February 23, 2005

An Alternate Reality for Social Security

Justin Katz

Perhaps its cause is an irrepressible idealism on my part, but I still find myself stunned and disheartened by the stooped-to depths of political dishonesty. In this one sentence, Rep. Patrick Kennedy appeals to a completely alternate reality to score political points among people whom he assumes to be uninformed and/or stupid:

Since the president took office and began squandering the Clinton surpluses, the federal government has treated Social Security like a credit card -- borrowing from the Social Security surplus to pay its other bills.

First of all, "the Clinton surpluses" never amounted to money in hand. Rather, they were projections into the future based on a booming economy. (Although, I suppose that if any body can squander something it doesn't have, it's the federal government.) Second of all, the money that Social Security raises each year began being filtered to the federal government's general funds via bonds long before President Bush ever stepped into the White House.

From there, deconstructing Kennedy's "facts" is a tedious matter that I leave to interested readers. (For example, the suggestion that "Social Security would be unable to pay full benefits in 2021, instead of 2042 or 2052," ignores the obvious reality that Bush's private account program is meant to supplement benefits that Social Security will eventually be unable to finance.) I offer a summary piece by Donald Luskin as a helpful antidote.

Overall, in building his phony version of political reality, Kennedy is either a dupe of his own rhetoric or a con man. The story is that Bush has been "squandering the Clinton surpluses," in part because he tapped the Social Security trust fund, money that he "borrowed for big tax breaks." Yet — yet! — Kennedy's counter-proposal is "the ASPIRE Act, which would give every child an investment account at birth [for which the government would] put in a seed contribution, and match parental contributions for lower-income children."

In other words, a Congressman who has declared that he's "never worked a f***ing day in [his] life" prefers giving government-funded, redistributionist hand-outs to eighteen year olds to allowing working citizens to keep more of the money that they earn. A man wealthy by default wishes to ensure the importance of the government teat to the common citizen by taking money from the hands of parents, filtering it through the grubby ones of government, and then handing it back to adolescents just as they exit their parents' legal guardianship.

Somehow, I don't think Kennedy's concept of "an ownership society" matches that of believers in a free market and individual independence. The difference is who does the owning, and the alternate reality that he's striving to bring about is not one in which Americans should invest hope... or votes.

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Well put.

I also would like to see us reclaim the credit for those so-called "Clinton surpluses." Some people willfully ignore the facts:

The surplus can be largely traced to a decrease in defense spending, which was due to a peace dividend from winning the Cold War - something Clinton had absolutely nothing to do with but President Reagan certainly did.

It can also be traced to a strong economy which, other than a brief and minor downturn around 1992, continued in growth mode from the early 1980's until the late 1990's - and was initiated by the Reagan tax cuts. Clinton can get credit for mostly not getting in the way but he deserves no personal credit for any policy innovation.

Finally, it can be traced to some moderation in government spending which began mostly after the Republicans took over Congress in 1994. People forget that the deficit had been declining after the passage of the Gramm Rudman act in 1986 and was down to the mid-$100 billion level by 1989 when Reagan left office, only to climb up to $300 billion annual deficits from the time Bush 41 broke his "no new taxes" pledge in 1990 until after 1994. (How we long for the days when Republicans in Washington, D.C. stood for moderation in government spending.)


Posted by: Donald B. Hawthorne at February 23, 2005 7:57 AM

David Frum added his comments on the Trust Fund debate in the February 22 edition of his diary on NRO:

Fact or Fiction?

Meanwhile, can we deal with an Internet legend arising inside the United States? One of the great issues in dispute in the Social Security debate is the significance of the Social Security Trust Fund. As just about everybody now realizes, Social Security will begin paying out more than it takes in sometime around 2018. Is this a problem?

Democrats tend to say "no." They observe that between 1983 and 2018, the US government will probably have collected some $3.5 trillion more in Social Security taxes than it will have paid in Social Security benefits. That extra money was used by the government to pay for other things. In return, the government issued debt to the Social Security Trust Fund. Beginning in 2018, Democrats continue, the Trust Fund can simply start cashing that debt and using it to pay benefits. $3.5 trillion is enough to pay benefits until the 2040s, so (they conclude) there's no reason to start worrying till then.

You probably know the Republican answer to this. The Trust Fund is a fiction, there is no money there, etc. etc. etc.

At which point Democrats start frothing and flailing and accusing the GOP of intending to renege on the national debt.

Here is one representative example, from a smart and relatively unhysterical Dem. He's responding to a Charles Krauthammer column making the standard-issue Republican point about the Trust Fund:

"By this standard, not only is my bond porfolio not real, my bank account isn't real, and, in fact, the cash in my pocket isn't real. The only 'real' money, apparently, is stacks of gold bars. Now once upon a time, your U.S. currency was redeemable for gold bars and, thus, one might consider it real. Alternatively, perhaps U.S. currency in the gold standard days was a 'mere I.O.U.' Either way, we've been off the gold standard for some time now, and people would be alarmed to learn that this means their money is fake. Does the Post pay Krauthammer in dubloons?"


But there's some sleight of hand going on here, and it's important to detect and arrest it.

Nobody is denying that the bonds and notes in the Social Security Trust Fund are valid. Of course they are. But when Democrats make this point, they are turning what is really an economic question into a legal one. Yes, yes, yes, the bonds are a binding obligation of the United States government. But the Dems want us to believe that they are also a valuable resource for the United States government - and that is hooey.

Yes, if you or I owned a big bunch of US government bonds, we'd feel pretty comfortable. We could cash them and retire to enjoy our claim on the future labor of others. But it does not do the US government much good to own a big bunch of its own bonds.

The Trust Fund is and always has been a dodge, in this sense: the economic problem of Social Security would be precisely the same if the Trust Fund had never been invented in the first place. It will not make the job of finding the money to pay the promised benefits even an iota easier after 2018 that the US government engages in a preliminary round of bond-cashing. It will still have to raise other taxes or cut other spending, just as if the Fund did not exist.

That's the real Republican point about the Fund - and sputter as the Dems will, it's unanswerable (or anyway irrefutable).

Posted by: Donald B. Hawthorne at February 23, 2005 1:21 PM

David Frum has weighed in today with a second round of thoughts on the Social Security Trust Fund:


To follow up on yesterday's post ....

When they encounter the argument below about the pointlessness of the Trust Fund, Democrats will often retort: "OK then - if the Trust Fund does not help pay Social Security's bills, why did we have to have it at all? Why did we raise payroll taxes back in 1983 to pile up this big Trust Fund? Wasn't that kind of unfair to wage-earners?"

I don't know that there's a good answer to that point, other than the debating point that the 1983 payroll tax hike was as much the work of Democrats as of Republicans. But I have to agree: It was an oppressive tax increase, and I will never understand why Democrats did not pick up the idea Daniel Patrick Moynihan floated back in 1989-90 to cut the payroll tax back down to 8% from 12+%.

No, actually, I do understand it.

Franklin Roosevelt separated Social Security from general revenues to create the illusion that this redistributive pension system was instead an individual saving plan. Because individuals were led to believe that they were getting back only what they had paid in, plus interest of course, they were persuaded to feel a stronger entitlement than they might have felt had they realized that some were getting back a whole lot more than they paid in and others rather less.

For that reason, Democrats have historically resisted what might seem like the obvious left-wing fix to the system: ie, scrap the whole thing, abolish the regressive payroll tax, raise income taxes, and fund pensions out of general revenues. That fix would have let the cat out of the bag. And so Democrats rejected Moynihan's tactically cunning solution as ultimately strategically unwise - and instead went along with a payroll tax increase that may have injured the people the Democrats claimed as their constituents, but nonetheless preserved what many Democrats regarded as an essential illusion.

Posted by: Donald B. Hawthorne at February 24, 2005 2:03 PM