Archive

Tag Archives: Social Security Trust Fund

By George P. Brockway, originally published January 13, 1997

1997-1-13 Milking the Social Security Cash Cow titleTHE BEST that can be said for the Advisory Council on Social Security is that after two years of study, its 13 members could not agree on what to do about the allegedly ailing program. They did agree about some of the “facts,” and that agreement is enough to make one relieved they didn’t agree about much else.

Somehow they got into their heads the notion that the program’s surplus, which goes into a “trust fund” invested in long term government bonds, earns only 2.3 per cent interest. They say that rate is “adjusted for inflation,” but I have my doubts. According to the latest figures available, at the end of 1994 the fund contained $415 billion, and in 1995 it earned $31 billion. I make that out to be 7.5 per cent[1]. Taking into account the change in the Consumer Price Index (2.7 per cent), we arrive at a real return of 4.64 per cent[2] more than twice the rate assumed by the Advisory Council.

A point to notice is that there was almost no trust fund until Social Security was “reformed” in 1983. After all, the actuarial problem is not complicated. Even in the BC (before computer) era, the number of people reaching retirement age in any year could be accurately foretold, and reliable estimates could be made of those who would die or become disabled.

In such circumstances it is ridiculous and wasteful to maintain a trust fund. The businesslike thing to do with regular costs is, as the accountants say, to expense them-that is, to pay them as they become due, just as the rent and wages and interest are paid. It is prudent to put aside an amount equal to a few months’ expenses in case another nut imagines he has a contract to shut the government down. Otherwise, in a population as large as ours the risks are as level as can be, and the nation can and should be a self-insurer.

In 1981 David A. Stockman, President Reagan‘s Director of the Office of Management and Budget, worked up some figures purporting to show that the “most devastating bankruptcy in history,” namely that of Social Security, was imminent. A bipartisan National Commission on Social Security Reform was duly appointed. Alan P. Greenspan, then a private citizen, was chairman.

For a year the commission dithered, apparently convinced that Stockman was born for strange sights, things invisible to see. Then, as Senator Daniel Patrick Moynihan later told the story in a newsletter to his constituents, he and Senator Bob Dole put together a semisecret unofficial group to take action. “In brief,” he wrote, “in 12 days in January 1983, a half-dozen people in Washington put in place a revenue stream which is just beginning to flow and which, if we don’t blow it, will put the Federal budget back in the black, payoff the privately held government debt, jump start the savings rate, and guarantee the Social Security Trust Funds for a half century and more.”

The Senator’s circular letter was dated June 10, 1988-less than nine years ago. How did the supposedly magnificent “revenue stream” it describes dry up so quickly? Why must we find a new one now? We hear a lot about the size of the Baby Boomer generation as compared with the size of the succeeding generation. But in 1983 the Boomers were all grown up, and their children were mostly born; so there were no big demographic surprises. It is also said that the Boomers’ life expectancies are longer than those of their parents’ generation. This is certainly true, but just as certainly it should have been obvious to the architects of the 1983 solution. The World Almanac could have told them that life expectancies in the United States have increased every year since at least 1900.

If a blue-ribbon commission somehow got it wrong in 1983, is there any reason to expect that another blue-ribbon commission, perhaps with Mr. Greenspan again as chairman and Messrs. Dole and Moynihan again as members, could get it any better in 1997?

No, there is not. The Social Security Act Amendments of 1983 set up a system of increased taxes and reduced benefits in order to build a trust fund that was expected to take care of things until 2030.  Now we are being told by prophets of doom (some of whom were members of the 1983 commission) that we must do something drastic about Social Security entitlements today or the trust fund will run out in 2030, inciting an intergenerational war.

What, I wonder, is all the excitement about? The trust fund was planned to run out in 2030. If the end of the fund in 2030 is expected to signal the end of the Republic, why didn’t the 1983 commission Senator Moynihan was so proud of attend to it, instead of pushing the problem off on another generation? And why should the present generation be saddled with solving a crisis that won’t occur until long after Senator Strom Thurmond has retired? Why shouldn’t the generation of 2030 be expected to solve a problem that will occur, as they say, on its watch?

There are answers, but they’re not what you read about in the papers. The thing is, the Social Security system is what Wall Street calls a cash cow-by far the biggest cash cow, public or private, there’s ever been. Greedy men and women-exemplars of homo economicusdream about her and can’t keep their hands off her.

Several schemes are being floated simultaneously. Some want to increase Social Security taxes to preserve and increase the trust fund. They want to do that not for any actuarial reason, but because the Social Security surplus is used to reduce the Federal deficit, and there is the possibility (remote yet real) some deficit hawk will get the shocking idea of levying progressive income taxes to control the deficit.

Since Social Security taxes are as regressive as taxes get, an increased Social Security tax is a valuable trade-off for the benefit of the rich and famous. It’s even better for them than the Forbes flat tax, because the tax starts with the first dollar anyone earns (that sticks it to the lower classes!) and ends at $65,400 instead of continuing on to tax every last megabuck reaped. In addition, it is a tax only on those who are employed and those who employ them. If you are an economic specialist and restrict your activity to clipping coupons and cashing dividend checks, you don’t pay any Social Security tax at all.

As it happens, Senator Moynihan understood the ploy in 1990 and tried to forestall it by reducing Social Security taxes and returning the system to a pay-as-you-go basis. When he couldn’t persuade his fellow Democrats to go along, he asked why we needed the Democratic Party. It was, and too often still is, a good question.

Another greedy scheme yields an additional motive for wanting the Social Security surplus to be ever larger. Brokers and investment bankers have long had their eye on the trust fund. For them it presents a charming opportunity. Think of it! Imagine your rich and doting uncle[3] turning over to you a fund of half a trillion dollars, now growing at the rate of close to $50 billion a year, and instructing you to churn the market and make it grow faster. Wouldn’t that be fun?

It would, in fact, be unadulterated fun. You wouldn’t have to weary yourself persuading tens of millions of timorous senior and pre-senior citizens to entrust their savings to you; your uncle would handle that. Nor would you have to maintain tens of millions of separate accounts and draw and mail tens of millions of checks every month, together with resolutely upbeat letters explaining why benefits are less than expected. Your uncle would handle those chores, too. A very handy and efficient fellow, that uncle, regardless of what you may hear on the radio.

MOST OF THE “reformers” put great stress on the questionable assertion that an individual citizen knows better what to do with his or her money than some faceless and indifferent bureaucrat in Washington. This tired old wheeze goes back at least to Adam Smith, whose faceless and indifferent bogeys were, Smith-quoters may be astonished to learn, not government employees, but members of the boards of directors of private corporations, some of which were remarkably similar to today’s mutual funds.

Let us try to foresee what would happen if some privatization scheme-say, investing 25 per cent of the trust fund in the stock market-should be adopted by Congress and signed by the President. Since, as we noted in “Caught in a Boom Market” (NL, September 9-23, 1996), the number of available shares is limited, the influx of something more than $125 billion would send prices shooting up. But it would have taken a while to get the “reform” bill through; consequently, much-if not all–of the rise would have been anticipated by smart money pulled out of other investments. The trust fund would not participate in the initial boom. Also, the source of the cash needed to move into the market would be a problem. The trust fund would have to redeem some of the government bonds it is holding, the Treasury would have to sell other bonds to get money to pay these off. In other words, the deficit would be increased by the amount invested in Wall Street.

Where would the money to buy the new bonds come from? All the smart money would already be in the stock market’ but perhaps there would be some timid money eager to shift from stocks to bonds, especially if the new bonds were priced low enough to yield an attractively high rate of interest. The high interest would send stocks down as more money shifted from stocks to bonds; then some would shift the other way, just as money sloshes from technology stocks one day to nursing homes the next. Where would the turmoil end? It would not end. As Ring Lardner might have said, that would be part of its charm.

Both the stock market and the bond market are always churning, because traders are constantly evaluating and reevaluating possible investments, trying to determine their comparative future earnings, capital gains and risk. When the market is volatile, the vital question is what the various stocks and bonds are going to sell for tomorrow. In the end, this all is guesswork, even when mainframe computers spew out charts of many colors: What’s to come remains unsure.

If the stock market is now “outperforming” the bond market, it is because the stock market is considered riskier, and the claimed difference in performance is a measure of the perceived risk. The very term “social security” suggests that the program is correct in its present stance of being risk-averse.

Some claim that investing Social Security funds in the stock market would send prices even higher, and that high stock prices make it easier for new companies to be launched and old companies to be expanded. Other things being equal, as economists say, this claim may be sound enough, but there is another side to it. When the market is really soaring, it becomes much simpler to make money by speculating in stocks and bonds than by producing commodities for people to use and enjoy. Things apparently are not equal at the present time, for leading American companies seem to have more cash on hand than they know what to do with. Why else would IBM and so many others be buying back their own stock instead of investing in new or expanding enterprises?

All that would be accomplished by putting Social Security funds at risk in the stock market, it can safely be said, would be a steady upward redistribution of income and wealth. The rich would in general become richer, and the poor poorer. Try as they may, some people seem never to be near a chair when the music stops.

Stockholders and bondholders (both new and old) would, as a group, be likely to prosper about as fast as, but no faster than, the Gross Domestic Product. The only way they might have the illusion of prospering more grandly would be if inflation accelerated. Brokers and investment bankers would be the big winners in fact, taking them as a group, the only winners. The cash cow would be lavish with commissions and fees and interest on margin accounts.

The costs of moving the Social Security trust fund into the market-particularly the increased deficit and the interest bill on the new bonds-would be borne by the government. There would be a furious struggle to decide whether to increase the debt or to downsize the budget. No matter how it was resolved, those at the bottom of the income scale would be pushed lower. Almost all bonds are necessarily bought by the rich; the interest they receive is, in our present tax system, disproportionately paid by the lower middle class-the same people who typically suffer when the budget is shrunk.

It all comes down to this: Individuals can, and many do, make out like bandits on Wall Street, but society as a whole cannot be more comfortable or more secure without producing more goods and services. Whatever it is that Wall Street produces, it is good neither to feed you if you’re hungry, nor to clothe and shelter you if you’re cold, nor to heal you if you’re sick.

The New Leader

[1] Do the math, the author is correct

[2] The author appears to have subtracted 2.7% from 7.5%… Ed. I don’t follow why that’s the right calculation

[3] Uncle Sam, in this case

By George P. Brockway, originally published February 8, 1993

1993-2-8 Social Security on the TableTHEY SAY THAT Social Security is on the table. I hope the table is spacious and sturdy, for Social Security is like the proverbial horse designed by a committee. It is part employment tax, part endowment, part life insurance, part social welfare. It doesn’t fulfill any of these functions well, especially since it embodies a scheme of family values that would ordinarily be thought archaic even by members of the 1992 Republican Platform Committee.

The best thing to do with Social Security is start over again. All citizens should without question be entitled (that’s right, “entitled”) to decent protection of their dependents and a decent retirement. Since everyone should be covered and the claims can be closely anticipated, it is foolish to try to build up trust funds of one kind or another. The benefits or entitlements should be treated as ordinary expenses of government and paid for out of current income taxes, not out of taxes on employment.

Actually, of course, that is already the case. In 1992 the Social Security tax brought in $126 billion more than had to be paid out. The 1993 surplus is estimated to be $131 billion, and the surplus is expected to continue to increase for another decade or more. These billions of dollars make up the Social Security Trust Fund, but they aren’t stuffed in a bank vault somewhere, as our gold reserves used to be at Fort Knox. Instead, the Fund buys U.S. Treasury bonds, and the money thus lent to the government is used to pay bills.

Twenty or 30 years from now[1], when the baby boomers are enjoying their golden years, the smaller succeeding generation, though paying the same Social Security tax rate, will not pay in enough to cover their parents’ entitlements. So the Trust Fund will annually redeem some of its Treasury bonds. And where will the Treasury get the money to meet its obligation? Out of current taxes. Where else?

As the detective stories say, follow the money. When you do, you will see that under the present system the Federal government collects 38 per cent of its revenues by a grossly regressive tax that takes 15.3 per cent of her pay from the mite of a widow housekeeper but only 0.6 per cent (or less) of the pay of the millionaire executive who employs her, and nothing at all from those whose sole quasi-economic function is to clip coupons and cash dividend checks. Furthermore, you will see that the surpluses generated by this regressive tax will not in the slightest lighten the burden of future generations.

What can be done about this? Probably nothing. A couple of years ago New York’s Senator Pat Moynihan tried to get the Social Security tax lowered to a rate that would simply cover the outlays. He said, in what still seems to me a measured observation, that if the Democratically controlled Congress failed to adopt the proposal, it would be difficult to see what the party stood for. He got nowhere (although the publicity he generated probably derailed President Bush’s drive for a reduced capital gains tax). Indeed, the Senator was accused of planning the rape of generations yet unborn, of financial ignorance, and of much else.

Moynihan is now chairman of the Senate Finance Committee, the third or fourth most powerful man in the country when it comes to taxes, but I doubt that he will have more success with his proposal than he did earlier. And I’m sadly certain that he would have no success whatever, even if he was of a mind to, in persuading the good citizens of the Republic of the virtues of my proposal. So I retreat to a prepared position with suggestions for treating the sores exposed by Nannygate, bearing in mind the fact that we’re talking about provisions of the law that ‘are violated at least three-quarters of the time by otherwise law-abiding citizens-provisions, moreover, that everyone who thinks about them for even a minute recognizes as unjust.

Consider first the case of a nanny (I thought the word went out when Peter Pan grew up) or a cleaning lady (as the job description used to have it) who is a married woman, perhaps a widow, perhaps a senior citizen. The odds are that she will be or is entitled to Social Security benefits as her husband’s spouse. In addition to her regular income tax, 15.3 per cent of her earnings will be collected by the Internal Revenue Service simply to swell the Social Security Trust Fund. She will almost certainly receive no retirement benefit or social welfare or anything except what she would have received if she hadn’t done a lick of work in her life.

That’s where the family values I mentioned at the outset come in. A man and his wife are not individuals but a couple in the eyes of the Social Security system. After the principal bread winner retires, the couple gets one and a half times his benefit. In the statistically unlikely case that the wife is the principal breadwinner, the couple’s entitlement will be based on her earnings. Because the Social Security tax is levied only on the first $57,600 of a person’s income, it may happen that both husband and wife have paid the maximum tax. If so, the benefits will be paid on the husband’s tax even where the wife’s total earnings are many times greater. That, I imagine, will one day be the case of corporate lawyer Zoe Baird and her academic husband.

For the Bairds the situation is merely ridiculous. They will not have to rely on Social Security in their retirement; and given the lack of much progressivity in the present income tax, they are taxed little enough as it is. The cases of the cleaning lady and the nanny are of a different order. There are undoubtedly many who love babies and even some who like housework and enjoy the gossip that often goes with it. But the great majority of women who do this sort of work do it because they need the money. For them the Social Security tax is a cruel hoax. It would be surprising if most did not pressure their employers to join them in breaking the law. Once Social Security is on the operating table, it shouldn’t be too difficult to remove this diverticulum, preferably by increasing the benefits payable to a second wage earner in a family.

Now consider the kid next door who mows your lawn or baby-sits for you. While we’re at it, let’s consider all part time workers under the age of, say, 21. Suppose that instead of filling out forms and withholding taxes and all that, you gave such claimants, along with their pay, a voucher worth approximately 15 per cent of the money due. You’d buy the vouchers at the local post office, where they would be available in several convenient denominations. Banks and even grocery stores might want to sell the vouchers as a public service. The vouchers would earn interest in the same way and at the same rate as series E bonds, with these provisos: They would have to be used to finance some approved form of education, and they would have to be cashed before the holder’s 26th birthday. The vouchers would be required for all paid work by youths that is, no records would have to be kept to see whether the present $50 minimum was reached.

I MENTION VOUCHERS because that is a popular word today in educational circles, but stamps would be better. You are probably too young to remember the Postal Savings stamps one used to be able to buy at the post office or the Defense Stamps of World War-II, but I’m sure you can imagine how easy stamps would be to handle. Each worker would be given a little booklet with spaces to stick them on and instructions on their use.

Not only would this scheme free employers of annoying paperwork, it would free the government of expensive record keeping. Moreover, it would be largely self-enforcing. The present system is widely evaded because the supposed beneficiaries are unlikely to get any benefit from the Social Security taxes they pay as teenagers. Upon retirement, their benefits will be calculated on their highest 35 years of earnings. Under my proposal, young workers would get the benefits almost immediately, and those benefits would go for a purpose most employers strongly approve of. The nation would give up the relatively small taxes it now collects and will get in return a much larger contribution toward a cause its future depends on. Last but not least, good citizens who hire teenagers will both feel a public pressure to pay the tax and be relieved of the guilty conscience and anger that go with breaking a bad law.

Finally, let’s look at the COLA problem that at this writing is still teetering on the edge of the table. Cost-of-living adjustments, or COLAS, seem to derange the minds of many worriers about the deficit. Bankers are peculiarly susceptible, perhaps, because they enjoy the most refreshing COLA of them all. They don’t call theirs a COLA, of course. They call it an inflation premium. The interest they charge you for a loan is, they figure, made up of two parts-the real interest and a premium to offset inflation. Well, my Social Security benefit is also made up of two parts-the base benefit and the cost-of-living adjustment. Same thing exactly, except for the amount of money involved.

The Social Security COLA last year came to about $12 billion, while the Banker’s COLA came to about $800 billion. The Banker’s COLA was, in fact, more than double the budget deficit that upsets bankers so. And mark this: Inflation last year ran at a rate of 3.1 per cent, costing the economy about $186 billion. The Banker’s COLA that theoretically makes up for inflation happens to have cost the economy 4.2 times as much. If there had been no Banker’s COLA, there would have been no inflation.

On the other hand, if there were to be no Social Security COLA next year, some 500,000 senior citizens would be pushed down below the poverty line. The same fate would await hundreds of thousands more in every subsequent year that the Social Security COLAS were frozen. Very few retired people can survive on Social Security alone, yet for many millions it is the difference between modest comfort and penury.

In the past 10 years (as the Federal Reserve Board was being congratulated for inducing two recessions in fear of inflation), the cost of living has increased 47.2 per cent. Without the COLAS, a 1O-year retirement (the present expectancy) inexorably becomes very bleak indeed.

Well, it’s fine to have Social Security on the table. But if your problem is reducing the deficit, the way to do something about it is by increasing the taxes of those who benefited from the ’81 and ’86 tax breaks. Or, as Jeff Faux, president of the Economic Policy Institute, put it: “Send the bill to those who went to the party.”

The New Leader

[1] This article is being loaded into the blog 21 years after it was originally published

By George P. Brockway, originally published February 5, 1990

1990-2-5 Social Gains and Capital Security Title

TRYING TO UPSTAGE New York’s Democratic Senator Daniel Patrick Moynihan, who wants to stop using the Social Security Trust Fund to reduce the budget deficit, the Bush Administration has concocted something it calls the “Social Security Integrity and Debt Reduction Fund.” This is supposed to do part of what the Senator is urging, but in 1993 instead of now. The Senator, of course, had a pithy comment: “It is well known that the Federal budget is always in balance three years from now. Never, however, now.” It is equally well known that the Administration’s sudden action is motivated by fear that Moynihan’s proposal of a tax cut for everyone will show up President George Bush’s proposed cut in capital gains taxes as the rich man’s scam it is.

1990-2-5 Social Gains and Capital Security Daniel Patrick Moynihan

Among the many things wrong with the Social Security tax, the two principal ones are, first, that it is regressive; second, that it is a tax on employment and both adversely affect the distribution of income. The regressiveness is generally recognized, except by those who have come to believe that all taxes must be regressive. Budget Director Richard G. Darman, for instance, claims the Moynihan tax cut would have to be replaced by some new tax that would fall on the same people and therefore be just as regressive. But that is nonsense.

Not very long ago the Federal income tax had a progressive schedule that exempted the lowest incomes and then ran from 11 per cent to 70 per cent. The top brackets were knocked off under Presidents

Richard M. Nixon and Jimmy Carter, with a 50 per cent maxitax substituted. For a brief period, a 35 percent bracket was added to the capital gains tax, making it somewhat progressive. This was soon dropped, unfortunately, and opportunities for tax shelters were so expanded that when they were largely eliminated by the current tax law it could be claimed that lowering the top bracket to 28 per cent or 33 per cent was revenue neutral. (“Revenue neutral” was Ronald Reagan’s educated way of saying Read my lips.”)

Some argue that while the Social Security tax is regressive as it is collected, it is progressive as it is paid out. The examples usually given are not encouraging. They show people who evidently lived in constant poverty, paid a high percentage of their minuscule incomes in taxes, and retired to receive benefits exceeding the taxes they had paid. But they were below the poverty level all their lives nothing to cheer about. Anyway, there is no reason on earth why Social Security should not be progressive when it collects as well as when it pays out.

Furthermore, from the point of view of the Social Security system, there is no reason to replace the Moynihan tax cut. When Bush says, “The last thing we need to do is mess around with Social Securiity,” he implies that the Moynihan tax cut would reduce benefits either now or in the future. I’m sorry to say that Senator Moynihan allows us to make the same inference when he quotes a newspaper’s opinion that using the Social Security surplus to balance the budget is “thievery.” I’ll grant that it is skulduggery, that it is intellectually dishonest and economically counterproductive and unjust. People are conned into paying an unfair tax and liking it. Still, it is not thievery. No one gets away with anything, except politically. Neither present nor future benefits are at risk-at any rate, no more at risk than they will be no matter what happens.

Budget Director Darman suggests that the Moynihan tax cut would make it necessary to raise taxes a couple of decades down the road to pay the baby boomers’ benefits as they reach the golden years. Yet taxes will have to be raised for that purpose then whether they are cut now or not. What is the Social Security surplus anyhow? It is not a bank vault stuffed with crisp Federal Reserve notes. It is simply some entries in a ledger showing that the Social Security Trust Fund owns some Treasury bonds.

Once the boomers’ benefits have to be paid, the Treasury will be asked to redeem the bonds for cash. The Treasury doesn’t have a bank vault full of Federal Reserve notes, either. To get the money, it will have to ask the President and Congress to use some of that year’s taxes to make good on the bonds. This will happen regardless of the size of the surplus, just as the benefits I am now receiving come out of current taxes, regardless of what and when I paid in.

People talk about Social Security as a sacred trust, and it’s pretty close to that. There is no doubt that millions of citizens depend on the benefits and are scared whenever they hear talk of changing them. Actually, changes are made every year as the cost-of-living allowance is adjusted, and there have been changes several times for other reasons. The present growing surplus is a consequence of comprehensive revisions made in 1983. Because I own some municipal bonds, half of my benefits are now subject to income tax. I didn’t agree to that; the President and Congress just hauled off and did it, and it costs me over $2,000 a year. I don’t object in principle, because I think all Social Security benefits should be taxable, and I think all municipal bond interest should be taxable. (But I do feel it is a mite unreasonable not to tax everyone who has one or the other. Why me?)

Besides being regressive, the Social Security tax is a tax on employment. It taxes workers for working, and it taxes employers for hiring them. In addition, because production is achieved solely as a result of work, the Social Security tax is a tax on production.

Yet the Chamber of Commerce and the National Association of Manufacturers and the Business Roundtable have not rallied around Senator Moynihan. That’s rather remarkable. Half of the Social Security taxes are paid by businesses, from the smallest to the largest. And the half paid by employees is a drag on business, too, because it contributes to costs. Moreover, the paperwork involved is bothersome and expensive (or so they used to complain).

It would appear that business associations are more interested in the capital gains tax, which is paid by their members as individuals, than in the Social Security tax, which is paid by the businesses they supposedly are acting for. Well, we shouldn’t be surprised. Very little of what is reported as business news has anything to do with producing goods or services. Takeovers, buyouts and the like make big headlines – and big changes (usually unpleasant) in the lives of workers and the cities they live in. If there is evidence of these shenanigans having a positive effect on the production of goods and services, it is a well-kept secret. Nevertheless, that is the sort of activity the President is eager to encourage by reducing the capital gains tax.

IRONICALLY, the same sort of activity would be encouraged should Senator Moynihan succeed in the second half of his ambition: to use the Social Security surplus to buy up all the public debt. The private funds released would, he reasons, be saved. Since it is a widely propagandized faith that our troubles are caused by our failure to save, the Senator imagines that prosperity would be around the corner.

I have previously discussed John Maynard Keynes‘ theorem that saving equals investment (see “Much Ado about Saving,” NL July 13-27, 1987). What I overlooked in my discussion (and what Keynes overlooked in his) is that “investment” covers many noble works and a multitude of sins. If you have saved some money and want to invest it, you can buy a factory (fixed capital), goods to sell (working capital), some common stock (claims on future profits), bonds (which will pay fees for the use of your money). You can also put your money where your mouth is in Las Vegas or Atlantic City or any of several state-run lotteries. You can buy land or a collection of beer cans or rare stamps or a painting by some pseudo-Monet. That is not all, but it gives the idea.

When you come right down to it, only the first two items (fixed capital and working capital) are investments certainly intended to result in production of additional goods and services. A company issuing stock gets its money from the first sale; no subsequent sales have any effect on production. In some instances, even the proceeds from the first sale may be intended merely to finance the purchase of another company, whose takeover may not in any way expand total production. As for the other kinds of investments, it is plain that they are speculations and have nothing whatever to do with production.

Consequently, although saving may equal investment, as Keynes argued and as most economists today agree, and although production requires investment, it by no means follows that all investments are productive of goods and services. In the present state of our economy, there are not enough sound productive investments for the money already available. The lack of attractive investment opportunities is frequently cited as the reason banks became involved in the Campeau fiasco. When productive investments are scarce, money runs to speculation, as it has been doing in a turbulent stream for the past decade.

In spite of the irrelevance of any hoped-for encouragement of saving, Senator Moynihan’s proposal offers a big step toward solving the fundamental problem of the maldistribution of income. If the Senator’s Democratic colleagues were as wise in statesmanship as he (and as astute politically), they would rally to his standard instead of sulking on the sidelines pretending to be “responsible.”

After all, a very strong case can be made for the proposition that the Reaganomic shift of the tax burden from the rich to the poor is largely to blame for the stagnation of the economy and (if you want to fuss about it) the escalation of the deficit. This case is, indeed, far stronger than that for the Bush myth that cutting the capital gains tax would stimulate productive investment and increase tax collections (see “George Bush’s New Trojan Horse,” NL, September 19, 1988). If the Democrats were not determined to self-destruct still another time, they might combine the Moynihan and Bush proposals in a single bill, and let the President worry about being “responsible” for a change.

 The New Leader

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.

%d bloggers like this: