David Cay Johnston

Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty?

Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus.

That surplus is almost twice the $1.4 trillion collected in personal and corporate income taxes last year. And it is projected to go on growing until 2021, the year the youngest Baby Boomers turn 67 and qualify for full old-age benefits.

So why all the talk about Social Security “going broke?” That theme filled the news after release of the latest annual report of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, as Social Security is formally called.

The reason is that the people who want to kill Social Security have for years worked hard to persuade the young that the Social Security taxes they pay to support today’s gray hairs will do nothing for them when their own hair turns gray.

That narrative has become the conventional wisdom because it is easily reduced to a headline or sound bite. The facts, which require more nuance and detail, show that, with a few fixes, Social Security can be safe for as long as we want.

SHIFTING TAX BURDENS

Let’s look at how Social Security taxes have grown in the last half century — a little-known tale of tax burdens shifted off the rich and onto workers. From 1961 through 2011, the year covered in the last Social Security report, Social Security taxes exploded from 3.1 percent of Gross Domestic Product to 5.5 percent.

Income taxes went the other way. The personal income tax slipped from 7.8 percent of the economy to 7.3 percent, with most of the decline enjoyed by people in the top 1 percent of incomes. The big drop was in the corporate income tax, which fell from 4 percent of the economy to 1.2 percent. Notice that the corporate income tax fell by 2.8 percentage points, an amount almost entirely offset by a 2.4 percentage point increase in Social Security taxes.

The effect has been to ease the taxes of the wealthy, while burdening the vast majority of workers. Considering how highly ownership of stocks is concentrated, the benefit of those lower corporate taxes went overwhelmingly to the top 1 percent and, especially, the top 1 percent of the top 1 percent. Considering that the Social Security tax is capped, most of the burden of the increased payroll tax went to the bottom 90 percent.

Now let’s look at how that $2.7 trillion Social Security surplus arose. In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits. The extra tax was supposed to pay off the federal debt and then be invested in federal bonds. Instead, Reagan ran huge deficits, violating his 1980 promise to balance the federal budget within three years of taking office.

FINANCING TAX CUTS

In my view, building the Social Security surplus has had two major effects.

One effect was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.

The other effect was a huge increase in consumer debt, as Americans saddled with higher Social Security taxes took out loans to cover other needs. Stagnant wages played a role, but the $2.7 trillion Social Security surplus is also a factor in a $1.5 trillion increase in consumer debt since 1984.

It is no wonder consumers have gone into debt. Paying a tax in advance is expensive. Indeed, the first lesson in tax planning is that a tax deferred for 30 years is effectively a tax avoided, provided the money is invested wisely. The reverse is also true. A dollar of tax paid in 1984 cost $2.20 in today’s dollars, and that’s before counting the interest that could have been earned.

With the coming bulge in retirees, Social Security will start to pay out more than it takes in 2021, according to projections in the latest annual report. Under current law the program would be able to pay only about three-quarters of promised benefits starting in 2033. But that scenario can easily be avoided through a combination of four policy changes that would ensure full benefits continue to be paid, though I fear Congress will continue to do nothing.

One would be restoring the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

Two would be raising the Social Security tax rate by two percentage points. That tax hike could be smaller or even avoided if, three, we reignited the growth in wages. Median wages have fallen in 2010 back to the level of 1999. And, four, it would help just as much if we created millions more jobs, which since 2000 have grown at only a fifth the rate of population increases.

Under current tax rules, the Social Security shortfall for the next 75 years is $8.6 trillion.

But there is a much bigger problem that needs our attention. If we continue national security spending at current levels, with no future increases, the total cost would be $63 trillion, based on the figures in President Barack Obama’s latest budget. Unlike spending on Social Security, much of the national security spending goes overseas. And that makes us worse off.

By David Cay Johnston
The views expressed are his own.

President Barack Obama this week started pitching his plan to cut U. S. taxes for everyone in 2012 and then in 2013 raise income tax rates for high earners, primarily those making more than $1 million, many of whom bear a lighter burden than a cop married to a nurse.

Two responses are certain.

There will be claims that economic ruin will follow once taxes go up. Never mind the proposed 2012 tax cuts are for virtually everyone. Never mind that the modest rate hikes would apply only to those who make more than 97 percent of their fellow Americans with most of the burden on those making more than $1 million. Never mind IRS data showing that tens of thousands of those whose increased taxes would increase their income tax rate by just 1.2 percentage points make more in a year than the median family earns in a lifetime.

Obama has also set a clever trap for anti-tax Republicans. Obama’s American Jobs Act would lower Social Security taxes for all workers and for all businesses in 2012. Republicans who vote against the bill would be voting against a tax cut. They would also be voting against a huge business tax break, letting business immediately write off all capital investments made in 2012.

The other, more pernicious attack will be on the best funded, most effective and most efficient government program around: Social Security.

The latest assault on Social Security comes from Governor Rick Perry of Texas, a Republican presidential hopeful who insists that social insurance for widows, orphans, the disabled and the old is a Ponzi scheme.

If Social Security is a Ponzi scheme then so are public education, businesses and the state government that has for decades employed Rick Perry.

ACCOLADE OR EPITHET
The education of the children born to today’s kindergarten students must come from future tax revenues. The profits Wal-Mart makes in 2091 depend on people not yet born making purchases. And if Perry is elected president, his salary and presidential pension will depend on new money coming in.

Every enterprise depends on future income, which is where any similarity between legitimate activities and Ponzi schemes ends, though Perry seems ignorant of this.

Perry boasts that he was an awful student. Instead of being dismissed as a know-nothing, however, he is a serious contender for the most important job in the world, in part because many Americans have been persuaded that the word “elite” is not an accolade but an epithet.

Egging on Perry are people whose elite education suggests they should know better, like Washington Post columnist Charles Krauthammer, who has an M.D. and a Pulitzer prize. One need not be elite, which means “the best,” to know that Ponzi schemes are criminal enterprises that depend on secrecy to defraud.

In contrast, Social Security is an open book. It publishes exhaustive financial reports, all of which have proven reliable. Social Security’s overhead, at less than one percent, is a much smaller share of its budget than any large corporation or that multi-billion dollar enterprise known as the State of Texas. And Social Security has collected more than $2 trillion in advance to help pay future benefits through 2037. That surplus makes it an anti-Ponzi scheme.

Social Security’s projected $5.3 trillion shortfall sounds huge, but it is spread over 75 years, making its impact insignificant. This minor problem would shrivel if we just went back to the levy under President Ronald Reagan, when 90 percent of wages and salaries were subject to the Social Security tax instead of the 83 percent today.
The shortfall would vanish if we reversed our policies that discourage higher education, export jobs, drive down wages and savage our manufacturing, research and development prowess.

CAT FOOD FOR DINNER
Most Americans are not old enough to recall when old ladies bought cat food on sale, not for a pet but for dinner. A half century ago more than a third of older Americans lived in poverty. Today fewer than 10 percent do because of Social Security.

More than a third of older Americans rely on Social Security for 90 percent of their income. The average benefit is just $14,124 per year, but many older Americans get only half that much, which Perry and Krauthammer tell us is more than we can afford.

Gentlemen, will that be Fancy Feast or Meow Mix for your fellow Americans who have not fared as well as you have fared?

Now let’s put the Obama plan, which has no chance of becoming law in the current Congress, in perspective. He would raise taxes on 534,000 of an estimated 166 million taxpayers in 2013 by an average of $39,182 each, the Tax Policy Center calculated. Their average income was $3 million in 2009, which is more than twice what the median income taxpayer earns in a lifetime of work.

Together these top earners made more money in 2009 than the 56.5 million taxpayers whose cash income was less than $25,000 and on average just $12,366.

To assert that we must not raise taxes at the top, but we must cut Social Security is to say this: America’s rich do not have enough and we must take from those with less to give the rich more.

Can we do better? Of course, but we won’t until we make it standard for politicians to develop their minds, and to understand taxes and public finance, enough so that we can call them elite.
(Editing by Howard Goller)