Is Obama endangering Social Security?

By Felix Salmon
December 13, 2010
meme doing the rounds on the left, that giving employees a 2% break on their Social Security contributions for a year is, in Ryan Grim's words, "a hidden threat to Social Security".

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There’s a meme doing the rounds on the left, that giving employees a 2% break on their Social Security contributions for a year is, in Ryan Grim’s words, “a hidden threat to Social Security.”

At the heart of the logic is a quotation from FDR:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”

This logic is now being applied in reverse. It’s going to be politically difficult to increase employees’ payroll contributions by 50% in a year’s time — that’s a tax hike, and nobody likes tax hikes. So there’s a decent chance that they will remain at 4.2% rather than 6.2%, with the extra Social Security contributions being paid not by employers, and not by employees, but rather by the general fund.

Rep. Keith Ellison picks up the narrative, quoted in Grim’s story:

We’ll replace the loss of money from Social Security with general fund money, but in the past Social Security has been raided to help fund general fund programs. So how long will it be before somebody says Social Security is not sustainable and we need to cut the program?

This is where I lose the thread. As Ellison points out, it’s been uncontroversial for decades to use the Social Security surplus to help pay for non-Social Security programs. Why should it be more controversial to do things the other way around?

Kevin Drum had a fantastic explanation of how Social Security works back in August, along exactly these lines. The 1983 Social Security reform created a decades-long surplus, which could be used for other expenditure. Then, when Social Security fell into deficit, other taxes were always going to have to make up the difference.

People on the right who want to cut Social Security will always make a fiscal argument for doing so, talking about how it no longer pays for itself. They will do so no matter where the payroll contributions are set, and they would do so even if they remained untouched. Meanwhile, people on the left who want to save Social Security will scream bloody murder any time anybody suggests even something as small as raising the retirement age in 50 years’ time. Trying to get these two camps to come to agreement on anything will always be impossible. And I fail to see how adding the general fund to the payroll tax as a contributor to the Social Security trust fund is going to change that dynamic.

Mike Konczal reckons that we would be better off, politically, with a tax rebate out of the general fund rather than a reduction in payroll withholding. But that ignores the behavioral economics of the reduction in the withholding tax: people are more likely to spend a relatively invisible increase in their take-home pay, and they’re more likely to save, or deleverage, with a one-off rebate check from the government.

The debate, in a year’s time, about whether we should let the payroll-tax cut expire is going to be a fascinating one to watch. But I don’t think it’s going to have much if any effect on the future of Social Security.

11 comments

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In point of fact, misuse of the SS surplus has long been controversial. Gore made the evils of looting SSTF a major campaign issue in 00, as any good Dem should. Recall the SS “lock box” he talked about in the debates? For this, he was largely mocked by the press in favor of genius Bush, who proposed putting the funds in the stock market at the height of the dot.com bubble. While one might properly describe using the SS surplus for other purposes as “old news,” that is not quite the equivalent of calling it “uncontroversial.” It is controversial, and should be opposed by the Dems, if they stand for anything at all.

Posted by maynardGkeynes | Report as abusive

The Social Security reform under Reagan made a clear distinction between Social Security funds and the general fund. When the Social Security surplus is used to offset borrowing, the Treasury issues a bond to Social Security to represent the obligation. These aren’t negotiable on the broader market, but they nonetheless represent a real obligation.

That said, there will never again by a significant Social Security surplus. Using the general fund to replace Social Security taxes does establish a precedent confusing the two, however the likely implication is an ever-increasing contribution from the general fund to make up for that shortfall. Ultimately the whole concept of Social Security being a separate (and separately funded) system will be erased.

Moreover, the TRUE danger to Social Security comes from the unrestrained borrowing that we are seeing. If the Social Security Trust Fund is ever to be redeemed, the Treasury will need to borrow money to do so. By pushing the federal debt ever closer to the limits (which the market will eventually decide and enforce with the usual arbitrary ruthlessness of free markets), we make it less likely that the Trust Fund can ever be redeemed.

Posted by TFF | Report as abusive

The best thing I have read about SS (unfortunately I forget who said – mark this danger of nearing your SS benefit years) is that it is just taxes and benefits – and it will be apportioned in the future pretty much in the past (unless you believe the old will start voting against it, and that the young will vote in greater percentages than they have in the past)

Posted by fresnodan | Report as abusive

I’d like to believe this. It’s logical. But logic doesn’t always prevail, as can be seen in this tax cut debate, where Dems had fact and public opinion on their side and still caved. The attacks on Social Security have been ramping up, particularly with the deficit commission’s proposal, and I don’t think it takes much for Republicans to jump on an opportunity to take a stab at the program. I found this piece in particular very convincing that the payroll tax holiday spells doom for Social Security: http://www.newdeal20.org/2010/12/13/how- the-white-house-is-putting-social-securi ty-at-risk-29856/

Posted by BryceCovert | Report as abusive

fresnodan, you can definitely boil it down to that in the end. Taxes and benefits, and with the budget ballooning as it has been I expect that the taxes and benefits will ultimately need to be in balance.

The ratio between working-age adults and retirees is changing dramatically, however, so if we apportion the same percent of GDP to Social Security that we have in the past, it will mean reduced benefits for the retirees. You can try to vote in dramatically higher taxes, but that won’t work well on a variety of fronts.

Posted by TFF | Report as abusive

This is the first real breach in either direction, and it’s the only direction I ever expected. Talk of the “lockbox” was ludicrous insofar as there was never any political chance that social security funds would be moved out of the social security account.

If you consider the treasury bonds to be that — that the general fund was using social security funds, in the same way that the real estate developer two counties over is using the money I deposited in the bank — then I’m not sure what else you would do when social security stores up a surplus. You’ve mocked investment in the stock market; should they lend it to the government at 0 interest by storing federal reserve notes? Should they buy gold or real estate or rocking chairs and sit on that asset? There are only two ways of shifting purchasing power into the future: durable/capital assets, and lending to someone else. (Stock ownership is in some sense in between; you can characterize it either way.)

An actual breach in the account requires an apparently permanent change in the value of its claims and assets that is different from the net flow of funds due to its designated taxes, outflows, and investment gains or losses. I believe this is the first time that has happened, and, aside from some possibility that this transfer or a future transfer of this nature will be backed out, this is the only direction in which any transfer is ever going to be made. The children are right to laugh at you, Al Gore; the politics of Social Security simply won’t allow anything else.

Posted by dWj | Report as abusive

The US debate over Social Security has been totally baffling to me. As far as I can tell, it is just about the only government program that has actually delivered what it promised, which is probably why so many knives are out for it. It has effectively been an enforced savings account for retirement with a small amount of income redistribution.

It has run a surplus for decades. Now that there may be a period of deficit a few years from now, all of a sudden it is “welfare?” I think the continuous GOP attempt to castrate Social Security will be a HUGE political miscalculation.

Most Americans have paltry retirement savings and much of the GOP base is located in non-unionized states and work for companies without pension funds. Once those people figure out that the GOP wants to take away their only major source of retirement funds after they have paid those taxes for decades, their base will erupt like Mount St. Helens.

Posted by ErnieD | Report as abusive

What General Fund money? We got a surplus? We got a surplus next year? ten years? foreseeable future?

q) What do you get when you do Keynesian stimulus via tax cuts?

a) California.

Posted by ARJTurgot2 | Report as abusive

“It has run a surplus for decades.”

The surplus wasn’t large until the Clinton years. Roughly a single decade of substantial surplus. The cash flow should roughly balance over the next decade, then steadily worsen as the boomers all retire.

Posted by TFF | Report as abusive

“it’s been uncontroversial for decades to use the Social Security surplus to help pay for non-Social Security programs. Why should it be more controversial to do things the other way around?”

If you’re willing to go that far why not take another step towards the abyss of the truely absurd. Stop collecting the tax entirely and just print crisp new bills and mail them to seniors via the postal service… problem solved!

…why does a loaf of bread cost $35?

…oh ya problem not solved.

Posted by y2kurtus | Report as abusive

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