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« Times Arts Frownlines 2 | Main | Policy Break -- Tax Takedown »

August 15, 2002

Policy Break -- Social Security forever

Michael --

In which I tear apart...

"Social Security (as We Know It) Is Here to Stay"
By Martin Mayer in the New York Times, 8/28/01

Buried under layers of argument, analysis and sophistry, the real issue in
the Social Security fight has become invisible. That issue is the nature of
the obligation. Is Social Security a firm contract with its beneficiaries,
as a government bond is a contract with its holders? Or is it simply
another government program that can be modified or even abandoned at any
time by Congress and the President? [The Social Security program has been
repeatedly modified through the years-in the direction of larger benefits-so
apparently it is simply another government program that can be modified by
politicians to obtain votes.] Through the years of the big deficits-the
early Bill Clinton years as well as the years of Ronald Reagan and the first
George Bush-presidents insisted that all the revenues from Social Security
taxes were available to be spent for other purposes, just as the revenues
from other taxes were. Borrowing from the so-called Social Security trust
fund was a routine way to pay the government's bills.

Mr. Clinton's first budget justified "consolidating" the surplus generated
by Social Security taxes into the general budget on these grounds: "The
federal budget meaning of the term 'trust' differs significantly from its
private sector meaning. In the private sector, the beneficiary owns the
trust's assets...In contrast, the federal government owns the assets of most
federal trust funds, and it can raise or lower future trust fund collections
and payments by enacting changes to existing law."

But history shows clearly that absent serious abuse (and sometimes despite
it), pension obligations, once assumed by a nation, are for all practical
purposes irrevocable. People who have come to expect government support in
old age as a right-especially if they have long paid taxes dedicated to a
pension program-will so resist revocation or even significant alteration of
this support that change is virtually impossible. [Ah, so this is not a
matter of ethics per se, which might find fault with the idea that retirees
should be so passionate about claiming benefits which are far larger than
those which they, as workers, ever paid to support, but rather about what
large groups of voters (in this case, the elderly) think they have the
voting muscle to get away with.] This practical truth is so well accepted
internationally that the World Bank does studies of "implicit pension
deficit" in every country, adding these obligations to the published
national debt figures to calculate each government's real balance sheet [if
this is so well known, name me a man on the street who can accurately give
me the World Bank's estimate of the U.S. government's implicit pension
deficit. Of course, Mr. Mayer doesn't actually mention the size of this
pension deficit-the number is in the trillions of dollars-as it might reduce
the political support for the current pay-as-you-go Social Security
program].

The contract between the United States and its Social Security recipients is
so strong that at times in the past 20 years it has been better than the
contract with holders of Treasury bonds: Social Security payments, indexed
to inflation, have not lost real value, while bonds have [Of course, the
damage from inflation is not restricted to bondholders, it affects everyone
not collecting social security payments-again, raising issues about the
ethical equity of all this special treatment for the elderly voting block].

What matters about the trust fund is that its existence expresses the fact
that social Security is a liability of the government [since 'the
government' has no existence apart from the individuals wielding power under
its name, what the author means is that Social Security represents a sacred
promise by those wielding the coercive power of the state to extract-by any
means necessary-money for the private benefit of the program beneficiaries
from the private assets of the nation's non-beneficiaries. Remember, there
is no such thing as 'big government'-the term is simply a euphemism for
increased claims on the wealth of minorities in democratic societies who
cannot protect themselves at the ballot box]. The assets in the trust fund
are Treasury Bonds. And bonds, of course, are claims on general revenues,
including money from taxes on capital gains and corporate income as well as
on the payroll tax. [Note Mr. Mayer here is explicitly admitting that Social
Security has nothing to do with individuals' providing for their own
retirement, on the model of a pension plan, but rather that Social Security
is simply a demand by a voting majority for a subsidy, to be paid for by any
means necessary.] When Treasury Secretary Paul O'Neil says the bonds in the
Social Security trust fund are not "real economic assets," he is denying
that the full faith and credit of the United States stands behind the
financing of Social Security benefits-at least as long as the Social
Security system holds bonds. This rhetoric is dangerous because it could
undermine confidence in the Treasury's bonds. [This is nonsense. Secretary
O'Neil is simply pointing out that the proceeds of the Social Security tax
are not being invested in real assets which will increase the productivity
of society in the future when the corresponding benefits will have to be
paid-unlike, for example, when an individual invests in the bonds of a
private company, that borrows in order to increase its productive capacity,
which will in turn allow that organization in the future to redeem this loan
with interest and still have additional value left over for its owners.]

As a matter of economics, the bonds in the trust fund are indeed irrelevant.
When revenues from Social Security taxes no longer cover the benefits being
paid out-which will happen somewhere around 2015, the government will
presumably sell bonds to make up the difference. The effect on the national
economy will be the same whether the bonds are drawn from a stash at the
Social Security Administration or printed fresh.

The premise of a permanent obligation to Social Security does not deny the
argument that the trust fund should be invested in assets with higher yields
than government bonds. [See ridiculous statement above regarding Secretary
O'Neil's comments.] Seeking higher yields from savings is politically
neutral. Alan Greenspan, chairman of the Federal Reserve, has worried in
public that the collective investment of Social Security retirement funds in
the markets would give the government too much power. Yet the Fed's own
pension system, for its employees, has its assets in corporate securities
managed by money managers who also manage private pension funds. If the
Fed, with its power over the nation's finances, can control its conflicts of
interest in making investments, surely the Social Security administration,
which is much less secretive [but please, enormously, enormously larger!],
could do the same [apparently Mr. Mayer hasn't realized that the U.S.
economy can go on working nicely despite the probably very real conflicts
involved in the Fed's own retirement program-because the Fed's retirement
program represents a de minimus amount-but might not be able to ignore
conflicts of interest at a scale that investing Social Security benefits in
the private sector would entail.]

Turning Social Security into a matter of individual private accounts, by
contrast, would tear up the contract that Americans who paid Social Security
taxes thought they had with the government [presumably, Mr. Mayer means a
sweetheart investment deal in which your benefits are greatly enhanced by
the wealth of whatever groups the power of your voting block entitles you to
expropriate]. A government that promised justice for all [the term "all"
here is particularly repulsive-what Mr. Mayer means is "benefits for me,
explicitly not paid for by me" or "benefits for us, explicitly not paid for
by us"; justice for all is exactly the principle most foreign to
re-distributionist schemes like Social Security] would suddenly leave many
of its older people at the mercy of the state of the market on the day they
retire-or of the prevailing interest rate on the day they receive their
annuities. [Of course, it would also leave many of the elderly owning far
greater assets which they could pass on to their children, as opposed to
benefits that are doled out by politicians at the helm of the redistribution
pump.] No change in American society in the last half-century has been so
dramatic as the reduction of the proportion of the elderly who are poor, and
most of this change is the benign shadow of Social Security. That's a lot
to put at risk.

With his gift for identifying and exploiting gut issues, Bill Clinton
demanded that the federal government "save Social Security first." [Meaning:
"Come on, guys, why give wealthy people back their own money via a tax
cut-doesn't their money feel better in your pocket, Mr.
Average-Subsidizee?"] George W. Bush decided that tax cuts were a higher
priority. Now his administration must deny in every way and in every forum
that the already codified expectations of Social Security recipients are an
inescapable charge on the general revenue of the government.

If Social Security is an obligation that binds the government, and a
government that is cutting taxes seeks to evade that obligation by reducing
the benefits, it will appear that old people of low or moderate income are
being made to work a year longer before retirement, or to accept a smaller
pension, simply to lift from the shoulders of the wealthy the burden of the
estate tax [Is Mr. Mayer here suggesting that if the burden of paying for
already promised benefits from Social Security would inflict real pain on a
substantial voting block, as opposed to the tiny minority paying significant
estate taxes, he would countenance its modification?]. And that would be a
perilous platform on which to stand for re-election [It feels good, doesn't
it, when Mr. Mayer finally gets to his point-to wit, like most leftists, Mr.
Mayer's claims in favor of 'social justice' really boil down to any scheme
that benefits the financial interests of the majority of voters-while safely
insulating them from ever sharing the burden of paying for such a scheme.
Face it, most people will get back every penny they contributed to Social
Security with interest-it's only the minority that's being expropriated to
make this happy system work. So his 'reasoned argument' is actually a
threat that reforming social security in any way that doesn't bow down and
worship the golden calf of majority self interest could be dangerous to the
political health of the Bush Administration-so much for 'justice for all,'
huh?]

Cheers,

Friedrich

posted by Friedrich at August 15, 2002




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