Drum Misses the Point on Social Security

Kevin Drum (formerly CalPundit) of the Washington Monthly, is usually a pretty reliable source, but in this post I think he misses the point almost entirely. He is arguing that the "Social Security Trust Fund" is not an IOU even though Congress steals it to make the deficit appear smaller, and the premise of his argument is that it's no more an IOU than money itself is in our society:

One of the most common conservative critiques of Social Security is that the Social Security trust fund is a myth. Since it consists solely of treasury bonds, it's nothing more than a promise from one branch of the government to another. It's not real money, it's just an IOU.

But that's a serious misunderstanding of what money is. It's a promise. After all, you don't think those dollar bills in your wallet or the bits and bytes in your bank account have any real value, do you? In fact, their only value is that they're a promise: a promise that you can exchange them at some future time for concrete goods and services. When people no longer believe in that promise (think Weimar Germany), money no longer has any value.

The trust fund works the same way: it's a promise to the taxpayers who filled it up that at some later date it can be used to buy goods and services. The mechanism for honoring this promise -- that is, ensuring that at some point in the future the original investors get the goods and services they were promised -- is to collect taxes and turn the resulting revenue over to retirees. This promise can no more be broken than the promise that the United States government accepts dollar bills as legal tender.

But this misses one crucial bit of reality. Yes, the government cannot simply default on this promise, it must make up the shortfall. This is quite obvious. The flaw in his reasoning is that he makes it sound as though government can make it up out of thin air. The government, however, only has revenue through its ability to collect taxes of one form or another. So the only way that the government can fulfill that promise is by increasing taxes somewhere, in this case the payroll taxes specifically.

At the point at which the baby boomers begin to retire in the next ten years, there will be more people retired than there will be workers, yet all of the money that was supposed to be set aside, invested and earning interest has been subsumed with deficit financing because it's part of the general budget. So in addition to the service (i.e. interest) on the debt that we run up year after year, we also have to service something on the range of $150 billion per year that was supposed to be set aside to pay the benefits of those retirees. Since that money is not actually there, but as Kevin notes the government must make it up, the only way they can do so is by raising the taxes on those still working to make up for it. So in fact it's not merely an IOU written from one branch of government to another, it's an IOU written by the government that can only be paid off by the younger generation.

It's another example of tax shifting, just like the mythical Bush tax cut, in that all it really does is shift the burden from present taxpayers to future taxpayers. It is the height of fiscal irresponsibility, and it has been engaged in gleefully by both parties for decades. The current politicians cannot cut spending because it is through giving away our tax dollars to various interests that they get those interests to give them the millions of dollars necessary to win reelection. And they can't raise taxes because that loses them votes. So they are left with "cutting taxes", which only runs up the debt and makes it necessary for taxes to be raised in the future. But by that time, the future politicians can claim that this is not "discretionary spending", it's mandatory spending (and it is), and they simply blame it on past politicians. Meanwhile, the cost just keeps going up on ourselves and our children. And nothing will change this as long as people continue to vote into office those who promise to give our tax dollars to the corporations that fund their election campaigns, meaning as long as they continue to vote for the two major parties.

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Sadly Ed I don't think anyone is going to change the scam until the bond market collapses. At which point the biggest problem in your line of work won't be losing another loan to Ditech.

There is another way to make up for the shortfall other than "raising taxes". Spending less will also work. The government is much too large. There are many, many layers that could be cut or reduced to make a smaller payroll. Of course doing so would encroach on someone's personal fiefdom and would be defended to the death. But what do companies that have to make a profit do when faced with lagging revenue? The get more proficient at what the do. They stream line things to become more efficient. Keeping the taxes the same and reducing government is the way to go.

There is another way to make up for the shortfall other than "raising taxes". Spending less will also work. The government is much too large. There are many, many layers that could be cut or reduced to make a smaller payroll. Of course doing so would encroach on someone's personal fiefdom and would be defended to the death. But what do companies that have to make a profit do when faced with lagging revenue?
But as I noted, this just isn't going to happen as long as we keep voting in the same two parties. Both parties rely upon vast amounts of corporate money to fund their reelection, and in return they give back huge amounts of our tax money to those corporations while they're in office (you don't think companies are dumb enough to invest in something year after year without getting a good return on their money, do you?). Of course spending cuts are the right solution; they just aren't gonna happen. Government grows as fast as a result of giveaways under the "smaller government" republicans (wink, wink) as it does under the "party of the little guy" democrats (wink, wink).

Ed: Just a note -- one party DID manage to balance the budget recently. And did it over the pissed-off objections of the other party (and despite several attempts to shut down the government to prevent it).

Now, perhaps that 8 year stretch of fiscal discipline was a fluke. On the other hand, the idiots that control all the tax and spend levers NOW show no interest in fiscal sanity whatsoever.

It appears your choices are simple: Big solvent government or big insolvent government. It's nice to dream of third-parties, but you've got to work with what you have.

It is true that for 2 years under Clinton, the budget was balanced even if you subtract the Social Security trust fund (one year had about a $10 billion surplus even if you don't count the trust fund money). Unfortunately, they still didn't actually invest the money from the trust fund that was intended for that purpose, but at least they didn't push the deficit up even higher so that it cost us twice as much. Historically, this was certainly a fluke, as the Democratic party has never shown any real interest in restraining spending or growth of government, and certainly not in cutting taxes.
Let me make clear, however, that the real problem is growth of government, not solvency or insolvency. To make a vastly overgrown government solvent without cutting spending, you have to overburden taxpayers now; to continue to grow government while running up huge deficits, you have to overburden future taxpayers. In either scenario, the taxpayers are stuck paying for our leaders to give away revenue to the corporate paymasters who pay for their elections. What the two parties have in common is their zeal for increasing the size and scope of government; the revenue side is only a matter of timing.

On Social Security and what i've heard of Bush's plan. If the over all idea that I'm hearing is accurate, it's like going up to a guy who's 34 years old and in debt up to his eyeballs on his hose and credit cards who has 10k in his qualified account, and saying something like "Look Mr Jones, your future retirement is going to cost one million dollar assuming yuo live to be 85 and retire at 65. You have a huge unfunded liability out there in the future that you have to fix. So, you need to go ahead and recognize that expense now instead of playing bookeeping games by borrowing one million dollars right now and putting it in the stock market". I think anyone can see this has potentially grave consequences to Mr Jones near term and intermediate term financial interests and that's assuming the market doesn't collapse at some point.