Further Thoughts on the Program in Peril.
Is there a Social Security crisis or not? To hear some tell it, the Social Security Trust Fund* is insolvent, nothing but a collection of “worthless pieces of paper.” To hear others tell it, the Social Security Trust Fund has a surplus of 2.5 trillion dollars (and growing), composed of “good as gold” US-government issued securities.
These positions are usually associated with “conservative” and “liberal” camps, respectively, although, as usual in American politics, these labels are not particularly helpful. Whether one supports or opposes Social Security is a matter of principle, and does not depend on the value of the securities presently in the Trust Fund. Those who oppose Social Security will do so if the securities are “good as gold,” and those who support it will, or should, do so even if those securities are “worthless.” Whatever political challenge it might pose for the side we favor (and here, that is definitely supporting Social Security), an honest evaluation of these securities is necessary in its own right, in order to help us prepare effectively for whatever political challenge we face. Politics is not the art of making people think it will be easier to achieve their goals than it actually will be.
Since it is the value of these “securities” about which the two positions on the Social Security “crisis” so vehemently disagree, in order to understand how they are both right, and all wrong, one must take a careful look at the specific economic and political characteristics of the securities in question. It is also necessary to understand the hijinks that have been happening with the Trust Fund over the past 30 years.
For most of its history, Social Security payments were made out of current Social Security tax revenue. Everyone knew, however, that, given an aging population and the looming baby boomer retirement wave, some kind of reserve would have to be created in order to secure those payments in the future. Thus, in 1983, in a move that was touted as a rare example of bipartisan fiscal sobriety, President Reagan proposed, and Congress enacted, a payroll tax hike that had been recommended by a commission headed by Alan Greenspan. This was done to build a large surplus in the Social Security Trust Fund that would be available to finance baby-boomers’ retirement needs. Our politicians had acted with responsibility and foresight to protect the most successful and popular New-Deal social program from the threatening surge in demand that everyone knew was coming. Or so it seemed.
For the last 30 years, working people, doing their civic duty, paid this increased tax to the Trust Fund from their wages (up to a current wage limit of $110,000), contributing a total of what is now over 2.5 trillion dollars. For the last 30 years, every presidential administration has also done its civic duty, taking every cent that people have paid into the fund to secure their Social Security payments, and transferring it to the general revenue account, where it was spent on anything and everything else – especially tax cuts for the rich and foreign wars. As economist, and “lifelong progressive Democrat,” Allen W. Smith summarizes it
[T]he United States government violated both the public trust and federal law for a quarter-century in a way that caused a major transfer of income from the lower and middle class to the richest of all Americans. By imposing a hefty increase in the regressive payroll tax in 1983, and then using a large portion of the new revenue to offset the lost revenue resulting from the unaffordable income tax cuts that went primarily to the richest Americans, the United States government engineered a major transfer of income from the lower and middle classes to the richest of all Americans.
So where does that leave Social Security? The approximately $2.5 trillion in surplus revenue, generated by the 1983 payroll tax hike, rightly belongs to the Social Security trust fund and to American workers who paid the extra taxes. But the money is all gone — “borrowed” or “stolen” by the federal government and spent for general government operations.
The government’s claim, of course, is that it has only “borrowed” all this money, replacing it with interest-bearing Treasury securities, US government debt obligations that can be “redeemed” – sold back to the government – at any time, and will have to be when current Social Security tax revenue no longer covers payments. (That would be now.) Only if the government, with new funds, buys back those $2.5 trillion worth of securities – in full and on time and whenever presented for redemption – will the Social Security program be able to make its payments as promised.
It is important to take a moment to understand what this means about Social Security and the national debt. Social Security has not increased the national debt by a penny.
The $2.5+ trillion of debt we are talking about here was not caused by
the Social Security program; it was caused to
it, by successive administrations taking the surplus out of
the Social Security program, and forcing debt upon
it. This is a debt of
the national government to
the Social Security program, which is not a debtor here. It is the creditor
. The $2.5+ trillion is, in fact, one of the largest components of the national debt – larger than the debt to China.
This also means that buying back every one of those $2.5+ trillion worth of securities – to ensure that all Social Security payments would be made on time and as promised – would, again, not increase the national debt by a penny. It would, in fact, be paying off a significant piece of the national debt – if, that is, it were paid off from tax revenues. Even if it were paid off by money borrowed from other sources, that would still not increase the national debt by a penny. It would only change the creditor. You cannot add to the national debt by paying off an obligation that is already part of the national debt.
The catch is, or isn’t, that the government did not replace the money it took with “regular” U.S. Treasury securities – the kind that it sells to China and Wall Street – but with what are called “special issue securities.” These are IOUs specifically created just for the Trust Fund. They are held only by the Trust Fund, can only be redeemed by – i.e., sold back to – the United States government, and have no economic value outside of the government.
As Smith says
: “Every penny of the $2.7 trillion in surplus revenue, generated by the 1983 payroll tax hike, was spent on wars and other government programs, as it came in. The government took the money and replaced it with non-marketable government IOUs. These IOUs, called “special issues of the Treasury,” are held only by the trust funds, and they have no marketable value. They could not be sold to anyone, even for a penny on the dollar.”
These facts are not in dispute. The dispute is about whether the difference between regular public-issue Treasury securities and these “special issue” securities means anything. For those in the “no problem here” camp, it does not. Because both are proclaimed to be “guaranteed by the full faith and credit of the United States,” both are equally certain to be paid off in full and on time, and whenever presented for redemption. Because the government has said it puts its “full-faith and credit” behind the special-issue securities, we can be absolutely certain that it will buy back those securities – all $2.5 trillion – just as promptly as it does the T-Bills it has sold to Saudi Arabia.
For those like Smith, on the other hand, the Trust Fund’s special interest securities are “just like” standard U.S. Treasuries in the same way that Alpo is “just like” beef stew:
The Social Security surplus revenue should have been saved and invested in public-issue, marketable Treasury bonds. These bonds are “good as gold” and default-proof. They are the kind of U.S. Treasury bonds that are owned by China and Japan…The government cannot, and will not, ever default on any of its public issue, marketable Treasury bonds because of the panic it would create in world markets and the damage it would do to the nation’s worldwide credibility. But Congress has the legal authority to default on its debt to Social Security, and, if it should do so, the outside world would probably view it primarily as an internal matter between the United States Government and its citizens
. One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so. [Here
, and, for more on “legal obligation,” here
. My emphasis]
Smith’s position here recognizes a couple of home truths that progressives who wish to defend Social Security should not shy away from. One is about “markets.” “Markets” will not treat a failure to honor these special-issue securities in the same way as they would treat the failure to honor regular U.S. Treasuries. They will see it as a renegotiation of the U.S. government’s debt to itself (a social debt at that), and far from punishing the U.S. government for reneging in some way on that debt, markets are much more likely to reward the government for doing so. That is because markets are not neutral or natural phenomena, but structured social institutions of class control. They will see the government’s diluted commitment to the quarantined, special interest securities as “fiscal discipline,” a step that only strengthens the government’s commitment to rigorously honoring tradeable Treasuries. And they will not be wrong. In creating the “special securities,” the government also implicitly created the Social Security Trust Fund as a separate class of creditor – one who would be easier to stiff than China.
The other, related, truth is about governments. Uttering, or printing, the words “backed by the full faith and credit of the United States government” does not mean the same thing when addressed to investors, banks, or foreign governments – to “the market” – as it does when addressed to the working people of the United States. That is because governments are not equally committed to different class interests, and do not give equal respect to their obligations to different classes. For the capitalist government of the United States, its obligation to repay the money that it took from working people, and give them all the retirement benefits they have fully paid for, is not as precious as its obligation to “market” investors. One class’s fiscal discipline is another class’s default.
Is there any progressive who does not understand this? Was there any reason for the government to create a special, quarantined security other than to preserve the possibility of changing its terms without compromising other securities in circulation? Other than to be able to treat the debts to its own working people, embodied in those securities, differently from the debts to “market” investors? If one security is “just like” another, then why create the other at all? I’m afraid it’s another example, as it usually is with this locution, of “just like” meaning “not at all the same as.”
Conservatives know this, and revel in it. Liberals wish that it were not so, and urge us to believe that it isn’t. In doing the former, conservatives take what they recognize (with some good reason) as the accounting facts regarding these special-issue securities, and use those facts to promote their agenda of destroying Social Security, by showing how damaged it already is. In doing the latter, liberals take (with some good reason) the “moral imperative” (in the economic sense of the obligation to repay) embedded in the securities, and use it to persuade us that there’s nothing fundamentally wrong with Social Security, despite the damage it may already have suffered.
It is curious how no-problem-here supporters of Social Security so emphatically want to construe the “moral imperative” as an economic fact that trumps any of the other obvious economic problems with the Trust Fund. The government’s “full faith and credit” guarantee is economically stronger than that $2.5 trillion debt. Really, it just has to be. It’s as if they’re trying to make a simple calculation that avoids all the political problems and contradictions inextricably woven into the government’s heart-crossed-and-hope-to-die promise. It is undoubtedly true that, from the perspective of any intellectually-honest, class-neutral economic theory, the government’s “full-faith” guarantee cannot mean different things to different creditors. But repeating that theoretical truth does not make it a social fact in a polity riven by the unequal distribution of class power.
Indeed, this issue is entirely political. The fate of the Social Security Trust Fund and Program depends on how the US Congress and government decide to treat these special-issue securities. This is not an “economic” problem, not a problem of how to balance the books, but a political problem, regarding which class interests the state serves. It is surely not “no problem.”
Certainly, against those who, claiming to be fiscally “conservative,” would dismiss the whole of Social Security as a failed program that should be abandoned, one has to insist that reneging on the “full-faith and credit” promise for the special securities would be no different than defaulting on “regular” T-Bills. To support reneging in any way would amount to sanctioning an outright default, and the theft of taxpayer monies that have already been paid for a dedicated purpose. By all means, call these “conservatives” out on their ostensibly class-neutral economic principles.
But, against those who would like to calm popular anxiety, and claim that “there’s no problem,” because, once we educate everyone on these economic principles, these principles will somehow take care of themselves, one has to insist that there certainly is a problem of political economy. Political power trumps economic rectitude. The “full faith and credit of the US government” is not an invisible hand that will slip us $2.5+ trillion for being so right. Some actual persons have to cast actual votes for actual policies. The only way those “special issue securities” are going to be repaid, in full and on time, so as to ensure the payment of ongoing Social Security obligations, is if a majority of the persons in Congress vote either to cut spending, issue more public debt, or raise taxes, to the tune of $2.5+ trillion for this purpose alone.
Aside from the fact that it’s no kind of progressive strategy, you simply cannot cut enough spending to close this hole. As for raising public debt, the government already has a fat “marketable” Treasury debt on its hands, and faces constant political resistance to asking for more. Yet it will have to go back to the “markets” for tens of trillions of new dollars – now that it’s covering banksters’ bad bets, as well as waging permanent, worldwide drone warfare, preserving most income tax cuts, etc. The government wants to preserve the “real” public debt offerings – the kind you have to pay back as promised – for these purposes, not for the selfish needs of spoiled old Americans.
This leaves one way, which happens to be the only “progressive” way, to make the Social Security system whole: raising taxes on the wealthy in one way or another. Collecting the Social Security payroll tax on all income (without raising rates for current payers) would go a long way to address the issue “progressively.” But we’re in a context of multi-trillion dollar bailout and other obligations, which, to address “progressively,” would require raising income taxes to confiscatory, Eisenhower-like (90%+ on upper tiers), levels. How do we get a majority of the persons in Congress to do any of that? Huge problem.**
(Thought experiment: Given that there are not enough spending cuts possible, if the government had replaced the Trust Fund money with “real” T-Bills, wouldn’t it be obvious that raising taxes is the only way it could solve the problem? You see, they are different.)
Achieving such tax increases requires a ferocious political battle, in a very hostile political context. Such a campaign can only be waged and won if you are focused, not on calming people down, but on demonstrating why they should be utterly pissed off, because the retirement security they’ve been paying for throughout their working lives is being stolen from them.
Even Democratic politicians used to recognize, and talk about, this robbery-in-progress. Some examples, taken from Professor Smith:
In 1989, South Carolina Senator Ernest Hollings inveighed
that: “…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund…in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st
century version of Confederate bank notes.”
In 1990, New York Senator Daniel Patrick Moynihan,
who had been a member of the Greenspan Commission and a strong advocate of the 1983 payroll tax hikes, “became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike. Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot.”
Also in 1990, in a critical analysis of Reagan and Bush I economic “growth,” Harry Reid, speaking on the Senate floor
, pointed to a chart, where “in emblazoned red letters is what has been taking place here, embezzlement. During the period of growth we have had during the past 10 years, the growth has been from two sources. One, a large credit card with no limits on it, and two, we have been stealing money from the Social Security recipients of this country. … Maybe what we should do in conjunction with the president, to really carry this conspiracy to its appropriate end, is rather than having it called the Social Security trust fund, why do we not change it and call it the ‘Social Security slush fund’?”
“Fraud,” “embezzlement,” “ransacking,” “looting”: These were the appropriate words to describe what was happening to the Social Security Trust Fund when Republicans were Presidents. Of course, Bill Clinton went on to “loot” the fund in exactly the same way, his more sensible tax policies notwithstanding. This was, and is, a bipartisan crime.
It borders on the delusional to keep insisting there’s no problem here. Yet, here’s
a typical, spirited, liberal defense of the “no problem here” position:
It's true that Congress could rewrite the laws so that Social Security would forgive those debts–but why should it do that? It would implicate Congress in the grandest of all larcenies–diverting money from the paychecks of working Americans with a promise that it will be used to help pay for their retirements, and then refusing to make good on that promise on the grounds that it has "no economic significance.”
‘Cause that’ll never happen.
And it won’t, at least not exactly like that. Congress will not say it’s reneging on the timely payback of the special interests securities. It precisely never wants to talk about them (which is why we should). It will just fix the COLA, raise the retirement age, defer payments, etc. It will be a death by a thousand cuts, over a number of years. All these proposed changes, which will be detrimental for beneficiaries, are only necessary because Congress does not want to repay the money it embezzled from those beneficiaries and replaced with those special interest securities. Those who want to save Social Security have to be aware that, behind the curtain, proposals to change the program are driven by the need to change the terms of repayment of those securities.
In fact, as Democratic politicians have clearly recognized in the past, this “grandest of all larcenies” has already happened, and will be nearly impossible to undo. All Republican and many (enough) Democratic politicians – and both parties as institutions – as well as President Obama, have already decided that they are going to renege on Social Security, one way or another. To undo this decision in the current political context requires a fight that is going to be very difficult to win, and those engaged in that fight need to understand how difficult it will be. Supporters of Social Security do themselves and the program no favor by minimizing its problems. In this context, “Why would Congress do that?” naiveté is positively harmful.
There can be no future for Social Security as we have known it, unless the public “demand[s] that the government make provisions to repay the $2.7 trillion that it has ‘borrowed’ or ‘stolen’ from Social Security. … It is time for the so-called friends of Social Security to pull their heads out of the sand and acknowledge the Social Security theft.” (Here)
Stop trying to put people to sleep! Make them angry! Relying on the full faith and credit of the US government, or Obama’s reelection, or Paul Krugman’s assurances – these are not going to save Social Security. “Borrowed” has already become “stolen,” and it’s going to take a fight to change that back. We need a strong, determined popular movement (Here’s
one suggestion), absolutely independent of either party
, armed with a fearless knowledge of all the problems and obfuscations surrounding the Social Security program, a movement that will come out on the streets and into congressional offices to force
Republicans and Democrats to repay, in full and on time, all the money that has been taken
from the social Security Trust Fund, and give retirees all
the benefits they have fully paid for.
No “means testing,” no COLA fixes, no change in the retirement age, no payment deferrals! The first cut is the deepest.
Unless there is such a movement – and it is very unlikely – we will soon see the end of Social Security as we have known it.
Notes, Links & Sources
The Social Security Trust Fund is actually a set of related Funds, often referred to in the singular.
**This paragraph has been revised from the original on 9/4/2012.