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Cogent thoughts on Social Security

February 01, 2005 ( politics )

My friend John-Paul Ferguson wrote this in response to a thread on the social security crisis and payroll taxes and such. Since that thread's pretty much impossible for anyone to find, he gave me permission to re-post it:

Payroll taxes are regressive because they kick in on the first dollar you earn (whereas income taxes for example kick in once you pass a certain threshhold) and are only collected up to a ceiling. It varies slightly for each tax; the current SS ceiling is $76,000. So, if you earn less than $76,000, you pay X percent of your income in payroll taxes; if you earn $152,000, you pay X/2 percent; if you earn $228,000, you pay X/3 percent, and so on.

Social Security is funded out of payroll taxes because, when it was created in the 1930s, it was understood as a pension program that workers basically paid for themselves. You pay money into the SS trust fund during your working life, and collect money out of it after you retire. In today's political climate, this is a really God-Damn important point. Social Security isn't a transfer program; it doesn't involve redistribution, a la the income tax (not that I think redistribution is a bad thing). The people who use it, fund it. The cap on earnings subject to the SS tax is also a result of political compromise. Since the idea was to create an equitable pension system, Social Security has a cap on the size of the payments you can collect from it. Rich people squawked that they should not have to pay unlimited contributions to a program from which they could get limited rewards. So, the compromise was to cap earnings subject to SS taxation, to roughly correspond to the cap in payments receivable.

Social Security taxation is "dedicated"; that is, the money from SS taxes goes into a separate budget--the trust fund--from general government revenues. This too was intentionally built into the system: that money was money that the government was not supposed to touch, because it had to be there in some form several decades down the line, when someone retired. The folks who designed Social Security were smart enough to realize that, if the rest of the government could borrow from SS revenues, the money wouldn't last. Hence the division. This, incidentally, is why people are always talking about the Social Security surplus or deficit as well as the budget surplus or deficit; they're two different things, coming from two different budgets.

(Incidentally, the Clinton administration is responsible for some of the most shameful mis-characterization of the Social Security system to date. The "record budget surpluses" of the Clinton years are partly a result of counting the SS surplus along with the fiscal surplus/deficit. The real (fiscal) surpluses were much smaller, and in some years non-existent.)

The Social Security Administration (SSA) takes its surpluses and buys US government treasury bonds. Like most bonds, these appreciate in value over the years; they're also almost universally considered one of the safest investments on Earth (Really. One of the only things safer are World Bank bonds, but for different reasons). This is another interesting thing to note: whenever a US Treasury Secretary, like Paul O'Neill, says that Social Security's surpluses are "meaningless" because they just involve "one part of the federal government borrowing money from another part of the federal government," he is either a) lying or b) implying that his own department's bonds, the core of most people's investment portfolios and one of the main pillars of the dollar's role as a global currency, are meaningless. Which of those do you think is more likely?

The problem that several of you mentioned in the IRC thread is that the number of retirees is growing relative to the number of workers. Thus, around 2014, the SSA will begin paying more in benefits than it takes in taxes. (Already you should be suspicious: why is an administration that won't publish accurate budget statistics for this year, and won't make budget predictions at all past 2010, except on Social Security, so concerned about something that is still a decade off? Why farsightedness on this and only this problem?) After 2014, we're hardly in big trouble: the SSA can cash in some of those T-bonds each year to plug the gap between revenues and benefits. Doing that, Social Security can continue to pay its current benefit levels through 2042 or 2052 (depending on whose projections you use). I should note that many of us will have retired by then.

After the surplus is spent, Social Security would either have to reduce its benefit levels or receive some funding from the general budget. This would only be fair: remember that George W. and his ilk wanted to return some of the late-90s budget surpluses to us in tax cuts? He was talking about the Social Security surplus. If he was willing to tap SS in the name of the general budget, why do Republicans think it would be impossible to tap the general budget to aid SS? I mean, we're financing the entire war in Iraq with borrowed money!

But that's beside the point: saying that SS will start running a deficit in 2042/52 assumes that we will make no changes to the system whatsoever. We can make changes. We can for example raise the earnings cap on payroll taxes. We could increase the payroll taxation rate for higher earnings (which in its own way would be fair, since wealthier people tend to live longer and thus collect more SS benefits). We could raise the minimum wage--which would effectively transfer some money from employer's pockets to workers', and thence to the SS trust fund (and, yes, other parts of the government). Any of these reforms could keep SS solvent right into the 22nd century--by which time the coasts might be underwater and all of this will be a moot point.

So why not privatize it? For starters, privatization doesn't patch SS up. Think for a moment about how such a trust fund works: it's not that you pay in money while you're working, and that money sits in a vault for a few decades, only to be pulled back out and handed to you when you retire. Money you pay in goes right back out in the form of benefits to current retirees. The benefits you've earned exist from year to year, but they are actually paid with revenues taken in in the year you collect them. It's like a conveyor belt. It works fine, as long as people are still paying in when you decide to collect.

What happens if, instead of paying into the system, working people instead put their money into private accounts? Suddenly, the SSA does not have current revenues with which to satisfy earned benefits. The system can only be maintained by the government borrowing massive -- massive -- sums of money to cover benefits of people who retired under the old system. This is exactly what the British and Chilean governments, who privatized their pension plans under Thatcher and Pinochet, respectively, had to do; and it's exactly what the Bush plan proposes.

It's this component that I think gets lost in a lot of debates. Yes, it's true that investing your pension money in the stock market is a fundamentally stupid idea: it removes the stability of the pension's expected value, which is the whole goddamn point of a pension. You end up only doing better if you retire into a bull market--and retirement isn't something you can necessarily wait a few years on. In addition, no one has explained to me how having millions of working people alternately pumping in and sucking out billions of dollars from the stock market is not going to introduce wild volatility into said market. And while we're on this point, note that the British government, which has labeled its pension privatization a failure, has often complained that the "waste" (from a pension plan's perspective) of broker's fees drastically lowers the return that the private pension system yields, compared to the old public one. Any one of these reasons, taken by itself, is justification enough not to start dumping SS tax money into private investment accounts.

But that stuff, awful as it is, is only part of the problem. Sure, privatization would remove the security of pensions and potentially immiserize millions of people in their golden years. But that's really not the worst effect. The worst effect is the one I mentioned above: the catastrophic effects such a privatization would have on the federal budget. You think our debt is bad now? How about adding the odd $10 trillion or three over the next few decades? What do you think that'll do to investor confidence, the foreign-exchange rate, the capital account? Not good things, probably.

...Look, it's late. I've said enough. The main point is this: any idiot can get up to speed on the mechanics and finances of Social Security really quickly. It's just not that complicated. In a time like this, when the government is actively lying to the population to try to gut it, the most successful (and solvent!) progressive social program in our history, we as citizens have a responsibility to learn how the thing works, so we can form an intelligent opinion on the matter. So, read up. Read anything Paul Krugman, or Thomas Frank, has written on the subject. Go check out www.thereisnocrisis.com. Hell, go read the Congressional Budget Office's own reports--they don't support Bush's plan! But don't just parrot third-hand disaster scenarios you sort of remember. This is serious shit; our use of the program quite literally depends on it.

Posted by griffjon at February 1, 2005 09:25 PM

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