Social Security: The Biggest Bush Scam Yet

These changes signal a looming danger: In the year 2018, for the first time ever, Social Security will pay out more in benefits than the government collects in payroll taxes. And once that line into the red has been crossed, the shortfalls will grow larger with each passing year. By the time today's workers in their mid-20s begin to retire, the system will be bankrupt, unless we act to save it.

A crisis in Social Security can be averted, if we in government take our responsibilities seriously and work together today.

--President George Walker Bush, Dec. 11, 2004

As part of his sweeping vision of an America permanently altered by the 'mandate' afforded those in the 51% Republican majority, President Bush has pledged to drastically alter the Social Security apparatus first put in place by President Franklin Delano Roosevelt in 1935. Apparently fancying himself as the candidate of reform, ("The American people voted for reform in 2004, and now they expect us to work together and deliver on our promises." Mr. Bush stated in the same address, absurdly) the President has vowed to re-organize Social Security so that a portion of the funds each American worker pays into the fund could be invested by the individual in the stock market. The money, Mr. Bush's campaign jingle exclaimed, is yours, and you should be able to invest it as you see fit.

The notion of controlling the flow of a greater amount of one's own money is an attractive one as it is sold to the public by the White House; the government is taking your money, they argue, and investing it in a slow-growing fund secured against the value of massive quantities of US Treasury bonds bought from the Federal Reserve with the money paid into it through payroll taxes. These bonds accrue interest much too slowly, they argue, meaning a greater drain on current and future workers to support the Social Security surplus fund than if the money were to be invested in the stock market, which can provide much higher returns. Furthermore, as these bonds are issued by the Federal Government and their interest is paid out by that same government, the resulting flow of monies isn't "real", insofar as it is only an exchange of cash for debt. This is a masterfully spun interpretation of the situation and a shockingly duplicitous and manipulative one. The notion of outstanding bonds as being a meaningless promise from government to itself is astonishingly facile and dangerous from a foreign relations standpoint as pointed out by the inimitable Mr. Paul Krugman in his latest Opinion piece for the New York Times;

Privatizers say the trust fund doesn't count because it's invested in U.S. government bonds, which are "meaningless i.o.u.'s." Readers who want a long-form debunking of this sophistry can read my recent article in the online journal The Economists' Voice (www.bepress.com/ev).

The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.

So much for the theory of government bonds being empty promises, but what of the issue of pushing debt from one extremity of government to another: what does it matter where the debt is incurred, so long as it is debt?

Well, it does matter, because of the way that Social Security is structured. As it stands, Social Security is set up as a separate entity from the "General Fund"- that is, delineated outside of the revenues for all other areas of the goverment. However, this system became unsustainable long ago, as the number of workers contributing to each fund is shrinking in relation to the number of beneficiaries. To address this problem, Congress passed a "fix" in 1983 that established a huge 'surplus' fund that would last for generations into the future. In this surplus fund we see the real "crisis" with Social Security and the mendacity of those who purport to want to reform it.

The "surplus", if a fund of money already owed to future recipients can be thus labelled, is NOT separate from the general fund of the government. In fact, it is counted along with all the other receipts of the federal government. This means that there is no surplus in Social Security, as the government as a whole is wildly in debt. In fact, this surplus is often counted against the federal deficit in order to artificially drive down the figure. This is no mere accounting trick, either; what it means, in simplistic terms, is even with a federally-mandated ban against dipping into Social Security to use the funds for other spending priorities, (a prohibition that was violated itself by Lyndon Johnson to pay for the Vietnam War) the government has been borrowing against it for some time and has, in effect, spent it all in a glut of taxing and spending that has left the country as a whole deep in debt, as well.

The last element of the Social Security "reform" "plan" (seperate quotations intentional) to be dealt with is, in the order in which the reforms are sold, the first; the notion that your money would be better invested in the stock market. While it is true that the stock market can lead to much higher yields, it is unlikely that the White House is advocating that every American be allowed to day trade his or her own retirement plan from the comfort of their own home. Rather, in a handout to Wall Street, they are most likely talking about investing into a number of Government-approved index funds. Put together by large Wall Street brokerage firms, these funds would be made available to the enormous pool of Social Security investors to choose between. This element of the Bush plan has been the least reported-upon, and for good reason; it is unclear exactly what they and their cronies stand to gain from this. While thus far this article has attempted to shy away from slanderous or assumptive thinking, the track record of the Bushies as being shameless in their support of their former and future business and political associates is so clear, that for the sake of this article it is to be regarded as objective fact.

So, if the wheels are being greased somehow, whose wheels are being greased in this plan? Much of the attention has fallen on the Wall Street brokerages and how they are pushing for the cut behind the scenes. Bear Stearns, Goldman Sachs, et al. have all had a hand in promoting this move, but why? The journalistic community seems to believe that they are salivating at the prospect of the trillions of dollars they could manage in personal accounts. These accounts would each accrue administrative fees, meaning that Wall Street could potentially siphon billions of dollars of Goverment money out of the system and into their pockets. I am not an economist, nor do I have connections to Wall Street, but I am going to dismiss this notion out of hand for a couple of good reasons. I do not believe that Wall Street, in its heart of hearts, wants to become and insurance company-like management hub of a huge government bureaucracy. The tens of thousands of employees required, the advanced data systems that would have to be put in place, the increased regulatory involvement that would ensue on not just the funds but the market as a whole would all seem to be unsavory prospects to corporations that typically make their money in the world of high-margin wheelings and dealings. The slim margins of profit that would be enforced by the government (as Americans would sour quickly to the plan were the brokerage houses earning a healthy portion of 'their' money from the government) would make their administration more trouble than they're worth, not to mention the fact that they are completely unequipped to do so in the first place. No, Citigroup wants no part of these funds for the profit off of individualized accounts, they want them for other reasons.

The first of these reasons has to do with payroll taxes. Both corporations and their employees pay a payroll tax, evenly split, on the amount earned. This percentage has been increasing slowly with time, and is becoming an ever increasing burden on employers. As with private insurance, the American system of care and pensioning is employer-based, not government-based, and this means that all benefits received by an American worker are profits lost to the American employer. Huge employers like General Motors or General Electric are seeing an extraordinary amount of drag on their current profits because of benefits and pensions promised to their former workers. With the approaching retirement boom, this is only going to get worse, and employers are worried that they will bear the brunt of the storm. The Republicans are smpathetic to this, as they should be; business is the lifeblood of the country, and its future health should be ensured. However, the fix is a non-fix; The Bush administration has flatly stated that under their plan, payroll taxes would be capped at the current rates. The shortfall, they seem to be arguing, would be made up by greater returns from private investment accounts. This is an artful dodge, as nobody could possibly divine what the rate of return would be but, by the calculations of most economists, it would be slightly lower in the stock market than in government bonds. Bill Frist himself sunk a significant amount of campaign fund money into the fund a number of years ago, and discovered how things can work out in the reality-based community even for mere interlopers from la-la land:

A campaign fund controlled by Senate Majority Leader Bill Frist (R-Tenn.) has lost almost $460,000 in stock market investments since 2000 and now does not have enough to cover a sizable bank loan, according to federal election records and the manager of the Frist account.

--Washington Post, Dec. 11, 2004

Clearly, the risk to the consumer/saver is great, so who wins? Well, though not for the reasons suspected by the neutered and retarded press, Wall Street would seem the obvious benefactor. The reason goes back to the payroll tax in part; with lower payroll taxes, large American manufacturers like GM and Intel free up future capital to plow into R&D or, more likely, profits. This means a healthier Wall Street in the kind of blue chips whose stability is important to even out the buffeting value of stocks in more volatile sectors of the economy. Second, if there are only to be a certain number of government-approved index shares, Wall Street investment houses could control the flow of the largest single pool of investment money in the country. Without strict governmetn regulation (as regulations are more likely to focus on the simpler issue of brokerage fees than the more complex ones of stock indexing), it would be possible to engineer trends on the market, or simply move funds in such a way as to bolster the company analyst's market outlook. The fees are peanuts, the enormous amount of cash on hand is not.

All of this is wild-eyed speculation, and distracts attention from the real issue: how do we maintain Social Security for the younger generations? The answer to this crisis is simple and, for some reason, completely unpalatable (at least in public) to both liberals and conservatives: balance the budget and tinker with Social Security. The enormous backwards-graduated tax plan passed by the Bush Administration just does not jive with the notion of ensuring the future of anything. When all governmetn is in the red, Social Security is in the red, and tinkering with the long viability of the program as a divorced entity from the rest of the federal budget is silly in the face of the budget shortfalls we are looking at. No, this is not reform, this is another "starve the beast" program. The idea is to put Social Security on poor footing at the same time that the government as a whole is wildly in debt so that it can eventually be dismantled and its surplus fund spent on other debt priorities in order to pay down debt without raising taxes. In the meantime, before the demise, the administration opposes further graduating the payout schedule (which would result in the rich paying more than they get back to bankroll the funds of those less fortunate) or raising the payout age. This means that their wealthy friends and benefactors receive the money they are owed and are allowed to invest it in the manner they almost certainly invest some of their other retirement savings, and reap the benefit of the current, more mildly graduated benefits schedule.

The real fixes to social security are: a raised retirement age, a more graduated benefits schedule and a slightly higher payroll tax. Other more radical fixes would be a consumption tax, pollution credits or a nationwide sales tax. THese would more accurately tax how much one spends rather than makes, making saving more attractive and targeting those who can most afford to pay by taxing their consumption. Sadly, these kind of sensible, humane and civic-minded reforms won't even be thought of for a moment.

Posted by Mordred at January 10, 2005 03:58 PM
Listed under The White House .