The "Illusionary" Trust fund

Al Gore told us then candidate George W. Bush was proposing giving the excess funds from Social Security contributions to the rich. Did we listen?

From The Washington Monthly
"Political Animal" blog by Kevin Drum

THE "ILLUSIONARY" TRUST FUND....There are lots of different ways to look at Social Security funding issues, and pretty much every one of them is jaw-droppingly boring. What's more, since the Bush administration is plainly not interested in actual policy issues related to Social Security, it seems not only boring but also pointless to keep yammering away about it.
But yammer we must. So here's one more angle to think about.

Social Security is funded by payroll taxes. In 1983, Alan Greenspan headed up a commission that recommended saving Social Security from imminent doom by raising those payroll taxes to cover expected increases in Social Security payouts. But there was a twist: Greenspan recommended raising payroll taxes above what was required to actually pay current benefits to retirees, with the resulting surplus used to buy treasury bonds that would be piled up each year in Social Security's trust fund. And since these bonds were sold to the trust fund by the federal government, this means that the federal government got a big chunk of extra money every year for use in the general fund.

Under this scheme, payroll taxes were sufficient to cover payouts plus bond purchases until about 2018. Then, from 2018 to 2042, when payroll taxes would no longer be enough to cover payouts, the difference would be made up by cashing in the bonds in the trust fund. In other words, the feds would tap into the general fund to give back all the money that Social Security had handed over between 1983 and 2018. This money would come from the same place all general fund money comes from: income taxes.

Still with me? Here's what this means:

Between 1983-2018, this plan calls for payroll taxes to be higher than they need to be to cover payouts to retirees. However, because the surplus payroll taxes are handed over to the feds, it means income taxes are lower than they would otherwise be.

Then, between 2018-2042, payroll taxes will be less than they need to be to pay benefits to retirees. However, the difference will be made up by higher income taxes, which will be used to pay off the trust fund bonds.

Payroll taxes are paid mostly by the middle class and the poor. Income taxes are paid mostly by the well off.

So: for 35 years the middle class and the poor pay excess payroll taxes and the well off get a break on their income taxes. However, for the following 24 years the middle class and the poor get a break on their payroll taxes and the well off finance it by paying higher income taxes.
Now, this may sound like a dumb idea to you, but that was the deal. The bottom 80% take it on the chin for a few decades, followed by a couple of decades in which the well off get socked.
But suppose — as conservatives are laying the groundwork for — that Bush decides the trust fund is a mirage, just a giant IOU from one part of the government to the other. And as part of his "reform" plan he proposes a complex scheme that, when stripped to its essentials, entails doing away with the flim flam of that illusionary trust fund and the higher income taxes it will require when 2018 finally rolls around. What would that mean?

It would mean that the middle class and the poor got suckered into overpaying their taxes for three decades, and then when the bill came due the well off ducked out of their end of the bargain.

Of course, that would be a brazen rip off of the middle class in order to give a break to the well off and the rich. George Bush would never do something like that, would he?

Social Security Reform

One topic which is opined and bloviated about currently is Social Security Reform. President George W. Bush wants to enable private accounts where an individual's payments into the Social Security System are collected into a private account pending his retirement.

It sounds almost like a good idea. An investment account held by the Federal Government rather than a brokerage house. It is too bad the idea won't work - and it makes me wonder if the whole point isn't to force the system to fail.

Payroll taxes are not an investment. In other words, the system is very low risk and essentially no return. The social Security Administration keeps track of who pays what amounts into the system, and who gets what amount of benefits. The average worker will pay in about what a 20 year long retirement will pay back (in constant dollars). Many payees don't make it into retirement, much less enjoy a 20 year long one - so a large portion of the participants get less in total benefits than they paid into the system.

As is rehashed in seemingly every story on he subject, Social Security is a pay-as-you-go system. Today's workers pay into the system money that is used to pay out benefits to today's' retirees. Until the "reform" of nearly 20 years ago, it was a system in balance - payments into the system, less operating costs, equaled payments out.

Proponents of Private Investment Accounts claim the stock market has a history of increasing value over the long term. They further promise that if each worker had a private account in the stock market, everyone would earn a little extra money for their retirement. This is the big lie.

The first question, which most opposing pundits ask, is how do we pay the transition cost from our pay-as-you-go system to an investment account system. The answer to this question is as obvious as it is politically unpalatable - the only choices are debt or reduced benefits or a combination. It seems like the Bush Administration will choose debt as their answer - which in the long run will more than wipe out any gains made by the investments. So we can leave this question and move on.

As you may have guessed and definitely should know, investments carry associated risk. When risk is present, some portion of the people involved will lose money. In the Private Accounts scenario, these people will simply be left with less than their starting amount (contributions). A simple bell curve will show that probably 60% of the participants will be in this "loser" pool. And, worse, after you take inflation and broker's fees into account the number will rise to 75% or so.

To me, this question is much larger and much more important than the former question. When we as a nation figure out that only a few are getting served as promised, what will we do?

War on Terror

I've read and listened to very many discussions about our current "War on Terror." Most seem to revolve around the question of whether Iraq should be included under the umbrella - which is to me not the right question.

The proper question has to be "Are we fighting a war against a defined foe, or are we fighting against a tactic of war."

If we are fighting against a tactic, or the idea behind the tactic, we have already lost. By waging "war" against the idea/tactic we are spreading it. We are increasing the numbers of people who know about it, and at the same time increasing the number of people who decide that the use of the tactic is appropriate.

Even more, the tactic is intended to produce an emotion {Terrorism is supposed to produce terror in one's opponent's}. War, in and of itself, does nothing to end but much to promote exactly the emotion Terrorists intend to instill.

Because our actions defeat our purpose, we will either never finish or we will lose this war.

The best course of action for us right now is to "Frame" the debate, in the style described by Kevin Drum, as being a war against Al Qaida, or Iraq, or any one specific. There is no other way to either win or end this war.