A Boogie Man Made Up to Scare YOU

There are a few myths, you could call them "boogie men," that have dominated how we think about the future and in doing so have altered how we understand our current political problems. In this post, I'll deal with the death of social security myth.

Particularly during the 2000 election, politicians, journalists, and analysts convinced us that social security was headed on its way to complete disaster. Politicians did this to push their political agenda, journalists did it because it was a great news story, and analysts...well there weren't too many and the only ones that were making noise either weren't being heard or weren't exactly sure what to make of all the commotion. The problem for analysts is that they had long sounded the alarm about social security: that it's basically a glorified pyramid scheme. So, when politicians started pointing to serious shortfalls in the system, they were at first excited that someone was finally listening to them, and then baffled when they realized that those politicians were just making problems up. Explaining why the talk of the death of social security was a myth was confusing and nobody had (or has) the guts to explain why. After Bush's victory, the issue became further confused as he proposed a privatization scheme. Instead of analysts explaining why this was even bigger nonsense, the scheme got shut down by Democrats scaring people into thinking that Bush was trying to ruin social security (which he was) without actually explaining how. Thus, we were left with the idea that social security was in trouble, but that fixing it would be siding with Bush. To sum up, social security was never fully explained to America and any debate surrounding it (from either the left or the right) has centered around the issue of fear. Since fear is powerful, politicians looked everywhere for fear and found it in a good line about how social security would soon be dead. Unfortunately, this is all nonsense.

Where to start? How about the beginning? All good diatribes start with history and this one won't be any different. The social security act was signed into law in 1935 under President Roosevelt during his so-called "Second New Deal." I won't go into the details of why it was created or why it's important, etc. Maybe I'll save that for another diatribe. The important point is that Roosevelt orchestrated the act and that he was a master politician that even Machiavelli would be jealous of. Roosevelt did three things to demonstrate how smart he was (despite the fact that he knew very little): he funded the program with payroll taxes, he separated social security from income taxes, etc., on employee checks, and he sold social security as a government-sponsored insurance system. Why was this so smart? I hoped you would ask:
1. between 1935 and 1952 when Eisenhower embraced the program, republicans/ conservatives put all their energy regarding social security into making it a program financed by the general fund [the general fund refers to all revenue collected by the government]. In other words, they wanted it to be financed like any other program. Why was this so important to them? Simple. By making it an appropriation of the federal government they could cut into it and eventually eliminate as they did with just about every liberal program when Reagan and Bush II took office. But, by placing the funds in a sealed program within the government, conservatives couldn't touch it.
2. By separating social security from other taxes, Roosevelt made sure that wage earners would know exactly where their payroll taxes were going. Thus, when we look at our checks we might think, "what is the government doing with all this money" for our state and federal income taxes, but when we look at the social security tax, we know exactly where the money is going. The gimmick paid off by giving the program a high degree of legitimacy and accountability.
3. by selling the program as a kind of old-age insurance, Roosevelt neglected to tell America that it was a quasi-pyramid scheme. To demonstrate, let me tell you the story of the first person to receive a social security check: Ida May Fuller, a Vermont resident, retired at the age of 66. She had paid $24.75 in payroll taxes when she retired, but like everyone after the program was created, she was entitled to full benefits. As it turned out, she lived to be 101 years old. That meant that she collected $22,888.92. One might ask, "where did all this money come from, if she only paid 24 dollars?" The odd scenario was created because social security payouts are not done through a locked account that you've been paying money into your whole life (as many people think) but out of current employee payrolls. This means that the continued success of the program depends on new entrants into the workforce; a.k.a. a pyramid scheme. Ms. Fuller played the part of the classic 1st entrant in the pyramid, receiving thousands of percents more value than she put it in, as did her entire generation.

As you may know, pyramid schemes get a bad rap. This is because they usually fall apart when there are no more new entrants. Such a scenario WILL someday happen (although it could be at the end of the world) when a whole generation of people who for their entire lives have paid into the system will not receive any benefits. This is the real fault of the social security system. Interestingly, it could happen anytime. It could happen tomorrow if Congress decided to end the program or it could end in 10,000 years. This is the insolvency of social security; it is also the only insolvency of social security...sort of.

But what about the whole end of social security thing? What about projections of a collapse in 2018 or 2041? What about the $11 trillion dollar deficit inherent in the system? Lies, lies, fibs, and half-truths (not in that order). All this talk about the end of social security as we know it began in 1982. In '82, budgetary analysts decided to finally address a major problem with social security: the baby boom generation. The baby-boom seriously upset how the system was financed and it meant that one day, when the baby-boom generation retired, there would not be enough funds to pay them benefits because they would be such a large percentage of the population. A commission headed by a young(er) Alan Greenspan came up with a solution: raise payroll taxes now on the baby-boom generation so that a surplus would be created to meet those demands in the future. And...the problem was solved. Let me say that again: the insolvency created by the baby boom generation has been solved...sort of.

So, why did we hear about it 20 years later as a big problem. For that we have Daniel Patrick Moynihan to thank. Moynhihan, who deserves his own diatribe, was a kind of half-intellectual, half-politician. By that I mean he wasn't a particularly good intellectual or a particularly good politician. In 1998, he headed a study that "discovered" a huge hole in the social security system that would explode in 2011 as the first baby boom generation began to retire. His reasoning was this: those payroll taxes collected for the last 20 years were collected in treasury bills. That means to redeem them, the SSA (social security administration) would have to go to the nation's revenue funds, get the money, and send it out to retirees. He then asked an interesting question, 'given our large deficit, where the hell are we going to get the money to pay the SSA?' hmm..sounds like a big problem...do you have any solutions?...I mean where could the SSA get this money?...it would be like if you put your money in the bank and then the bank used it for a whole bunch of loans...where would you go to get your money back???...






FROM THE BANK!!!!!!! The only reason that social security is not funded by general funds is that Roosevelt worried it could lose legitimacy and be vulnerable, thus he gave it its own funds (overseen by the SSA). The SSA then collects extra money, turns them into treasury bills as the government pays off debt and then gets the money back because it's still money that belongs within the protected funds of the SSA. In fact, to question if the government should pay SSA is not only ludicrous, it is a serious (unintentional) assault on the entire legitimacy of social security. And legitimacy is important for social security because...well, it's a pyramid scheme. Not paying back the SSA would be not paying back all those retirees who have been paying extra money into the system for the last 20 years. In reality, the extra payroll tax was a brilliant ploy because it allowed the treasury to pay less interest on its deficits all those years. Unfortunately, it means that we have been having even BIGGER deficits the last 20 years than previously thought and it means we will have BIGGER deficits in the future as we pay back the SSA. But it is not because of SSA that we have those deficits, in fact, without the SSA our deficits would have been even BIGGER as we would have had more debt to pay interest on (translation: the Reagan deficits were even BIGGER than we were told and the Clinton surpluses really were about breaking even...which is why you never hear about this...neither party wants to tell you how badly they've been doing the last 20 years...)

Moynihan's report drew attention to an issue that didn't really need any. In response, politicians took advantage of the hysteria, apparently realized that Moynihan was crazy, and started scaring people with more problems that weren't problems. In 2000, Gore and Bush gave their solutions to a problem in social security that wouldn't become one until 2041 or 2048, depending on which analyst (called actuaries) you asked. According to the SSA actuaries, around 2048, the surplus built up between 1982 and 2011 will become exhausted. After that date, the SSA would not have enough funds to fully fund the benefits of retirees. This is the "sort of" problem I mentioned earlier with the baby boomers: in the 2040s the children of baby boomers will begin retiring. Coupled with the expected increased life expectancy of the baby boom generation, this will represent a drain on the system. It was a demographic feature not included in the 1982 solution. It is from this problem that Bush and Gore based their programs to save social security.

Before I go through why this is all nonsense, let's go through the Gore and Bush proposals of 7 years ago (remember that back then, before 9/11, there wasn't much to talk about except social security and tax cuts). Gore's solution was the oft-SNL parodied "lock-box." Gore said the way to solve the problem of the 2040s and any future accounting problems would be to create a kind of 'rainy-day' separate fund to rescue social security. He would do this by using the surplus accrued during the Clinton years and by not giving a huge tax break to the wealthy (as Bush would do).

Bush's plan, which he would finally attempt to pass in 2005 following his "presidential mandate" victory in '04, would be to establish private accounts. The whole plan was a bit complicated and even more slimy, so I'll try to go through it quickly. Look at it this way, social security would not be able to pay full benefits to retirees in 2048 from a lack of funds. Bush's solution would be to stop the collection of the surplus payroll taxes and instead allow current workers to use it for private investment in the stock market. He argued that investments in Wall Street would increase the value of those accounts sufficiently to pay for 2048 and afterwards. Sounds good? Well, here are a few things to consider:
- the plan calls for a kind of optimism in the stock market that...well requires a lot of the faith that Bush is always wearing on his sleeve. Revenues gained from investment would have to grow faster than treasury bill interest rates to have any effect. And of course, the stock market could crash and then...no more social security. How every working American would be able to manage these portfolios is also a mystery.
- the plan would halt the pyramid scheme: with private accounts you actually would be collecting your money at the end that you had been putting in while you were working. If we can get more out of the stock market than through the payroll taxes, why would you want social security around anyway? that is the question conservatives hoped you'd be asking. The entire plan is a way to convince America that social security is a lousy welfare program.
-with even optimistic projections, the best we could do would be to receive full benefits when 2048 comes around. Well, if that's the case, why don't we find another way to guarantee full benefits that wouldn't put the entire system at risk? It's a good question and there's a reason Bush and Cheney used a lot of gloom and doom talk when selling the private accounts program to convince people that social security had no future: it is easily fixed.

There are a variety of ways to fix the 2048 disaster. One, suggested by Gore is the lock-box. Another way could be the same used in 1982: raise the payroll taxes. Of course, when this was suggested by Kerry, republican attack dogs charged that he was trying to raise taxes. Well, if Reagan could do it, why can't we do it now? We could also raise the maximum income taxed for collection. I didn't mention it earlier, but as part of the compromise when the social security act was passed, Roosevelt agreed that there should a cap on the income that were subject to payroll taxes. For example, if you made $120,000 a year, you might only have to pay payroll taxes on $80,000. You then would receive benefits for a person who paid $80,000 a year (by the way, social security is slightly progressive in that those with larger salaries get slightly less retirement benefits as a percentage of what they pay than those with smaller salaries). Simply by raising the maximum limit by 15-20 thousand dollars we could solve the looming "disaster" in 2048. This isn't a big tax hike. Those that had more money subject to payroll taxes would receive MORE social security benefits when they retired to compensate. Still, the system would be solvent. In fact, there are all sorts of gimmicky ways to fix social security (raise retirement age, slightly decrease benefits, have a general fund tax) that won't risk completely ruining the system. Because of this flexibility, there really is NO PROBLEM. It's just a matter of how we decide to fix it.