SYNOPSIS: The Government will have to provide Social Security benefits, no matter how nice reneging would be.
You began saving for your retirement 18 years ago. You could have bought stocks and corporate bonds, but your nephew persuaded you to keep it in the family. So ever since you have been lending him money. Your contributions helped him through some bad financial patches, and recently he used money he borrowed from you to pay off his mortgage.
But now he tells you that you had better start investing for your retirement. After all, he says, you don't have any real assets. "What about the money you owe me?" you ask. "That's not a real asset," he replies. "It's just a promise. The only way I could honor that promise is by earning more or spending less money on myself. And you can't expect me to do that." Meanwhile, you happen to know that he has ordered himself a yacht — and that the payments on that yacht would be enough to cover the debt he owes you.
Most people would regard your nephew's attitude as inexcusable. But George W. Bush's hand-picked commission on the reform of Social Security thinks your nephew has the right idea. The Social Security system has been running surpluses since 1983, when the payroll tax was increased in order to build up a trust fund out of which future benefits could be paid. These surpluses could have been invested in stocks or corporate bonds, but it seemed safer and less problematic to buy U.S. government debt instead. The system now has $1.2 trillion in its rapidly growing trust fund. But the commission says that the government bonds in that trust fund aren't real assets.
That's like saying that when you paid off your nephew's mortgage, you did nothing to improve his cash flow.
Every dollar that the Social Security system puts in government bonds as opposed to investing in other assets, such as corporate bonds — is a dollar that the federal government doesn't have to borrow from other sources. If the Social Security trust fund hadn't used its accumulated surpluses to buy $1.2 trillion in government bonds, the government would have had to borrow those funds elsewhere. And instead of crediting the trust fund with $65 billion in interest this year, the government would have had to cough up at least that much extra in actual, cash interest payments to private bondholders. So the trust fund makes a real contribution to the federal budget. Doesn't that make it a real asset?
Because the trust fund has been used to pay off debt, it reduces the amount the government spends on debt service, and makes it easier to pay benefits to retirees. Still, it's true that when the Social Security system starts cashing in its i.o.u.'s the federal government will have to have higher taxes and/or lower spending than it would if it could simply renege on its promises. But are we actually, as the commission claims, talking about a crushing burden?
Here's some arithmetic: If we had 2040 demographics today (48 retirees per 100 workers, instead of the current 30), Social Security benefit payments this year would exceed payroll tax receipts by about $180 billion. That sounds like a lot. But it so happens that if the Bush tax cut passed two months ago (your nephew's new yacht) were fully phased in today, it would reduce revenue this year by about $170 billion.
Yesterday the ever more partisan Alan Greenspan who, 18 years ago, led the commission that increased payroll taxes and thus created the Social Security surplus — told a Senate hearing that the Bush tax cut was "quite modest." Well, if it's a modest tax cut, then the sums Social Security will need to cover its cash shortfall are also modest. You can't have it both ways.
But having it both ways — what George Orwell called doublethink — is what this commission report is all about. We're supposed to believe that Social Security surpluses are meaningless, because it's all one budget, but that Social Security deficits are a terrible thing, because the program must stand on its own. We're supposed to believe that $170 billion a year is a modest sum if it's a tax cut for the affluent, but that it's an insupportable burden on the budget if it's an obligation to retirees.
And we're supposed to listen seriously to the recommendations of a commission that has just issued a biased, internally inconsistent and intellectually dishonest report.
Originally published in The New York Times, 72501