- For the better part of two centuries of the American
Republic, "unmentionables" was a category of topics such as
ladies
underwear, various bodily functions, and human conditions, especially as
related to sex, not to be discussed except in the most intimate of
circumstances.
Whatever those limitations were, they have evaporated in the growing heat
of marketing, media advertising, television programming, Internet
columnists
and bloggers, common parlance, and perhaps ordinary voyeurism. But over
that period certain topics have become virtually unmentionable if not
actually
taboo in Washington: One is increases in taxes, another is honest
discussion
of the purposes of legislative and other policy proposals, a third is how
our money is actually being spent or planned for spending, and a fourth
is the real rationale for changing any of the above. The net effect is
nobody ever talks about the real issues.
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- Why is Social Security Being Discussed?
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- Social Security is the current worst/best case of the
Washington political state of mind. Problem number one is that everybody
in Washington, Republican or Democrat, media of all sizes and shapes, and
interested lobbies, are talking about the "reform" of Social
Security. What do they mean? Using a reasonably straight dictionary
definition,
a reform means that something that used to be ok has gone awry and needs
to be fixed: as the Oxford English Dictionary puts it, reform is "the
amendment, or alteration for the better, of some faulty state of
things."
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- But everybody seems agreed that Social Security has not
done anything wrong, and it is not now doing anything wrong. In fact,
Social
Security is a widely popular program with revenues and assets that meet
foreseeable requirements for at least the next thirty-five years. That
is robust and healthy when compared to any other area of government.
Therefore,
a reasonable person could ask:
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- What needs to be fixed?
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- The field of fix-ability is a rat's nest of arguments,
data, and confusion, but mostly assertions, mainly because so many of the
talkers have conflicting agendas. The Bush assertion is that Social
Security
is "broke" now and needs to be fixed now; Social Security needs
aside, his personal agenda for years has been to set up some sort of
private
accounts. But the Annual Report of the Board of Trustees of the Social
Security Trust Funds gives a clear and complete picture of the
situation.
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- There is no crisis
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- Social Security received revenues from the earnings of
154 million people in 2003, and it paid benefits to 47 million people.
Social Security took in $632 billion and paid benefits of $471 billion.
Thirteen percent of income to Social Security in 2003 was interest on the
Trust Funds, and 2% came from income taxes paid by Social Security
recipients
on their benefits. With Social Security administrative costs running less
than one percent of revenues, the great bulk of the spread between receipts
and benefit payments, roughly $160 billion, was loaned to the US
Treasury.
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- What Are the Trust Funds?
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- Social Security regularly has been taking in more than
it has paid out for about two decades. The surpluses have accumulated in
Trust Funds of interest-bearing Treasury Bonds. The Trust Funds amounted
to $1.53 trillion at the end of 2003. According to the mid-range estimate
of the Social Security Administration, assuming no program or tax rate
changes, the system will have sufficient revenues to cover all benefits
through the next 12 years-to the end of 2017. By the estimate of the
Trustees,
unclouded by political choices and considerations, Social Security will
have Trust Funds and revenues to cover all anticipated funding needs for
the next 37 years, to 2042, maybe longer. At the end of that period, the
Trust Funds will be exhausted (the Trustees' report says
"insolvent"),
and payroll tax revenues will then cover 80% or less of presently
anticipated
benefit payments.
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- This timetable appears to provide ample room for even
the slow-moving object the Federal Government can sometimes be to make
and carry out timely adjustment decisions. No doubt, with such an orderly
process in mind, and without getting into the politics of the matter, the
Trustees' annual report candidly examines the means to solve anticipated
shortfalls.
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- The potential remedies
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- The Trustees' report suggests several measures: (a)
a 1.89% increase in payroll taxes (b) a reduction of benefits of 12.6%.
(c) a general revenue transfer, needed beginning after 2042, equivalent
to $3.7 trillion in present dollars, or (d) a combination of the above
actions. Other options identified by Social Security Administration
sources,
include an immediate removal of the cap on earnings now exposed to the
Social Security tax, or an increase in the retirement age toward or up
to 70. Another option is to shift the indexing of Social Security benefits
from wages to prices. In short, the system is not in or approaching a
crisis,
but timely decisions will be needed, and very specific options have been
identified. Each of these options has different implications and, one
should
add, political pitfalls.
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- Here is what really needs to be fixed
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- There is virtually a total paralysis of Washington
political
will to openly discuss the relationship between benefits and costs with
the public. The so-called Social Security "third rail" is
actually
on both sides of the track. On one side is sensitivity to any discussion
of cuts in benefits. On the other is any discussion of increases in taxes
on employers and employees to meet rising costs. But keeping people in
the work force longer would probably meet some opposition, and eliminating
or merely raising the income ceiling on contributions would cause
complaints,
especially from those who just benefited from Bush tax cuts.
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- We, the people, need to stop being passive about a
political
system that willingly allows our representatives to either lie or not
inform
us about the economic realities of benefits or services we receive or are
seeking. In short, we need to elect and hire people who will tell it like
it is on the true costs of government and the benefits and services
provided
by it. If our representatives were prepared to give us a straight story,
meaning they thought we were prepared to hear it, we would have the
relevant
choices put to us for approval. That, several pundits aver or imply, is
most unlikely to happen, but let us look at the options.
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- Raise the payroll tax
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- The single adjustment required to make Social Security
funding problems go away for the next 75 years is the equivalent of a 1.89%
increase in payroll taxes, made now, and made permanent. This option means
an increase in the payroll tax share of each employee and employer of
about one percent of the wages subject to Social Security tax, with, of
course, a rough 2% increase for the self employed. For both Republicans
and Democrats, however, the idea of a tax increase appears only slightly
less distasteful than losing an election. That state of mind alone reflects
the charade that Washington politics often can be.
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- Cut benefits
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- This choice would require a 12.6% cut in benefits that
would have to be made now and made permanent. This would hurt present
beneficiaries in the lowest income brackets, and probably irritate those
in higher income brackets. If this were to be the option chosen, the Bush
proposal and some others would likely be to defer any such action for as
long as possible, leaving the impact on generations of workers likely to
leave the labor force two decades or more from now. Workers yet unborn
could pay for it or cope with the consequences. That order of political
gun shyness keeps the issue out of voter range for four or more
presidential
election cycles. In any case, such a benefit cut, if taken now, would keep
the program solvent for the next three generations.
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- Borrow from Treasury
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- The third choice would reverse a decades-long pattern
of Federal borrowing from Social Security by providing the Social Security
Trust Funds a $3.7 trillion infusion out of the general revenue stream
supporting the Federal budget. That choice appears to steer clear of the
potential anger of workers and employers, or of beneficiaries, but does
it really? This option amounts to freeing up funds-at the expense of other
programs--totaling roughly half of the present national debt. It is not
a simple matter, even spread out over 30 some years after 2042.
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- This proposal is probably a non-starter, because the
present Federal revenue stream is already substantially below
expenditures-running
a $420 billion deficit in 2004. While Bush talks about cutting that
deficit,
he has not succeeded so far, and continued occupation of Iraq, plus plans
to tangle with Iran and/or Syria are not hopeful signs. Moreover, it would
be hard to find that $3.7 trillion at the rate of the notional $125 billion
or so per year that seems required. Any funds for this purpose would
likely
be taken at the expense of dozens of popular programs. The political noise
level would be unbearable, but, at the same time, significant and important
work, such as homeland security or environmental protection, health care,
and education support could be impaired.
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- Raise or remove the ceiling on taxable wages
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- Until recently, wages up to $87,000 per year have been
subject to payroll taxes, and an upward adjustment of a few thousand
appears
already in the cards. Higher income brackets--the ballooning salaries
of CEOs and other senior executives--are not included. Contrary to the
progressive concept of American taxes, those most able to pay are exempt
from payroll tax on the great bulk of their salaries. Such a change would
not fly well with an administration that from its beginning has targeted
tax cuts on the wealthiest people in our system. Any suggestion of lifting
the cap would excite an already overactive greed gland.
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- Increase the retirement age
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- Under consideration appears to be a move to raise the
retirement age from the present 65 years to a future 67 and an eventual
70. This shift recognizes the fact that more and more people are working
longer, either deferring retirement or going into second careers. The
longer
the shift in the present retirement age, the more people have to adjust
present retirement plans, and that is a source of some political
discontent.
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- Change the Index
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- Indexing, that is pegging increases in Social Security
benefits to a broadly-based economic indicator, is already the practice.
The index used is change in wage rates. That tends to rise faster than
the price index, so a switch in the index would slow increases in benefits,
thereby relieving program cost pressures in future years. It seems fairly
painless, but it would expose beneficiaries more to the adverse income
effects of inflation. They would steadily lose ground compared to wage
earners.
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- Why not a Combination?
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- In a situation where every available choice is likely
to offend identifiable blocks of constituents and voters, Washington is
not typically at its best. However, there is a real opportunity here to
spread the adjustments in costs and/or benefits fairly thinly across much
of the population. Each of the five options cited above most directly
affects different groups, while any one of three of them (the 1.89% payroll
tax increase, the 12.6% cut in benefits, or elimination of the cap on
payroll
taxable income) could solve the problem completely for the next 75
years.
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- If the goal is a real effort to save Social Security
in something like its present form, there are two choices: Either adopt
a set of measures that require little adjustments by many people, or enact
specific adjustments that cause particular groups to shoulder the entire
burden of course correction.
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- What is the real agenda?
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- This review of the options says that the key choices
are easy to state, albeit political hurdles. But what actually is going
on here? The facts suggest that we could leave the system alone and let
the trust fund cover our needs until 2042. That altogether is a safe
political
choice. Several things can change in the intervening 37 years, but we
are likely to see far enough ahead to anticipate and change course. To
understand why just sitting on the problem does not appeal to the key
actors,
it is essential to look at deliberate, or perhaps unconscious,
unmentionables.
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- How did the trust fund get its present shape?
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- Some objectors say there is no such trust fund, because
it exists only in the form of Treasury Bonds. Those bonds must be viewed
as the equivalent of cash when necessary; their conversion would be a
problem
only in the event of failure of the US Government and default on its
obligations.
Such a default is not out of the question, and some international financial
experts are worried about it even now, but it appears unlikely. There
are two problems with the trust funds as Treasury Bonds.
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- First, at a whopping $1.53 trillion dollars at the end
of 2004, the Social Security trust funds amounted to about one-fifth of
the entire Federal debt, clocked at $7.69 trillion on February 20, 2005.
Without being asked, American payroll taxpayers have loaned this much to
the Federal Government in the past two decades. That is the reason the
Trust Funds do not exist as funds or bank deposits, and are not now ready
cash to fund the program.
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- Second, when Social Security revenues and benefits become
even in 2017, and benefits begin to require drawings from the Trust Funds,
those loans to the general revenue stream of the Federal system have to
stop. Between 2017 and roughly 2042, the entire trust fund obligation
of the Treasury could be paid down. This could be a neat reduction-roughly
20%-- in the national debt. However, most likely their contribution
through
loans to the general revenues of the government (averaging roughly $70-80
billion per year) would be sorely missed. By cashing in Treasury Bonds
to cover its current benefit payments, Social Security diminishes funds
that are supporting other activities of the Federal system; those
activities
must be cut accordingly, or other funds must be found to replace
them.
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- A little known tax shelter emerges
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- Here a peculiar, perhaps unique Washington kind of tax
shelter lies exposed. Congress and the White House borrowed the surplus
contributions of employers and workers to avoid raising taxes to Americans
in general. Use of the Social Security Trust Funds became part of a
virtually
covert long term pattern of deficit financing and spending. Moreover,
borrowing
from the Trust Funds placed the transactions outside the usual arms length
debtor/creditor pattern of relationships. Social Security Trust Funds in
that sense were ideal loans. The hope, maybe the expectation, of successive
administrations, beginning with Ronald Reagan, was that the debt would
not be called. It could turn out that way under one or more of the
possible
models.
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- Another unmentionable is the cost in additional funds
to run Social Security, that is to maintain benefits, when a third of the
revenues or some significant part thereof are diverted into private
accounts.
Over a matter of decades, maintaining benefits to present stakeholders-an
apparent absolute-- while encouraging the diversions into private accounts
would cost trillions of dollars. Adding debt on that scale, given the
present elevated level of national debt at $7.6 trillion and growing, is
basically out of the question.
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- The facts are simple
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- If we do nothing but sit on our hands for a while, we
can come up with workable answers to the future funding needs of Social
Security. The basic propositions on the table are straightforward: We need
program modifications, call that reform if you wish, only if we want to
change what Social Security does in the future. If we want to assure
continued
Social Security coverage and benefits as we now enjoy them, or if we want
to add anything to this package, what we really need is revenue adjustment.
In effect, to assure the continued fiscal health of a program that is now
quite healthy, over time we need a revenue adjustment, a benefit
adjustment,
or some combination of those to keep the program healthy for the long
haul.
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- Why then is Social Security a problem?
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- Why are we having so much trouble with this? The answers
may lie with other unmentionables, some deliberate, some, we might trust,
inadvertent. The biggest unmentionable is the impact of the War on
Terrorism,
and military adventures such as Iraq, on the ability of the Federal system
to fund sustained operations without raising taxes or going into deeper
debt. If the Social Security Administration starts using its assets to
maintain benefits in 2018, it will end the practice of quiet borrowing
by Treasury. That will make the budget problem even worse. The required
payback of the Trust Funds $1.53 trillion-plus any additions up to 2017
that could run the total over $2 trillion-probably means that every Trust
Funds dollar paid back is worth two in terms of potential Treasury
obligations:
One would be used to pay Social Security and the other-unless the Federal
budget is forced to shrink in stride with the Social Security payback--
would represent new borrowings to fill the resulting budget gap. Viewed
through this window, it is simply inconvenient to pay the Social Security
Trust Funds debt.
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- That inconvenience, however, is a simple artifact of
Bush team ideologies and preferences. The current budgetary bind is due
principally to the Bush team need to pay for the so-called War on Terrorism
or to defeat world tyranny by military operations. The persistence of that
bind is due to the unwillingness of the Bush team to raise taxes or to
rescind tax cuts that were contrived early in the first Bush
administration.
The chickens are coming home to roost, and the likely need to repay Social
Security only makes that prospect appear more bleak. The Bush scheme
itself
would make matters much worse.
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- The Bush way out is a diversion
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- Bush apparently hopes that the general allergy of
Congress
to tax increases will help him through this situation, but to accomplish
that he needs to keep all eyes off the actual Social Security payment
issues
through touting his private account scheme. To pull off this sleight of
hand, the Bush team, conservative Republican supporters, businesses, banks
and other money managers are putting together a propaganda program costing
an estimated $200 million. Molly Ivins says this little campaign is
designed
to make us like being screwed over. Her language is colorful, but she
is right.
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- What is the real agenda?
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- You can bet any buck you have left that nowhere in that
propaganda scheme will the real reasons for messing up Social Security
ever be mentioned. The real reason is the decades- long campaign of
conservative
Republicans, a few conservative think tanks and a bevy of small government
advocates to kill Social Security along with any other social programs.
Bush will never breathe a word about this because a sizeable part of his
power base consists of Social Security beneficiaries. He therefore adopted
the innocent sounding notion of privatizing the program to make us think
what he has in mind is constructive. In reality it is the first kiss of
death.
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- However, we should not lose sight of the money ball:
The central effect of the Bush scheme is to get Social Security
stakeholders
to divert up to a third of present payroll taxes directly into the accounts
of private investment houses. That would be an enormous income
windfall-better,
much better than another tax cut-- for those businesses; every percentage
point of actual transfer that occurs is worth $35-40 billion or more a
year in new business to the investment houses. Only the third or fourth
buyer of the Brooklyn Bridge would be gullible enough to fall for this,
but that is what the propaganda campaign will try to sell us.
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- Who really will benefit from the Bush scheme?
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- The motives of the business and financial managers who
are paying for the propaganda campaign are hardly altruistic. Two hundred
million dollars are a drop in the bucket when compared with the real money
this transfer scheme would involve. We need to face the reality that the
Social Security privatization scheme is being launched and would be run
by people whose clear intent is to end Social Security. If we are not
attentive and hard headed about it; if we do not bluntly and collectively
say no, Bush will talk reform while letting his propaganda machine cozen
us into one of the best deals private business anywhere ever had: The
voluntary transfer of billions in Federal payroll tax revenues directly
into private business coffers.
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- Wake up, please! The Bush team and its business
supporters
will not mention any of this. We had better pay attention and cut off this
end run before it gets started. In the meantime, tell your congressmen
and senators to support Social Security Administration adjustments to
assure
the program stays as healthy as it now is. Be prepared to bite the bullet
on costs that are clearly in your interest.
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- **********
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- The author is a writer and speaker on global issues and
a regular Internet columnist on rense.com. He is a retired Senior Foreign
Service Officer of the US Department of State and former Chairman of the
Department of International Studies of the National War College. He is
a graduate of Stanford, holds an MA in political science and economics
from San Jose State University, and studied development economics at
Berkeley.
He will welcome comments at wecanstopit@charter.net
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