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12/27/2004: "Social Security Trust Fun"

I’ve been pleased to see Social Security in the spotlight, but not because I think there’s any merit in the Bush Administration’s proposals. Rather, it’s an opportunity to add some value, something this site absolutely exists to do. I can add some value because I’ve been deep into the issues of retirement planning in general and social security in particular, for example, from over a decade of heading up large-scale initiatives by very large organizations to implement a wide variety of retirement plans. One of these was the organization whose plan was the model for social security (send an email if you know who it was, and I’ll acknowledge your correct answer). So here’s some added value, relating to the so-called Social Security Trust Fund. I’ve talked before at length about why it’s a “so-called” trust fund (so much so I’ve been referring it to it by the acronym S-CSSTF). The short answer for why it’s a “so-called” trust fund is that there are no real investment holdings like there would be for any kind of a conventional retirement fund. What we want to do today is to really spell out why the S-CSSTF is so perverse, and what the GOP has had to do with it. The accounting is actually pretty simple; it’s only the implications that are subtle. The basic accounting is that the S-CSSTF currently takes in more than is necessary to pay out benefits to current retirees. This surplus is due to Ronald Regan’s increase in Social Security taxes to “save” Social Security. He didn’t, of course – if he had the current administration wouldn’t be using the threat of insolvency to justify another notch on its drive to privatize. What happens with the surplus is that it 1) pays for this year’s government expenses and 2) is considered exactly the same as normal taxes for purposes of calculating the year’s deficit. These two simple accounting rules produce the following three effects: 1) The equivalent of an extra tax imposed disproportionately on the middle and lower classes. Because SS taxes are capped, the proportion of income a middle class taxpayer pays is vastly higher than that of a millionaire. 2) It makes deficits look hundreds of billions of dollars smaller, encouraging more deficit spending than would be politically possible if the true amount of borrowing were apparent 3) (the most perverse of all) it absolutely locks future generations into paying for the retirement benefits of the current generation, without providing them a dime to actually assist with those payments. In other words, it is heavily skewed to benefit the current generation, who get government goodies from the same surplus that fiscally commits future generations to pay for their retirement of the benefit that squandered the “fund” money in the first place. Maybe an analogy would make this more clear: Say you set up a trust fund for your kids as a tax-avoidance scheme to make your income look smaller for tax purposes. You then take the money out of the fund via a loan in their name. You spend the proceeds of the loan on a hot new car. When you’re ready to retire, you tell them that they owe you the money for the loan. Crazy as it sounds, that’s exactly what’s going on. And while the Administration is talking again about “saving” Social Security, the focus is not to eliminate the immorality of the current setup, but to make the loan that future generations are stuck with even larger!