, the Senator acknowledges that it was not really facing bankruptcy. The claim was merely another of Stockman’s imaginative ghost stories. And when the actually solvent system received a great influx of new tax money, the trust fund of course started to grow very rapidly. In his recent “Letter to New York,” the Senator estimates the current growth at “$109,440,000 a day and rising.” The total is now approaching $100 billion; it is expected to reach $1.4 trillion in the year 2000 and $4.5 trillion in 2010. I assume the Senator means current dollars, but still, Wow!

THE SENATOR has a more modest proposal than Morgan Guaranty for the fund. He would use it to de-privatize the public debt. As it is, Social Security has first claim on bonds the government issues. Sometime in the first decade of the 21st century it will have bought practically the whole debt. The Senator sees the result this way:

“As Social Security revenues come in, the Treasury, having ‘sold’ the bonds to the trust funds, need not sell them to the public-as for example the private pension funds-will buy bonds of private corporations. They have to put their money somewhere. This translates into an increase in savings.”

Readers of my July 13-27, 1987, column (“Much Ado About Saving”) will know why I don’t consider saving a rational or even a feasible objective of public policy, and readers of my October 5, 1987, column (“Of Taxes and Deficits“) will know why I consider some sort of national debt desirable. Saving is a residual, not a target; and without a national debt, the only money will be paper issued by private people and corporations.

There are several other suggestions for the surplus. One would use it to bolster the hospital insurance part of Medicare, said to be in even worse shape than the Old Age, Survivors and Disability Insurance Fund was claimed to be. Another would use it to balance (or overbalance the budget, and thereby permit the rehabilitation of people, bridges or battleships, depending on your taste. A third would use it to reduce other taxes.

What all the foregoing schemes have in common is unquestioning acceptance of the Social Security tax (and scheduled increases) in its present form. This is mainstream conservative thinking, in accordance with the new law of political science I proposed four years ago (“New Choices and New Taxes,” NL, August 6, 1984[1]): “In any confrontation between neoconservatives and neoliberals, the neoconservatives will always win, because the neoliberals will allow the conservatives to keep whatever they have previously gained, regardless of when or how they gained it.”

Hardly anyone is giving a thought to the truth that the miraculous Social Security surplus is the consequence of an absurdly high and shockingly regressive tax imposed because of a blind panic induced by deliberately false information. Barry P. Bosworth, a senior fellow of the Brookings Institution, puts it succinctly: “We are not, in fact, saving the Social Security surplus; we are simply using a system of regressive wage taxes to finance general fund outlays that were formerly financed with the personal and corporate income taxes.” As the law now stands, Social Security has been transmuted into just another system for taking more from the poor in order to leave more for the rich.

It is unseemly for Senator Moynihan to be so proud of his part in the scam. If he really thinks that reducing the budget deficit and the national debt is the road to prosperity, he would be well advised to search for ways to make the rich contribute their share and not rest smugly content with a system that takes a far higher percentage of a day laborer’s wages than of the seven-figure salary of the CEO at the company that occasionally employs him – a system, moreover, that taxes you only if you work and not at all if your economic endeavors are limited to cashing your dividend checks and clipping your coupons.

The New Leader


[1] Editor’s note:  The name of this article in print is “Bad Ideas from Brookings.”  On occasion The New Leader changed the title from that submitted/suggested by the author.  This is one case.

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