Posted on 21 April 2010
By Mark Miller
Is Wall Street getting ready to come after your Social Security?
Two big summit meetings will be held in Washington next week to discuss ways of reducing the federal deficit. The first will be President Obama’s National Commission on Fiscal Responsibility and Reform, which holds its first meeting on April 27. The next day, Wall Street billionaire Pete Peterson convenes a fiscal summit through his Peter G. Peterson Foundation.
Peterson is a former CEO of the now-defunct Lehman Brothers and former chair of the Federal Reserve Bank of New York. He underwrites the foundation with his own funds — and his agenda is no secret.
He sees the coming retirement of baby boomers as a threat to the economy and the federal budget. He wants aggressive cuts in Social Security and Medicare benefits, as well as the creation of a commission that would have legal authority to create a plan to reduce the deficit and then simply present it to Congress for an up or down vote — no debates, no amendments.
So — taxpayers have bailed out Wall Street to the tune of $700 billion-plus, but Pete Peterson is worried about the deficit. And, he thinks the real problem is Social Security. That despite the fact that Social Security has a $2.5 trillion surplus, which is enough to pay benefits for 25 years or more.
If that’s the case, how can Social Security be a deficit problem? Because the government has already spent the surplus elsewhere. It owes that money to Social Security, but can’t afford to pay it back.
Social Security made headlines earlier this year when it became known that the program will — for the first time — take in less cash this year than it pays out on a current-year basis. It’s basically a pay-as-you go program with current benefits funded by today’s workers. Unfortunately, recession-induced unemployment has cut into collections of the payroll tax that funds the program (the FICA tax) and the number of older unemployed workers filing for benefits has soared.
But Social Security also has that big surplus, which has been accumulating since the last “fix” to the program was implemented during the Reagan years. At the time, payroll taxes dedicated to Social Security were raised substantially to create a cushion for the future retirement of all those boomers. The money sits in something called the Social Security Trust Fund.
But as boomers start to retire in greater numbers, there won’t be enough current workers coming along behind them to keep the program solvent on a pay-go basis. That means the surplus funds will be drained.
And, the surplus funds exist only in an accounting sense, because over the years, the government chose to spend it all for other purposes, creating the illusion of a smaller overall deficit. The Trust Fund’s assets are Treasury bonds and other U.S. securities, representing the government’s obligation to pay back the Trust Fund to pay for future benefits.
William Greider explained how this Social Security bait-and-switch worked in an excellent March, 2009 essay in The Nation:
To understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan. The Gipper’s great legislative victory in 1981 — enacting massive tax cuts for corporations and upper-income ranks — launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase that Congress imposed on working people in 1983: the payroll tax rate supporting Social Security — the weekly FICA deduction — was raised substantially, supposedly to create a nest egg for when the baby boom generation reached retirement age. A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. Since there was no partisan fight, the press portrayed the massive tax increase as a noncontroversial “good government” reform.
Ever since, working Americans have paid higher taxes on their labor wages — 12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus — now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago.
Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes — whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are — around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.
The question now: will the government stand behind its promise to taxpayers, or won’t it?
President Obama’s commission holds its first meeting on April 27. It is charged with coming up with solutions to the nation’s debt and deficit crisis, and while it has no pre-determined agenda, some critics worry that it’s made up mainly of deficit hawks and too few members who will fight to protect Social Security.
One member nominated by Republicans is Rep. Paul Ryan (R-Wisconsin), the ranking minority party member on the House budget committee. Ryan has proposed a re-tread of the Social Security privatization plan first offered by President Bush in 2005, which was soundly rejected by Congress.
Ryan proposes to give people under age 55 the choice of opting out of Social Security into privatized personal accounts, reducing “the demand on government spending,” as his proposal puts it. (Don’t you wish your Social Security benefits had been working hard for you in the market when stocks crashed in the fall of 2008?)
I hope the Obama Administration doesn’t buy into this nonsense. Conflating Social Security’s problems with the federal deficit presents a false choice between balancing the federal budget and paying out benefits people earned by paying into the system over the course of their working lives.
Social Security is the most successful and valuable part of our retirement safety net. The program operates with tremendous efficiency, keeps millions of Americans out of poverty every year and pays an annuity-style benefit at a time when traditional pensions are declining. Perhaps most valuable is the program’s automatic annual cost-of-living adjustment (COLA) for inflation — a feature you can’t find in very many retirement benefit programs.
What’s more, there’s no evidence that Social Security is causing an undue burden on the economy. A 2007 AARP study shows that entitlement spending has stayed relatively steady as a percent of our gross domestic product over the past two decades, with the exception of health care spending. In fact, Social Security represents a smaller share of GDP now than it did in Ronald Reagan’s first term as president.
Social Security is going to need reform. The options are well-known — delaying the eligibility age, changing the COLA formula and increasing taxes. But especially in a hard times economy, we need to protect Social Security’s future — not eviscerate the program.
Alicia Munnell, director of the Center for Retirement Research at Boston College, explains why the notion of a Social Security crisis is over-blown.
Listen to a debate on the budget deficit and entitlement programs, featuring Peterson Foundation CEO David Walker and Robert Kuttner, co-editor of The American Prospect.
Moneywatch.com Editorial Director Eric Schurenberg explains Social Security’s problems and the options at hand to get the program back on track over the long haul.