Friday, January 19, 2007

Straight talk on the Social Security Trust Fund (Dean Baker)

Here in the US the set of institutions that make up the public household (as Daniel Bell usefully called it) have been under right-wing assault for a generation–with some success, but only up to a point.

In particular, the attempt to dismantle Social Security (under the guise of "reforming" it, since in the current Republican lingo "to reform" is a specialized technical term that generally means "to undermine" or "to eviscerate") was supposed to be one of the big initiatives of George W. Bush's second term, but it turned into a major political debacle.

However, the desire has not gone away, so the effort is bound to be revived in the future, especially since genuine reform (as opposed to "reform") of Social Security and other major entitlement programs is a task that will have to be addressed sometime down the line. (With Social Security--as opposed to, say, Medicare--there is really no urgent need for action any time soon, but something will have to be done sometime.)

In the meantime, the misleading propaganda campaign in support of the effort to dismantle the Social Security program, along with other key elements of the public household, continues unabated. And journalists often fall for it, so in connection with these debates it's an endless but necessary struggle to try to separate sense from nonsense and serious arguments from mere propaganda. In a brief but trenchant piece in The American Prospect (properly commended to our attention by Brad DeLong), Dean Baker offers some useful myth-busting on these issues. His discussion clears up a lot of confusions and prevarications in a short space, so it's worth reading.

--Jeff Weintraub
The American Prospect [on-line]
January 18, 2007
Beat the Press
Dean Baker's commentary on economic reporting

The Social Security Trust Fund

Since the “entitlement” cutters seem to be on the warpath again, it might be time for another sermon on the Social Security trust fund. This one really should not be hard, but I am afraid that that there are many powerful people with a vested interest in creating confusion, and they have succeeded.

In 1983, Congress (following the recommendation of the Greenspan commission) deliberately raised the Social Security tax far above the level needed to pay current Social Security benefits. This led to a large surplus. Under the law, this surplus must be used to buy U.S. government bonds. Also, under the law, the bonds held by Social Security are liabilities of the federal government, just like any other bonds. When the program needs the money from the bonds to pay benefits, it can rely on the interest and eventually the principle from these bonds, just like any private pension or individual.

Note, that there was never any rule that any Social Security only gets government bonds if the government runs a surplus. In other words, from the standpoint of Social Security, it matters not an iota that the government has mostly run deficits for the last quarter century. This may have been bad policy, but it doesn’t affect the size of the trust fund.

The most recent projections from the non-partisan Congressional Budget Office show that Social Security will have enough money between projected taxes and the bonds in the trust fund to pay all benefits through the year 2046, with no changes whatsoever.

This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at appoint when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes.

There are many people who want to do this – effectively default on the government bonds held by the Social Security trust fund. If this default is now on the national agenda, then it certainly seems reasonable for the workers who are losing their benefits to raise the prospect of defaulting on government bonds more generally. After all, what can possibly be the rationale of only defaulting on the government bonds held by workers through the Social Security trust fund, but not defaulting on the government bonds held by the wealthy people who think this is such a good idea?

--Dean Baker