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Debt, Taxes And Kiss Of Death
The Social Security Unmentionables

By Terrell E Arnold
2-28-5
 
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.
 
Why is Social Security Being Discussed?
 
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."
 
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:
 
What needs to be fixed?
 
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.
 
There is no crisis
 
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.
 
What Are the Trust Funds?
 
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.
 
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.
 
The potential remedies
 
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.
 
Here is what really needs to be fixed
 
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.
 
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.
 
Raise the payroll tax
 
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.
 
Cut benefits
 
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.
 
Borrow from Treasury
 
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.
 
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.
 
Raise or remove the ceiling on taxable wages
 
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.
 
Increase the retirement age
 
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.
 
Change the Index
 
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.
 
Why not a Combination?
 
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.
 
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.
 
What is the real agenda?
 
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.
 
How did the trust fund get its present shape?
 
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.
 
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.
 
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.
 
A little known tax shelter emerges
 
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.
 
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.
 
The facts are simple
 
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.
 
Why then is Social Security a problem?
 
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.
 
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.
 
The Bush way out is a diversion
 
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.
 
What is the real agenda?
 
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.
 
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.
 
Who really will benefit from the Bush scheme?
 
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.
 
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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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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